Meaning and Definition of Managerial Economics.

Managerial Economics as a subject gained popularit-y in U.S.A after the publication of the book
Managerial Economics by Joel Dean in 1951. Joel Dean observed that managerial Economics
shows how economic analysis can be used in formulating policies.
Managerial economics bridges the gap between traditional economic theory
and real business practices in two ways. Firstly, it provides number of tools
and techniques to enable the manager to become more competent to take
decisions in real and practical situation. Secondly, it serves as an integrating
course to show the interaction between various areas in which the firm
operates.

Forward Planning: -Future is uncertain. A firm is operating under the

conditions of risk and uncertainty. Risk and uncertainty can be minimized
only by making accurate forecast and forward planning. Managerial
economics helps manager in forward planning Forward planning means
making plans for the future. A manager has to make plan for the future e.g.
Expansion of existing plants etc...The study of macro economics provides
managers a clear understanding about environment in which the business
firm is working. The knowledge of various economic theories viz, demands
theory, supply theory etc. also can be helpful for future planning of demand
and supply. So managerial economics enables the manager to make plan for
the future.

Decision making: Decision making is an integral part of modern management. Perhaps the most
important function of the business manager is decision making. Decision making is the process of
selecting one action from two or more alternative course of actions. Resources such as land,
labour and capital are limited and can be employed in alternative uses, so the question of choice
is arises.
Managers of business organizations are constantly faced with wide variety of
decisions in the areas of pricing, product selection, cost control, asset
management and plant expansion. Manager has to choose best among the
alternatives by which available resources are most efficiently used for
achieving the desired aims. Decision making process involves the following
elements

Law of Demand
The law of Demand is known as the first law in market. Law of demand shows the relation
between price and quantity demanded of a commodity in the market. In the words of Marshall
the amount demanded increases with a fall in price and diminishes with a rise in price.
According to Samuelson, Law of Demand states that people will buy more at
lower price and buy less at higher prices. In other words while other things
remaining the same an increase in the price of a commodity will decreases
the quantity demanded of that commodity and decrease in the price will
increase the demand of that commodity. So the relationship described by the
law of demand is an inverse or negative relationship because the variables
(price and demand) move in opposite direction. It shows the cause and effect
relationship between price and quantity demand.
Demand Forecasting.
Accurate demand forecasting is essential for a firm to enable it to produce the required quantities
at the right time and to arrange well in advance for the various factors of production. Forecasting
helps the firm to assess the probable demand for its products and plan its production accordingly.
Demand Forecasting refers to an estimate of future demand for the product.
It is an objective assessment of the future course of demand. It is essential
to distinguish between forecast of demand and forecast of sales. Sales
forecast is important for estimating revenue, cash requirements and
expenses. Demand forecast relate to production inventory control, timing,
reliability of forecast etc...

Delphi Method: It is a sophisticated statistical method to arrive at a consensus. Under this

method, a panel is selected to give suggestions to solve the problems in hand. Both internal and
external experts can be the members of the panel. Panel members are kept apart from each other
and express their views in an anonymous manner

Demand Estimation
Business enterprise needs to know the demand for its product. An existing unit must know current
demand for its product in order to avoid underproduction or over production. The current demand
should be known for determining pricing and promotion policies so that it is able to secure
optimum sales or maximum profit. Such information about the current demand for the firm s
product is known as demand estimation.
Demand Estimation is the process of finding current values of demand for
various values of prices and other determining variables.

Production function
Production function shows the technological relationship between quantity of
out put and the quantity of various inputs used in production. Production
function is economic sense states the maximum output that can be produced
during a period with a certain quantity of various inputs in the existing state
of technology. In other words, It is the tool of analysis which is used to explain
the input - output relationships. In general, it tells that production of a
commodity depends on the specified inputs. in its specific tem it presents the
quantitative relationship between inputs and output . inputs are

The laws of production

Production function shows the relationship between a given quantity of input
and its maximum possible out put. Given the production function, the
relationship between additional quantities of input and the additional output
can be easily obtained. This kind of relationship yields the law of production
The traditional theory of production studies the marginal input-output
relationship under (I) Short run; and (II) long run. In the short run, input-
output relations are studied with one variable input, while other inputs are
held constant .The Law of production under these assumptions are called
the Laws of variable production. In the long run input output relations are
studied assuming all the input to be variable. The long-run input output
relations are studied under `Laws of Returns to Scale.

Economies of Scale
The factors which cause the operation of the laws of returns the scale are grouped under
economies and diseconomies of scale . Increasing returns to scale operates because of economies
of scale and decreasing returns to scale operates because of diseconomies of scale where
economies and diseconomies arise simultaneously. Increasing returns to scale operates when
economies of scale are greater then the diseconomies of scale and returns to scale decreases when
diseconomies .overweight the economies of scale . Similarly when economies and diseconomies
are in balance ,returns to scale becomes constant.
When a firm increases all the factor of production it enjoys the same advantages of economies of
production . The economies of scale are classified as ;
1. Internal economies.
2. .External economies

Isoquant curve.
The terms Iso-quant has been derived from the Greek word iso means
`equal` and Latin word quantus means `quantity`. The iso-quant curve is
therefore also known as`` equal product curve ``or production indifference
curve . An iso- quant curve is locus of point representing the various
combination of two inputs capital and labour yielding the same output. It
shows all possible combination of two inputs, namely- capital and labour
which can produce a particular quantity of output or different combination of
the two inputs that can give in the same output . An isoquant curve all along
its length represents a fixed quantity of output

Price Discrimination
A monopolist is in a position to fix the price of his product .He enjoys the
control of supply of the product . A monopolist is able to charge different
price for his products to the different customers. This is known as price
discrimination . According to Mrs. John Robinson the act of selling the same
article , produced under single control at different prices to different buyers is
known as price discrimination. This is also known as differential pricing

Difference between Accounting Cost and Economic Cost

Accounting cost means the expenses incurred by the firm on production and
sale of goods or service. These are paid by the firm to the outsiders. For
example, payment made for wages, raw materials, fuel, power, building etc.
are the accounting costs. Accounting cost is the money paid for contractual
payments. It includes payments and charges made by the enterprise to the
suppliers of resources. It is the explicit cost. But economic cost includes not
only explicit cost but also implicit or imputed cost. Implicit cost includes rent
charged on owned premises, interest charged on owned capital, wages paid
to entrepreneur etc. Implicit cost is not included in accounting cost.
Accounting cost includes only explicit costs which are recorded in the books
of account. Implicit cost will not be recorded in the books of account. Thus
the economists concept of cost is more comprehensive as compared to
accountants concept of cost

Incremental Revenue
Incremental revenue simply refers to increase in revenue. It is the difference between the new
total revenue and the existing total revenue. It measures the impact of decision alternatives on the
total revenue . The formula for measuring incremental revenue is as follows:
IR = R2-R1
Where, IR = Incremental revenue
R2 = New total revenue
R1 = Old or existing total revenue

Steps in formulating pricing policies:

1. Selecting the target market or market segment on which marketer would concentrate more.
2. Studying the consumer behavior and collecting information relating to target market selected.
3. Studying the prices, promotion strategies etc.of the competitors and their impact on the market
segment.
4. Assigning a role to price in the marketing mix.
5. Collecting the cost of manufacturing the product at different levels of demand.
6. Fixing suitable (strategic) price after determining the price objectives and according to a
selected method of pricing.