Module 1

Managerial Economics

Economics: Derived from Greek word Oikonomia’ which means Household

Management. Economia -household Mgt. It is associated with everyone life, at all
levels. Individual, people, firm, industry, nation all uses economics.

2 views of subject matter of economics:

• Traditional view
• Modern view
Traditional view:
Production
Distribution
Exchange
Consumption
Modern View:
Price Theory
Income theory
Growth Theory

Economics- Meaning
• Economics is a social science, its basic function is to study how individual,
and people, firm, industry, and nation maximize their gains from the limited
available resources and opportunities.
• The social science that deals with the production, distribution, exchange and
consumption of goods and service.
• Economics is the study of choice related to the allocation of scarce
resources.
Managerial Economics

• It is the application of economic concepts and theories in the field of

business.
• It is the study of the economic theories, logic, concepts which are necessary
in the business for solving problem and decision making.
• Formerly it was known as ―Business Economics. but the term has now
been discarded in favour of Managerial Economics.

PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.

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Definition

‘Milton M Spencer & Siegelman in their book published in1961’- “Managerial

Economics is the integration of economics theory with the business practice for the
purpose of facilitating decision making & forward planning by the management.”

BUSINESS
ECONOMIC
PRACTICES
THEORY

MANAGERIAL
ECONOMICS

DECISION FUTURE
MAKING PLANNING

Differences B/W Economics & Managerial Economics

Economics Managerial Economics

Micro & Macro Economics Micro economic in nature

Deals with individual, firm, and Deals with only firm

nation.

Scope is wider Scope is limited

It is Study of principles of economics Application of economic principles

to the business

PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.

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 NATURE OF MANAGERIAL ECONOMICS

[Link] in nature:
In managerial economics, problems of a particular organization are looked upon
rather than focusing on the whole economy. Therefore it is termed as a part of
microeconomics.

2. It is Pragmatic:
It is concerned with practical problems and results. It has nothing to do with
abstract economic theory which has no practical application to solve the problems
faced by business firms. It considers the particular environment of decision-making
and not general one.

PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.

9686919392 pravi1988@[Link]
3. Normative Economics
The nature of managerial economics is prospective and not descriptive. It deals
with future planning, policy-making, decision-making and how to make full use of
economic principles in all these.

[Link] Utilizes some theories of Macro Economics

Any organization operates in a market that is a part of the whole economy, so
external environments affect the decisions within the organization. Managerial
Economics uses the concepts of macroeconomics to solve problems. Managers
analyze the macroeconomic factors like market conditions, economic reforms,
government policies to understand their impact on the organization.

[Link] solving nature

Managerial economics is a stream of management studies which emphasizes
primarily on solving business problems and decision-making.

[Link] of both science and Art

Managerial Economics is both knowledge acquiring and knowledge applying discipline. Thus, it
can be concluded that managerial economics is science and arts both .Managerial Economics
requires a lot of creativity and logical thinking to come up with a solution. A
managerial economist should possess the art of utilizing his capabilities,
knowledge, and skills to achieve the organizational objective. Managerial
Economics is also considered as a stream of science as it involves the application
of different economic principles, techniques, and methods, to solve business
problems.

[Link] and quantitative in Nature

When you make business decisions as a manager, you take into account
qualitative factors like reputations, brand strength and employee morale, as well
as quantifiable data such as sales figures, profitability and return on investment.

8. It is a Theory of firm

PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.

9686919392 pravi1988@[Link]
According to Norman F. Dufty, Managerial Economics includes, that portion of
―Economics known as the theory of firm, a body of the theory which can be of
considerable assistance to the businessman in his decision-making‖. For instance,
the study of managerial economics includes the study of the cost and revenue
analysis, price and output determination, profit planning , demand analysis and
demand forecasting of a firm. As already stated earlier, the another name of
managerial economics is ‗Economics of the Firm.‘

[Link] is a dynamic in nature.

It changes from time to time & people to people. It’s a continuous process.

[Link]-disciplinary
Managerial Economics uses different tools and principles from different disciplines
like accounting, finance, statistics, mathematics, production, operation research,
human resource, marketing, etc. This helps in coming up with a perfect solution.

Positive and Normative Economics

 Positive Economics refers to a science which is based on data and facts.

 Normative economics is described as a science based on opinions, values,

and judgment.

 Positive economics is descriptive, but normative economics is prescriptive.

 Positive economics explains cause and effect relationship between variables.

On the other hand, normative economics pass value judgments.

 Positive economics explains ‘what is’ whereas normative economics

explains ‘what should be’.

 The statements of positive economics can be scientifically tested, proved or

disproved, which cannot be done with statements of normative economics.

PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.

9686919392 pravi1988@[Link]
 Scope of Managerial Economics

I. Subject Matter of Managerial Economics

II. Relationship with other Subjects

I. Subject Matter of Managerial Economics

1. Demand Analysis & Forecasting

2. Cost Analysis

3. Production Analysis

4. Supply Analysis

5. Pricing Decisions, policies & practices

6. Analysis of Market

7. Profit Management

8. Capital Management

[Link] with other subjects

• Statistics

• Accounting

• Operations Research

• Mathematics

• Economics

PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.

9686919392 pravi1988@[Link]
 • Human Resource Management

• Management

USES OF MANAGERIAL ECONOMICS

1. Decision Making- It May Be Related To Production, Investment, Sales

Target Etc..

2. Forward Planning

3. Problem solving

4. Inventory Management- Maintaining Adequate Stock

5. Production Management- Producing In Right Quantity.

6. Marketing Management- Marketing For Diff Types Of Market,

Competition.

7. FINANCIAL – Estimating Funds Required For Production.

8. Estimation of Demand

9. It teaches the art of Economizing

[Link] determination

PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.

9686919392 pravi1988@[Link]
 PROBLEM SOLVING

DECISION PRODUCTION
MAKING & & INVENTORY
FORWARD
PLANNING
BUSINESS
ECONOMICS

MARKETING &
PRICE FINANCE
DETERMINATION

ESTIMATION OF
DEMAND

MANAGERIAL ECONOMIST

• Managerial economist is a person who manages business efficiently using

various economic theories and methodologies.

• He supports the management team in better decision making through his

analytical skills and specialized techniques.

• A Managerial Economist is also termed as an economic advisor or business

economist.

• He is responsible for analyzing various internal and external environmental

forces that influence the functioning of business organizations.

• Managerial economist makes several successful business forecasts and

updates the management team regarding the economic trends from time to
time.

• He has an efficient role in earning reasonable profits on invested capital as it

supplies all relevant information which helps in making proper plans and
strategies.
PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.
9686919392 pravi1988@[Link]
 Role and Responsibilities of Managerial Economist

1) Studies Business Environment: The managerial economist is responsible for

analyzing the environment in which business operates. Proper study of all external
factors that affect the functioning of organization is must for proper functioning.
He studies various factors like growth of national income, competition level, price
trends, phase of the business cycle and economy and updates the management
regarding it from time to time.

2) Analyses Operations of Business: He analyses the internal operation of

business and helps management in making better decisions in regard to internal
workings. Managerial economist through his analytical and forecasting skills
provides advice to managers for formulating policies regarding internal operations
of the business.

3) Demand Forecasting And Estimation: Proper estimation and forecasting of

future trends helps the business in achieving desired profitability and growth.
Managerial economist through proper study of all internal and external forces
makes successful forecasting of future uncertainties or trends.

4) Production Planning: Managerial economist is responsible for scheduling all

production activities of business. He evaluates the capital budgets of organizations
and accordingly helps in deciding timing and locating of various actions.

5) Economic Intelligence: He provides economic intelligence services

by communicating all economic information to management. Managerial
economist keeps management always updated of all prevailing economic trends so
that they can confidently talk in seminars and conferences.

6) Performing Investment Analysis: A managerial economist analyzes

various investment avenues and chooses the most appropriate one. He studies and
discovers new possible fields of business for earning better returns.

7) Focuses On Earning Reasonable Profit: He assists management in earning a

reasonable rate of profit on capital employed in the business. Managerial

PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.

9686919392 pravi1988@[Link]
economist monitors activities of organizations to check whether all operations are
running efficiently as per the plans and policies.

8) Maintaining Better Relations: A managerial economist maintains better

relations with all internal and external individuals connected with the business. It is
his duty to develop a peaceful and cooperative environment within the organization
and aims to reduce any opposition taking place.

FUNDAMENTAL CONCEPTS/BASIC ECONOMIC TOOLS IN

MANAGERIAL ECONOMICS

• OPPORTUNITY COSTS.

• INCREMENTAL PRINCIPLE

• TIME PERSPECTIVE

• EQUI-MARGINAL PRINCIPLE

• DISCOUNTING PRINCIPLE

1) OPPORTUNITY COST

MEANING

• The cost of sacrificing something else(y) from the use of a given resource
when a decision is made in favour of one thing(X).
PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.
9686919392 pravi1988@[Link]
 • The opportunity cost is the sacrifice of the next best alternative available.

• It states that any opportunity utilized is the next best opportunity that is
sacrificed

• Sacrifices may be monetary or real.

• In simple Opportunity Cost mean Cost of Missed Opportunity.

• Costs are treated differently by accounting people and economist.

• Accountant consider only Explicit Cost

• Economist consider both Explicit & Implicit Cost.

Meaning of Explicit & Implicit Cost

• Explicit cost is the actual cost incurred in terms of money and accounted in
books of the firm.

• Exp… Interest paid on bank loan Rs 20000

• Implicit Cost is virtually incurred but not accounted in books of the firm.

• Implicit Cost also be intangible costs that are not easily accounted for,
including when an owner allocates time toward the maintenance of a
company, rather than using those hours elsewhere

• Exp… loss of interest income on funds and the depreciation of machinery

2) INCREMENTAL PRINCPLE

The concept refers to the changes that takes place in total cost & revenue due to
changes in price, quantity of products, investment and managerial decisions.

Two concepts

1) Incremental cost

2) Incremental revenue

Incremental Cost
PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.
9686919392 pravi1988@[Link]
 • It is the changes in total cost due to some managerial decisions

• It is defined as the ratio of change in total cost owing to change in total

quantity of output.

INCREMENTAL REVENUE

• It is the changes in total revenue due to changes in managerial decisions.

• It is the ratio of change in the total revenue owing to change in the total
output level.

• Incremental principle helps in accepting or rejecting fresh orders.

• Decision Making= IR>IC

3) TIME PERSPECTIVE

• Time plays a imp role in fixing the price and demand and supply

In economics 4 times periods are identified

 Market Period

 Short Period

 Long Period

 Circular period

Managerial economists are also concerned with the short run and the long run
effects of decisions on revenues as well as costs.

 In the short period, the firm can change its output without changing its size.

PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.

9686919392 pravi1988@[Link]
  In the long period, the firm can change its output by changing its size.

 In the short period, the output of the industry is fixed because the firms
cannot change their size of operation and they can vary only variable factors.

 In the long period, the output of the industry is likely to be more because the
firms have enough time to increase their sizes and also use both variable and
fixed factors.

4) Equi-Marginal principle

• Developed by traditional economist

• Extension of Law of diminishing marginal utility

• In this Equi-Marginal principle consumer gets equal satisfaction by

consuming all product.

• Modern economist modified this law and called Law of Proportional

Marginal Utility.

• As per this law consumer will spend his income on different goods in such a
way that marginal utility of each goods is same.

• In simple, Marginal Utility in this case is equal when consumer consumes

various goods as per his/her desire.

Formula

MUA/PA=MUB/PB=MUC/PC

• Mu of each goods in proportioned to its price is equal or equilibrium.

5) DISCOUNTING PRINCPLE

• A rupee received tomorrow is worth less than a rupee received today. (A

bird in hand is worth two in bush)

• In other side a rupee one year later is not equal to a rupee today, but _____
than that(more or less)

PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.

9686919392 pravi1988@[Link]
 • The process of ascertaining the present value of the future cash flows is
called Discounting.

• If decision affects cost and revenue at future dates, it is necessary to

discount those cost and revenue to present value before valid comparison.

Firms & Industry

• A firm is an organization that combines & organizes resources for the

purpose of producing goods & services for sale.

• A firm can be defined as “an organization that buys & hires resources and
sell goods & services.”

• A firm is defined as “an organization carrying on economic activities like

production, distribution & marketing of goods & services with a view to
earn profit.”

• Firms can be either Proprietorship, partnership, public sectors etc.

Main functions of firms are:

 Purchase of resources/Inputs
 Producing Goods & Services
 Selling the goods & Services
Industry

• Industry may be defined as “group of firms carrying on Identical activity

with the object of earning profits.”

• In simple, it is a group of firms which produces similar commodity is called

an Industry.

Industry may be:

• Manufacturing Industry

• Service Industry

Forms of Ownership

PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.

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 • Proprietary concern

• Partnership firm

• HUF

• Companies

• Co-operatives

• Joint sectors

• Govt undertakings

Objectives of Firms

1. Organizational Objectives

2. Economic objectives

3. Social Objectives

4. Strategic Objectives

1) Organizational Goals

• Long run survival

• Growth maximization
• Establish a business empire
• Expanding its share of sales
• Obtain market leadership
2) Economic objectives

• Profit maximization
• To reduce their cost of production
PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.
9686919392 pravi1988@[Link]
 • To preventing the entry of new firms
• Financial soundness
• Economic self-sufficiency
• Value creation
3) Social objectives

• To improve the welfare of the society

• To participate in community development programme
• To provide good quality products
• To providing employment opportunities
• To not resorting any anti-social practices
4) Strategic objectives
• Bigger market share
• To give newly developed products
• Higher product quality than rivals
• E-commerce facilities
• Superior on-time delivery
Alternative Objectives of Firms

• Regular innovation

• Best possible use of resources

• Desire for liquidity

• Adoption of fair trade practices

• Contribution to the revenue of the country

• Building public confidence for the product

Baumol’s model/Sales Maximization theory

PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.
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“The model has postulated maximization of sales revenue as an alternative to
profit maximization objective”.

Managers prefer to maximize sales revenue rather than maximize profit.

William Baumol

• William Jack Baumol was an American economist. He was a professor of

economics at New York University.

• He was a prolific author of more than eighty books and several hundred
journal articles.

Reasons for sales max

1. Salary and other earnings of managers are closely related to sales.

2. Banks and financial corporations look at sales revenue

3. Indicator of firm.

4. Prestige of managers

5. Profit max a difficult task.

6. Competitive spirit

7. If sales decline means consumers might not buy its product because of its
unpopularity.

8. If sales are large then firm can expand & earns large profits.

Basic Assumptions

1. Time horizon (single period time horizon of the firm)

2. Minimum profit constraint.

3. Price of the product remains unchanged.

4. Advertisement is the major instrument

PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.

9686919392 pravi1988@[Link]
 5. Conventional Cost Curves assumed to be U shaped.

6. The firm aims at maximising its total sales revenue in the long run subject to
a profit constraint.

THANK YOU
ALL THE BEST

Praveena D
Assistant professor
[Link] Dept
SDM College Ujire
9686919392
Pravi1988@[Link]

PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE (AUTONOMOUS), UJIRE.

9686919392 pravi1988@[Link]