1)explain the concept of managerial economics Explain the role & responsibility of

marginal economic in the decision making process.

Managerial economics is a branch of economics involving the application of economic methods

in the managerial decision-making process. Economics is the study of the production,
distribution and consumption of goods and services. Managerial economics involves the use of
economic theories and principles to make decisions regarding the allocation of scarce resources.

Managers use economic frameworks in order to optimize profits, resource allocation and the
overall output of the firm, whilst improving efficiency and minimizing unproductive activities.
These frameworks assist organizations to make rational, progressive decisions, by analyzing
practical problems at both micro and macroeconomic levels. Managerial decisions involve
forecasting (making decisions about the future), which involve levels of risk and uncertainty,
however, the assistance of managerial economic techniques aid in informing managers in these
decisions.

In order to optimize economic decisions, the use of operations research, mathematical

programming, strategic decision making, game theory and other computational methods are
often involved. The methods listed above are typically used for making quantitate decisions by
data analysis techniques.

The theory of Managerial Economics includes a focus on; incentives, business organization,
biases, advertising, innovation, uncertainty, pricing, analytics, and competition. In other words,
managerial economics is a combination of economics and managerial theory. It helps the
manager in decision-making and acts as a link between practice and theory. Furthermore,
managerial economics provides the device and techniques for managers to make the best
possible decisions for any scenario.

Some examples of the types of problems that the tools provided by managerial economics can
answer are:

 The price and quantity of a good or service that a business should produce.
 Whether to invest in training current staff or to look into the market.
 When to purchase or retire fleet equipment.
 Decisions regarding understanding the competition between two firms based on the
motive of profit maximization.
 The impacts of consumer and competitor incentives plan on business decisions

the Roles and Responsibilities of a Managerial Economic are:-

A managerial economist is responsible for providing economic analysis and support to managers
within an organization. They use economic theory and principles to help managers make
decisions about pricing, product development, market demand, and other strategic business
decisions.
Managerial Economics helps in Decision Making process
Various principles or fundamental concepts and analytical tools which are offered by managerial
economics, are used by modern business organisations in decision-making process. Relationship
of Managerial Economics with other Disciplines helps in decision making. These can be
explained as under:

Role of resposnbility Managerial Economics in Decision Making

1. Opportunity Cost Principle

The sacrifice of alternative courses of action for any decision is referred to as opportunity cost.
Opportunity cost may be defined as, ‘the revenue foregone or opportunity lost by not using the
resources in second best alternative use’. It is also called imputed cost. Measurement of sacrifice
is done by opportunity cost. It is shown as the role of managerial economics in decision making.
The sacrifice which is made for taking a decision is measured by opportunity cost. This concept
can be explained by following points:

 The opportunity cost of the funds employed in one’s own business is the interest that
could be earned on those funds had they been employed in other ventures.
 The opportunity cost is the value of time an entrepreneur devotes to him
 Business is the salary he could earn in any field with other occupations.
 The opportunity cost of using a machine to produce one product is the earnings for gone
which would have been possible from other products.
 The opportunity cost of using a machine that is useless for any other purpose is Zero
since its use requires no sacrifice of other opportunities.

2. Incremental Principle

Marginal Cost and marginal revenue of economics theory are related with incremental principle
concept. Estimation of the impact of decision alternatives on cost and revenues, emphasizing the
changes in the total cost and total revenue resulting in the changes in the prices, costs products,
procedures, revenues, Investment on whatever may be at stake in the decision are involved in the
incremental cost. It is the role of managerial economics in decision making.

 Incremental Cost: The change in total cost resulting from a particular decision may be
referred to as the incremental cost.
 Incremental Revenue: The change in total revenue resulting from a particular decision is
referred to as the incremental revenue.

3. Marginal Principle

The application of marginal concepts in economic theory is referred to as the marginal principle
or marginalism. Marginalism is associated with arguments concerning changes in the quantity
used of a good or a service, as opposed to some notion of the overall significance of that class of
good or service, or of some total quantity thereof. If the resources are scare then the manager has
to be very careful about the full utilisation of each and every additional unit of resources (inputs).

For taking decision about the use of an additional man-hour or machine-hour, manager is
required to know what the additional output is expected there from. Similarly, for taking decision
about additional investment, manager required to know role of managerial economics in decision
making. Also, what is the additional return from that investment. For all such additional amount
of output or return, the term ‘marginal’ is related.

4. Equi-Marginal Principle

The allocation of the available resources among the alternative activities is deal with by the
Equi-Marginal Principle.

According to this principle, an input should be allocated in a way that the value added by the last
unit is the same in all cases. This generalisation is called the equi-marginal principle. Here, we
come to know the role of managerial economics in decision making.

Let us consider that a firm is involved in three activities such as A, B and C activity. All the
activities require the services of labour and the firm should allocate the available labour in such a
way that the value of Marginal Product of labour is equal in all the three activities.

In symbols:
VMPLA = VMPLB =VMPLC
Where, VMP = Value of Marginal Product
L = Labour
a, b, c = Activities

The value of the marginal product of labour employed in a is equal to the value of the marginal
product of the labour employed in B and so on.

5. Principle of Time Perspective

A business firm should take any decision only after considering the short-run and long-run. The
short-run refers to a time period which is long enough to allow using the variable factors of
production in different amounts. The long-run refers to a time period which is long enough to
allow using all the factors of production in different amounts. It is required that proper balance
should be maintained between short-run and long-run effects.

6. Discounting Principle

Discounting is a process of reducing the future values to their present values. In this context, a
discount rate referred by the interest rate which is used in present value problem. For making
investment decisions, it is very important concept in managerial economics. The origin of this
principle is valuation of the money received at different point of time.

This discounting principle is:

FVN = PV (1+r)N
where, FVN = Future value in years
PV = Present value
r = Discount interest rate
n = Time between the future value and present value

7. Scarcity Principle

‘Excess demand’ of any commodity or service is referred to as scarcity. At any time, if demand
(requirement) for anything exceeds its supply (availability) then that thing is called scarce.
Amount of demand in relation to supply determines the scarcity and hence it is called relative
concept. The scarcity required managerial attention because it lies at the root of any problem.

8. Principle of Risk and Uncertainty

While taking decision a business executive has to face these important situations: risk and
uncertainty. Therefore, the business executive should understand the meaning and implications
of situations so that he can take business decisions easily and effectively. Risk is the probable
measurement of uncertainty. When uncertainty is reduced to a number of possible results to
alternative courses of action, it is called risk.

2) Define elasticity of demand explain how elasticity of demand is useful in marginal

economics.

The term “elasticity of demand” refers to the responsiveness of the quantity of demand of the
product or commodity to the changes in one of the variables that are likely to affect the demand
of the product. You can calculate this change in demand by simply calculating the percentage
change in quantity of demand divided by the percentage of one of the variables on which the
demand of the product depends.

The common variables on which the demand of the product or commodity depends are price of
the commodity, prices of related commodities, consumer’s income and many more. For example,
if the price of a product falls by a significant amount then the demand of the product will rise as
a result of the price fall. This means that certain products see an increase in demand with
decrease in the price, which shows that the said change in the price has a direct effect on the
demand of the commodity.

While understanding the elasticity of demand, it is also important to understand that the effect of
change in economic variables is not always on the quantity demanded for the product. The
demand of the product or commodity can be both elastic as well as inelastic. While elastic
demand is one where there is a larger fluctuation in demand quantity even to a small change in
the economic variable, inelastic demand is when there is very little fluctuation in the quantity of
demand to the change in one of the economic variables. When the demand is perfectly elastic
there is a sharp rise or fall in the product’s demand due to the change in the price of a
commodity. However, a relatively elastic demand is when the change in demand is greater than
the change in price.

Another term that needs consideration while talking about elasticity of demand is unitary
elasticity. Unitary elasticity is one where the change in quantity of demand of the product or
commodity is equal to the change in one of the economic variables.

the types of Elasticity of Demand

As we have already discussed, you now know that there are different variables on which the
demand of the product or quality depends. Therefore, depending on the particular variable that
affects the demand of the product or commodity, the elasticity of demand is classified into
different types. The three main types of elasticity of demand include price elasticity, income
elasticity and cross elasticity. Although all these three types are important to understand, it
should also be noted that whenever the elasticity of demand is mentioned, it is considered to be
price elasticity unless it has been mentioned otherwise. Now, let us have a look at all these three
types separately to understand them a little better.

1. Price elasticity

The price elasticity of demand refers to the response of the product’s quantity of demand
to the price of the product or commodity. When talking about this particular variable, it is
assumed that all the other variables including the consumer’s income, tastes, and prices
of all other goods are steady or constant. You can easily calculate the price elasticity of
demand by dividing the percentage change in demand quantity with the percentage
change in price. The formula for calculating the price elasticity of demand is as follows:

Ep = percentage change in the demand quantity / percentage change in price

In the above formula, Ep represents the symbol for price elasticity of demand.

2Income Elasticity
 Another variable that affects the demand of the products or commodities is the income of
the consumer. Income elasticity of demand is the degree of responsiveness of the quantity
of demand to the change in the consumer’s income. It should come as no surprise that an
increase in the consumer’s income will cause the demand of the product to rise and the
decrease in consumer’s income will cause the demand of the product and commodity to
fall. The income elasticity of demand can be easily calculated by dividing the percentage
change in the quantity of demand by the percentage change in the consumer’s income.
The formula for calculating the income elasticity of demand is as follows:

EI = percentage change in the quantity of demand / percentage change in the consumer’s income
In the above formula, the symbol EI Represents the income elasticity of demand.

3Cross Elasticity

As we discussed above, the third variable that may affect the demand of the product or
commodity is the change in price of other related goods and commodities. This is what
cross elasticity of demand represents. Cross elasticity of demand is the responsiveness of
the quantity of demand of one product or commodity to the change in price of some other
related product or commodity. For example, let’s consider there are two commodities,
commodity X and commodity Y. The change in demand of commodity X due to the
change in price of commodity Y is what cross elasticity of demand represents.

 elasticity of demand is useful in marginal economics.

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