Managerial

Economics

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“The purpose of studying economics is not to acquire a set
of ready- made answers to economic questions, but to
avoid being deceived by economists”
- Joan Robinson
76% of senior executives say that it is important they have the
knowledge and skills to respond to trends like resource scarcity,
the low carbon economy and doing business in emerging markets

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What is Economics?

Unlimited wants and

scarce resources

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What is Economics? … Contd

Father of Economics

Economics is
the study of
nature and
uses of
national wealth.

Adam Smith (1723-1790)

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Basic Assumptions
I. Ceteris Paribus- Other things remaining equal

It is a Latin word means ‘with other things (being) the same’

“ The existence of other tendencies is nor denied, but their

disturbing effect is neglected for a time” - Marshall

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Basic Assumptions
II. Rationality
Implies that consumers and producers measure and
compare costs and benefits before taking decisions

● Consumers: Maximising utility and minimising sacrifice

● Producers : Maximising profits and minimising costs

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Types of Economic Analysis
[Link](individual consumers and firms)
Macro (Aggregates- Industry, not firm)

B. Positive (factual statements- “What is”) – The

distribution of income in India is unequal.
Normative (Value judgments- “What ought to be”) –
The distribution of income in India should be equal.

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 Types of Economic Analysis
C. Time period

Short run -A time period not long enough for consumers

and producers to adjust to a new situation- K/L
Long run- Planning horizon- A time period long enough for
consumers and producers to adjust to a new situation- All inputs
can be varied- K and L- Whether to change product lines, build new
plant etc.

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Kinds of Economic Questions
1. What to Produce? (Micro)
2. How to Produce? (Micro)
3. How much to produce? (Micro)
4. For Whom to Produce? (Micro)
5. Are Resources Used Optimally? (Micro)

6. Are Resources fully employed? (Macro)

7. Is the Economy Growing? (Macro)
8. In what phase of the business cycle is the economy? (Macro)

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 Managerial Economics-
Meaning

“Application of economic theory and tools of

analysis of decision science to examine how an
organization can achieve its objectives most
efficiently” Salvatore

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Meaning
Spencer and Siegelman: “… Integration of economic
theory with business practice for the purpose of
facilitating decision making and forward planning
by management”

Evan Douglas: “Application of economic principles and

methodologies to the decision-making process
within the firm or organization…under conditions of
uncertainty”
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Conceptualization of ME

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Users of Managerial
Economics

Thank you sir I

learned many
economic concepts
from you. It’s
helping me a lot
E
c Manager
o
n
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Nature
Microeconomics Normative
economics Uses theory of firm
Takes the help of macroeconomics Aims at
helping the management A scientific art
Prescriptive rather than descriptive

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Scope of ME
Theory of demand Theory of capital and
● Demand Analysis investment
● Demand Theory
Environmental issues
Theory of production ● Business cycles
● Variable factor of production ● Industrial policy of the
● Fixed factor of production country
● Trade and fiscal policy of the
Theory of exchange or price country
theory ● Taxation policy of the country
Theory of profit ● Price and labor policy

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Decision Making Process

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 Meaning & Nature of DMP
oImportance of Quantitative Tools

o Analysis of variables is a key procedure in economic analysis.

o Economic research and policy-making require up-to-date data

and extensive analysis.

oUse of Mathematical tools

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…Meaning & Nature of DMP
oUse of Statistical Techniques

oTime Series: For Demand forecasting

oRegression: Two or multiple variables used to
study interrelationships, estimation and prediction
oMeasures of central tendency and
variation

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 Conventional Decision Rules
[Principles relevant to managerial decisions]

A. Concept of Scarcity

◦ Human wants are unlimited, but human capacity

to satisfy such wants is limited.

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…Conventional Decision Rules
[Principles relevant to managerial decisions]

B. Concept of Opportunity Cost

◦ It is the benefit foregone from the alternative that is not selected.

◦ The economist has to make rational choice in all aspects of

business by sacrificing some of the alternatives, since resources
are scarce and wants are unlimited.

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…Conventional Decision Rules
[Principles relevant to managerial decisions]

C. Production Possibility Curve (PPC)

◦ PPC is a graph that shows the different combinations of the

quantities of two goods that can be produced (or consumed) in an
economy, subject to limited availability of resources.

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…Conventional Decision Rules
[Principles relevant to managerial decisions]

D. Concept of Margin

◦ The Marginality deals with a unit increase in cost or revenue

or utility.

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Role of Economics
What is the role of Economics in Business?
Costs, prices, output, compensation, strategic behaviour
and ethics making.

The Big Picture- Whose job is this?

Economic theory forms the basis for different
management areas such as accounts, finance,
marketing, systems and operations.
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…Role of Economics
A manager has to deal with problems pertaining to
the individual firm as well as domestic and global
environment.

Microeconomics: Deals with individual unit

Macroeconomics: Deals with aggregates

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…Role of Economics
Microeconomics:
Theory of demand and supply- consumer behaviour,
demand theory, demand forecasting and factors
affecting individual and market supply- Helps in choice
of commodities for production.
Theory of Production: Production function and laws of returns
to scale etc- gives an idea about I/O relations, input
requirement size of firm, technology choice of output-
Helps producer to plan production, cost and budget.

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…Role of Economics
Market Analysis: helps understand degrees
of competition, pricing-output decisions,
price discrimination, monopoly power,
advertising

Profit Analysis: Provides logical analysis of break-

even point, emergence of profits, profit-
maximizing output, dealing with risk and
uncertainty 26
…Role of Economics
Macro economic: variables and policies impact business

@ Behaviour of macro economic indicators: GDP, GNP,

GDCF(Gross Domestic Capital Formation), HDI (Human
Development Index) etc.
@ Business Cycles – Inflation-

Employment @ Fiscal Policy: Taxes

and Govt.
Expenditure @ Monetary Policy: 27
Role of Economics in Business
Economics is a tool, means to an end:
To help efficient allocation and
achieve business objectives
To optimising resources - Maximise goals,
minimize costs under constraint
Logic, tools and techniques of economics to
analyse business problems, evaluate business
options and opportunities with a view to
arriving at an appropriate business decision.

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Role of Managerial Economist
Role Of Managerial Economist: To
decide
What to
produce?
Where?
How ?
How much?
Allocation of
resources For 29
 …Role of Managerial
Economist
Plan and control business
operations- Cost minimisation
Profit
maximisation ??
Managing
competition
Economic
intelligence Market
research 30
 …Role of Managerial
Economist
Uncertainty & Risk management

Forecast change in environment and policies-

domestic and international
To manage change in global scenario
Everything comes at a price- quality is
not free

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Growing Challenges to the
Managerial Economist
A) Globalization
What is Globalization ?

People-goods-services- communication-
Finance- Ideas

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…Growing Challenges to the
Managerial Economist
Global corporations
- Research & production facilities across
countries
- Global markets
- Global Finance
- Employment Diversity
- Global work culture

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…Growing Challenges to the
Managerial Economist
➢ Increased
➢ competition
➢ Increased
➢ Opportunity
Tastes converging
internationally? Customising
to local tastes

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Growing Challenges to the
Managerial Economist
B) Computerisation and Technology
➢ Easier model-building and simulation
➢ Quick and easier data analysis
➢ Rapid spread of information
➢ Internet changing both buyers and
sellers
➢ Videoconferencing- saving cost and time
➢ Paperless administration
➢ Speed of dispatch, lower inventories, less
waste
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Session V
Quiz &
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[Link] the largest number of
cameras in India?
[Link] has the biggest revenue from
music business in India?
[Link] gained the most when
business of British Airways was
affected due to the 2008 recession?

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Answers to the Lessons?
1: Samsung (whose main line of
business is NOT cameras but cell
phones)
2: Airtel (which is not in music business)-
by selling caller tunes makes more money
than HMV etc
3: videoconferencing and telepresence
services of HP and Cisco.
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What are the Lessons?

Nokia missed the Smartphone bus. Apple's I

phone and Google's Android are making life
difficult for Nokia.

But Google is not a mobile company

Nokia is a global behemoth, with 35% of the world’s
handset market.
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What are the Lessons?

Products have vanished from the market in the past 20

years:
◦ Black & white TVs
◦ Fountain pens
◦ Type writers
◦ Alarm Clocks

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What are the Lessons?
Lessons by the Managerial economist:
Today's competitor is obvious. Tomorrow's is not-
Think beyond conventional framework; think beyond
the obvious
Need to identify competition (present) Need to
foresee competition (Future) Need to beat
competition (Strategies)

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Objectives of the Firm
Why do people do business?

What motivates the owners /investors / promoters to take so much

of risk and conduct their own businesses, rather than going for a
secured employment?

Is it only maximization of profits that drives businesses?

◦ Or is it something beyond?

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Profit Maximization Theory
Objective of business is generation of the largest amount of
Profit = (Total Revenue-Total Cost)
Traditionally, efficiency of a firm measured in terms of its profit
generating capacity

Criticism
▪ Confusion on measure of profit
▪ Validity questioned in competitive markets

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Baumol’s Theory of Sales Revenue
Maximization
In competitive markets firms aim at maximizing revenue through maximization
of sales

Sales volumes determine market leadership in competition

Manager’s salary and other benefits linked with sales volumes, rather
than profits

Criticism
▪ Insufficient empirical evidence

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 Marris’ Hypothesis of Maximization of
Growth Rate
Two sets of goals:
▪ Owners (shareholders) aim at profits and market share (Uo )
▪ Managers aim at better salary, job security and growth (Um)
Both achieved by maximizing balanced growth of the firm (G), which depends on Growth
rate of demand for the firm’s products (GD) and Growth rate of capital supply to the
firm (GC)the
Where,
G = GD = GC d = diversification, k =
success rate,
GD = f(d, k)
r = financial security
GC = f(r, π) ratio,
π = constant rate of
profit increase 45
 …Marris’ Hypothesis of Maximization of Growth
Rate
Constraints in the objective of maximization of balanced growth:
▪ Managerial Constraint : Non availability of managerial skill sets in required size
creates constraints for growth
▪ Financial Constraint : debt equity ratio (r1), liquidity ratio (r2) and retained
profit ratio (r3)

U m = f(Salary, Power, Status, Job Security) U 0 = f(Profit,

Market Share, Brand Image)

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Behavioural Theories
Simon’s Satisficing Model
▪ Biggest challenge before modern businesses is lack of full
information and uncertainty about future
▪ The objective of maximizing either profit, or sales, or
growth is not possible.
▪ they act as constraints to rational decision making
▪ the firm has to operate under "bounded rationality"
▪ can only aim at achieving a satisfactory level of profit, sales and growth

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Behavioural Theories
Model by Cyert and March
▪ Apart from dealing with inadequate information and uncertainty,
businesses also have to satisfy a variety of stakeholders, who
have
different and oft conflicting goals
▪ ‘Satisficing behaviour’ aims at satisfying all stakeholders.
▪ Managers form an Aspiration level on basis of past
experience, past performance of the firm, performance of other
similar firms, and future expectations

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 Reasonable Profit Objective
Profit is necessary in the long run
◦ It is an indicator of the financial health of the company and growth

Shareholders, creditors and other investors are

satisfied that the firm is growing and their capital is well-invested
The possibility of profit maximization may attract competition, while
reasonable profit may make the market less attractive
Workers and unions refrain from demanding higher wages as profits are not
huge
Thus a minimum reasonable profit is a must for any firm,
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References

1. Managerial Economics in a Global Economy – Dominick

Salvatore
2. Managerial Economics – Geetika, Piyali Ghosh and Purba
Roy Choudhury
3. Managerial Economics – R. L. Varshney and K.L.
Maheshwari

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