Course Name: Managerial Economics

Course Code: HMC-601

Semester: 6th
1.
Course Objectives “
To develop student capability to apply the micro and macro-economic
Concepts and techniques in making decision pertaining to different
business situations.
Understand the theoretical and conceptual basis of economics (e.g.,
2. Market structure, Demand forecasting, inflation rates, etc.) Upon which
engineering projects analysis is built.
Educate the students on how to systematically evaluate the various cost
3. elements of a typical manufactured product, an engineering project or
service, with a view to determining the price offer.
Prepare engineering students to analyze profit/revenue data and make
4. economic analysis in the decision making process to justify or reject
alternatives/projects.

2
 “
Course Outcomes
Explain the basic
Examine various
concepts and importance
macroeconomics concepts
of managerial economics
such as, index numbers,
in decision making.
business cycle, banking,
inflation, etc. and apply them
in day to day life.

Develop various Understand about business

competitive strategies, environment of a country
including costing, after acquiring good
pricing, product knowledge about micro
differentiation, and economic concepts such as
demand &utility analysis,
market environment
consumer behavior, demand
according to the natures
forecasting techniques and
of products and the shall be a good decision
structure of the market. maker.

3
●
“
Text Books
P.N CHOPRA: Business Economics/ Advanced Eco. Theory
● D.N. DWIVEDI: Managerial Economics

Reference Book
● KIRTI: Engineering Economics

E-Material
● Google Classroom

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 Unit-1
“Meaning and Importance of Managerial Economics”
Contents :

1. Introduction to Managerial Economics.

2. Meaning and Scope of Managerial Economics.
3. Role and responsibilities of managerial economist.
4. Relationship of managerial economics with other disciplines.
5. Importance of Managerial Economics in decision making.
6. The basic process (steps) of decision making.

5
Introduction
Managerial economics, as the name itself implies, is an offshoot of two distinct disciplines:
Economics and Management.

Economics is a social science concerned with the production, distribution, and consumption of
goods and services. It studies how individuals, businesses, governments, and nations make
choices on allocating resources to satisfy their wants and needs, trying to determine how these
groups should organize and coordinate efforts to achieve maximum output.

Microeconomics
The study of an individual consumer or a firm is called microeconomics (also called the Theory
of Firm). Micro means ‘one millionth’. Microeconomics deals with behavior and problems of
single individual and of micro organization. Managerial economics has its roots in
microeconomics and it deals with the micro or individual enterprises.

Macroeconomics
The study of ‘aggregate’ or total level of economic activity in a country is called
macroeconomics. It studies the flow of economics resources or factors of production (such as
land, labour, capital, organisation and technology) from the resource owner to the business firms
and then from the business firms to the households. It deals with total aggregates, for instance,
total national income total employment, output and total investment.
6
Cont..
Managerial economics, as the name itself implies, is an offshoot of two distinct disciplines:
Economics and Management.
• Management
Management is the science and art of getting things done through people in formally organized
groups. It is necessary that every organisation be well managed to enable it to achieve its desired
goals. Management includes a number of functions: Planning, organizing, staffing, directing, and
controlling.

• Manager
A manager is a person who directs resources to achieve a stated goal. This definition includes all individuals
who:
(1) direct the efforts of others, including those who delegate tasks within an
organization such as a firm, a family, or a club;

(2) purchase inputs to be used in the production of goods and services such as the output of
a firm, food for the needy, or shelter for the homeless; or

(3) are in charge of making other decisions, such as product price or quality.
7
Meaning
In management studies, the terms ‘Business Economics’ and ‘Managerial Economics’ are
often synonyms. Both the terms, however, involve ‘economics’ as a basic discipline
useful for certain functional areas of business management. Managerial Economics has
emerged as a separate branch of Economics. The emergence of managerial economics can
be attributed to following factors-

Increasing application of Economic

Logic, concepts, theories and tools of
economic analysis in the process of
Business Decision making
Growing complexity of the Factors
business environment and contributing to the
decision making emergence of
Managerial
Economics
Rapid increase in demand for
professionally trained managerial
manpower with good knowledge of
Economics 8
 Cont..
● Managerial Economics as a subject gained popularity in the USA after the publication of the book
“Managerial Economics” by Joel Dean in 1951.
● Main problems faced by a business firms are:
 The choice of a product to be produced or services to be rendered
 Decision about price and output of the product so as to maximise profits or attain desired goals.
 What methods or techniques of production are to be used in the production process.
 How much advertisement expenditure is to be incurred for promoting the sales of their products.
 Long term decisions pertaining to production
 Long term decisions related to investment or Capital Expenditure.
● Managerial economics is an application of microeconomics and its supportive quantitative methods
(drawn from mathematics and statistics) in the decision-making process for managers who are in
pursuit of recognizing and utilizing the optimal treatments and solutions to managerial problems and
issues in order to reach a certain level of efficiency in achieving the firm’s objectives.
9
Cont..
Scarcity of resources results from two fundamental facts of life:
1. Human wants are virtually unlimited and insatiable, and
2. Economic resources to satisfy these human demands are limited.
Thus, we cannot have everything we want; we must make choices broadly between three areas:
1. What to produce?
2. How to produce? and
3. For whom to produce?

Managerial economics, when viewed in this way, may be taken as economics applied to "problems
of choice" or alternatives and allocation of scarce resources by the firms. Thus managerial
economics is the study of allocation of resources available to a firm or a unit of management
among the activities of that unit.

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Definitions of Managerial Economics
According to Spencer and Siegelman
“The integration of economic theory with business practice for the purpose of
facilitating decision- making and forward planning by management”.

According to Mansfield
"Managerial economics provides a link between economic theory and
decision sciences in the analysis of managerial decision making”

According to TJ. Webster

"Managerial economics is the synthesis of microeconomic theory and
quantitative methods to find optimal solutions to managerial decision-
making problems”

According to Prof. Evan J Douglas

‘Managerial economics’ is concerned with the application of
economic principles and methodologies to the decision making
process within the firm or organisation under the conditions of
uncertainty” 11
 Nature of Managerial Economics
 Art and Science: Managerial economics requires a lot of logical thinking and
creative skills for decision making or problem-solving. It is also considered to be a
stream of science by some economist claiming that it involves the application of
different economic principles, techniques and methods, to solve business problems.

 Micro Economics: In managerial economics, managers generally deal with the

problems related to a particular organisation instead of the whole economy. Therefore
it is considered to be a part of microeconomics.

 Uses Macro Economics: A business functions in an external environment, i.e. it

serves the market, which is a part of the economy as a whole.

 Multi-disciplinary: It uses many tools and principles belonging to various

disciplines such as accounting, finance, statistics, mathematics, production, operation
research, human resource, marketing, etc.

 Prescriptive / Normative Discipline: It aims at goal achievement and deals with

practical situations or problems by implementing corrective measures.

 Management Oriented: It acts as a tool in the hands of managers to deal with

business-related problems and uncertainties appropriately. It also provides for goal
establishment, policy formulation and effective decision making.

 Pragmatic: It is a practical and logical approach towards the day to day business
problems.
Scope of Managerial Economics
The scope of managerial economics refers to its area of study. It is comprised of economics concepts,
theories and tools of analysis that can be applied in the process of business decision making to analyse
business problems, to evaluate business options, to assess the business prospects, with the purpose of
finding appropriate solution to business problems and formulating business policies for future. The scope
of managerial economics covers two areas of decision making

1. Operational or Internal issues. 2. Environmental or External issues.

SCOPE

Operational issues refer to those, which Environmental or External Factors

are within the business organization and refer to general economic, social and
they are under the control of the political atmosphere within which
management. the firm operates.

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1. Operational or Internal issues. Demand Analysis and Forecasting Production & Cost Analysis

A major part of managerial decision making depends on A firm’s profitability depends much on its cost of production. A wise
accurate estimates of demand. A forecast of future sales manager would prepare cost estimates of a range of output, identify
serves as a guide to management for preparing production the factors causing are cause variations in cost estimates and choose
schedules and employing resources. It will help management the cost-minimising output level, taking also into consideration the
to maintain or strengthen its market position and profit base. degree of uncertainty in production and cost calculations.

Resource Allocation Pricing & Competitive Strategies

Managerial Economics is the traditional economic theory Pricing decisions have been always within the preview of
that is concerned with the problem of optimum allocation of managerial economics. Price theory helps to explain how prices
scarce resources. Marginal analysis is applied to the are determined under different types of market conditions.
problem of determining the level of output, which Competitions analysis includes the anticipation of the response
maximizes profit. In this respect linear programming of competitions the firm’s pricing, advertising and marketing
techniques has been used to solve optimization problems. strategies.

Strategy Planning Capital or Investment Decision

Strategic planning provides a long-term goals and Capital is the foundation of business. Lack of capital may result in
objectives and selects the strategies to achieve the same. small size of operations. Availability of capital from various sources
The perspective of strategic planning is global. strategic like equity capital, institutional finance etc. may help to undertake
planning has given rise to be new area of study called large-scale operations. Hence efficient allocation and management of
corporate economics. capital is one of the most important tasks of the managers. 14
2. Environmental or External issues. Economic Environment
The type of economic system in the country.
a. The general trends in production, employment, income, prices, saving and investment.
b. Trends in the working of financial institutions like banks, financial corporations, insurance companies.
c. Magnitude and trends in foreign trade;
d. Trends in labour and capital markets;
e. Government’s economic policies viz. industrial policy monetary policy, fiscal policy, price policy etc.

Social Environment

The social environment refers to social structure as well as social organization like trade unions, consumer’s co-
operative etc.

Political Environment

The Political environment refers to the nature of state activity, chiefly states’ attitude towards private business, political
stability etc.
Role and Responsibilities of Managerial Economist

Role

Analysis of Business Analysis of External

Operations Factors
Other Functions
of Managerial
Economist

16
 Cont..
Analysis of Business Operations:
The managerial economist can help in the management in making decisions regarding the internal operations of a firm.
Managerial economists play an important role in managing management in the following areas -
● Determining the budget of profit and sales volume in the coming years.
● For the Future Purpose, the quantity of production quantity should be determined by the goods schedules and stock
policy.
● In the next years, what changes should be made in the price policy and wage policy?
● What is the firm’s credit policy in the future, and what are the changes in it?
● In the upcoming years, the business should be expanded and contracted, if yes, how much?
● How many installed capacity should be used in the future. and how much of the instruments should be applied, that the
tools can be used?
● What steps should be taken to cut costs?
● How much cash will be available in the quarter of the coming year, half- yearly. and suggest how to reduce the
deficiency and how to use excessive, etc.

17
 Cont..
Analysis of External Factors:
The prime duty of a managerial economist is to make extensive study of the business environment and external factors
affecting the firm's interest. The managerial economist can continue his studies by advising continuous study and
comprehensive analysis of these factors and tell the highest management in making policies necessary adjustments.
● In what markets, what are the demands and how the market of the firm’s products is likely to be?
● What are the trends of the national economy and the international economy? And what are the chances of change
soon?
● What is the state of the business cycle and what will be its appearance and speed soon?
● What is the probability of the supply of raw materials and the price? And what are the possibilities they have soon?
● Determination of future demand and price related possibilities of the built route.
● What is the cost and availability of creditworthiness in the future?
● What are the prospects of changes in future economic policies and controls?
● How is the competition event or the possibility of growth in business in the future?
● What are the prospects of the availability and cost of fuel or power?
● What will be the prospects and speed of change in the future of national income and what will be the change in the
production and demand of the firm? 18
 Cont..
Other:
● Surveying different markets.
● Predicting the industry’s total demand for business.
● Analyzing pricing in different industries, finding a suitable solution to the problem.
● Analysis of valuables and actions in competitive firms.
● Evaluation and analysis of capital projects in productive work.
● Determination of production schedules and goods tables in the industry.
● Making various appropriation decisions available financial instruments.
● Analysis of agriculture, industry, transportation or other development work.
● Analyze the development of the economy.
● Comparative analysis of projects.
● Forecasting external conditions affecting a professional firm.

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Responsibilities of Managerial Economists

A Managerial economist plays a very significant role in decision-making and forward planning. But,
to serve his role successfully, he must thoroughly recognize his responsibilities, some of which are
following:-
 To increase the profitability of the Firm: An economist has a responsibility to earn profit for the
firm by taking right decision about investment, production, sale and market research.
 To make Accurate and Successful Forecast: It is a responsibility of an economist to make
successful research and use past data to find out the expected sales in future and the trend in sales.
 To maintain relations with Experts: The important responsibility of a managerial economist is
to provide solution to complex business problems, for this purpose he must establish and maintain
the relations with such experts of different fields who can provide their service to the firm as and
when required.
 To aware availability of Resources: A managerial economist should be aware of locations and
situations of the specific markets, by which he should be able to provide the resources of firm’s
operation quickly at reasonable price.
 To Simplifying the decision making process: The management has to take many decisions in its
day-to-day functioning. It is the main responsibility of a managerial economist to make the
decision making process as simple as possible so that quick and correct decision could be taken
promptly.
 Responsibility to minimize risk: Minimizing risk is another responsibility to the economist. It
can be done by minimizing future uncertainty by knowing about all the prospective facts present in
the market. To minimize risk successful forecasting and right decisions are needed.
Relationship of Managerial Economics with other Disciplines

Figure shows how managerial economics acquires its essential identity

through the contributions of three components:
(1) Quantitative economics,
(2) the scientific procedure of decision making, and
(3) the related functional fields. 21
Cont…
 Economics: Managerial Economics is economics applied to decision making. It is a special
branch of economics, bridging the gap between pure economic theory and managerial practice. As
stated earlier that managerial economics is an application of economic theory into business
practices / management. Managerial economics uses both micro and macro economics-their
concepts, theories, tools and techniques..
 Mathematics : Mathematics has helped in the development of economic theories and now
mathematical economics has become a very important branch of economics. Mathematical
approach to economic theories makes them more precise and logical. Geometry, trigonometry and
algebra are different branches of mathematics and they provide various tools & concepts such as
logarithms, exponentials, vectors, determinants, matrix algebra, and calculus, differentials and
integral.
 Statistics: Statistical techniques are very useful for collecting, processing & analyzing business
data, testing & validity of economic laws before they can be applied to business. Statistical
techniques like regression analysis, forecasting is used in economics. Suppose forecasting has to
be done. For this purpose, trend projections are used. Similarly, multiple regression technique is
used. In managerial economics, measures of central tendency like the mean, median, mode, and
measures of dispersion, correlation, regression, least square, estimators are widely used.
 Operations Research: OR is used for solving the problems of allocation, transportation, inventory
building, waiting line etc.. Linear programming and goal programming models are very useful for
managerial decisions. These are widely used OR techniques. In fact, OR is an inter-disciplinary
solution finding technique. It combines economics, mathematics and statistics to build models for
solving specific problems and to find a quantitative solution there by.
Cont…

 Accounting: It provides business data support for decision-making. The data on costs, revenues,
inventories, receivables and profits is provided by the accountancy. Cost accounting, ratio
analysis, break-even analysis are the subject matters of accountancy and they are of great help to
managers in decision-making.
 Psychology and Organisation Behaviour : In fact, managerial economics analyses the individual
behaviour of a buyer and seller [microeconomic units]. Psychology is helpful in understanding the
behavioural aspects like attitude and motivation of individual decision making unit. Psychological
Economics-a new discipline of recent origin analyses the buyer‘s behaviour useful for marketing
management. Behavioural models of firms have also been developed based on organization
psychology and micro economics to explain the economic behaviour of a firm.
 Management Theory: Management theories bring out the behaviour of the firm in its efforts to
achieve some predetermined objectives. With change in environment and circumstances, both the
objectives of firm and managerial behaviour change. Therefore sufficient knowledge of
management theory is essential to the decision-makers. The basic knowledge of the principles of
personnel, marketing, financial and production management is required for accomplishing the
task. In the process of management such as planning, organising, leading and controlling, decision
making is always essential. Decision making is an integral part of today’s business management.
 Computer and Economics : Today each person is dependent on computers. Managers depends
on comp for decision making. Through comp data is presented in organized manner which
facilitates decision making.
 Decision Making (Steps Involved)
Decision making is crucial for running a business enterprise which faces a large number of problems requiring
decisions. Problems which requires decisions to be made by managers includes which product to be produced,
what price to be charged, what quantity of the product to be produced, how much investment expenditure to be
incurred etc. Following chart portrays the decision making process -
Cont…
1.
. Establishing the Objectives
The first step in the decision making process is to establish the objective of the business enterprise.
The major objectives of the firm are:
Ֆ To achieve the Organizational Goal
Ֆ To maximize the Output
Ֆ To maximize the Sales
Ֆ To maximize the Profit of the Organization
Ֆ To maximize the Customer and Stakeholders Satisfaction
Ֆ To maximize Shareholder’s Return on Investment
Ֆ To maximize the Growth of the Organization

2. Defining the Problem

What is the problem and how does it influence managerial objectives are the main questions.
For instance, a cotton textile firm may find that its profits are declining. It needs to be investigated
what are the causes of the problem of decreasing profits. Whether it is the wrong pricing policy, bad
labour-management relations or the use of outdated technology which is causing the problem of
declining profits. Once the source or reason for falling profits has been found, the problem has been
identified and defined.
Cont…
3.
. Identifying Possible Alternative Solutions
This will require considering the variables that have an impact on the problem. In this way,
relationship among the variables and with the problems has to be established.
In regard to this, various hypotheses can be developed which will become alternative courses for the
solution of the problem. For example, in case of the problem mentioned above, if it is identified that
the problem of declining profits is due to be use of technologically inefficient and outdated machinery
in production.
The two possible solutions of the problem are:
(1) Updating and replacing only the old machinery.
(2) Building entirely a new plant equipped with latest machinery.

4. Evaluating Alternative Courses of Action

This requires, the collection and analysis of the relevant data. Some data will be available within the various
departments of the firm itself, the other may be obtained from the industry and government.
The constraints may be legal such as laws regarding pollution and disposal of harmful wastes; they way
be financial (i.e. limited financial resources); they may relate to the availability of physical infrastructure
and raw materials, and they may be technological in nature which set limits to the possible output to be
produced per unit of time.
Forecasting or predicting the consequences of each alternative should be considered.
Cont.…
5. . Implementing the Decision

After the alternative courses of action have been evaluated and optimal course of action selected, the final
step is to implement the decision. The implementation of the decision requires constant monitoring so that
expected results from the optimal course of action are obtained.
It should be noted that once a course of action is implemented to achieve the established objective, changes in
it may become necessary from time to time in response in changes in conditions or firm’s operating
environment on the basis of which decisions were taken.