Managerial Economics

Unit-1 : Introduction to Managerial Economics :

1. Definitions

2. Nature and Scope

3. Relationship with other areas in Economics

Production Management
Marketing
Finance
Personnel
Operations Research

4. The Role of Managerial Economist.

 Definitions

• Managerial Economics refers to the application of Economic

theory and tools of analysis of decision science to achieve
organizations objectives .
• ME is the science of choice in the face of unlimited ends
and scarce resources which have alternative uses. Since resources
are scarce and the uses to which they can be put to are unlimited,
one is required to choose the best amongst the available
Alternatives.
Various Definitions
1. Joel Dean : The use of Economic analysis in the formulation of
business policies.
2. William Baumol : To build theoretical models of economics and
apply them to arrive at optimal solutions.
3. William Meckling : To structure Organization’s problems and
solve them.
 Definitions

4. Spencer and Seligman : The integration of economic theory and

business practice for the purpose of facilitating decision-making and
forward planning by management.”
5. Petersen and Lewis : “Managerial economics can be viewed as an
application of that part of microeconomics that focuses on such
topics as risk, demand, production, cost, pricing, and market
structure.”
6. Edwin Mansfield: “Managerial economics is concerned with the
ways in which managers should make decisions in order to maximize
the effectiveness or performance of the organizations they manage.”
7. Hynes: “Managerial economics is the study of allocation of
resources available to a firm among the activities of that unit.” -
 Definitions

• The crux of the problem which economics tries to address

is the choice of the best uses of resources among the
alternative uses.
• Broadly there are two main branches of Economics :
1. Macro Economics : It is the study of economic system
as a whole. It includes techniques for analyzing changes
in total output, total employment, consumer price
index, exports, imports. It focuses on Aggregate data
and changes in output levels
2. Micro Economics : focuses on the behavior of the
individual actors on the economic stage , that is firms &
Individuals and their interactions in markets.
 Nature and Scope
Nature of Managerial Economics
Decision-Making and Forward Planning :

•Decision Making and Forward Planning is primary function of

Managers. Decision making is the process of selecting one
action from two or more alternative courses of action while
forward planning is establishing plans for the future.

•Once Decision is made to achieve the Company Objective Eg.

Profit Maximization then plans as to
production,pricing,capital,raw materials, labour are prepared

•Significant characteristic of business organizations is to face

the Uncertainty and decision making in light of Uncertainty
becomes very complex. This is where Economic theory offers a
considerable advantage.
 Nature and Scope
Nature of Managerial Economics
Decision-Making and Forward Planning :
• Economic Theory deals with number of concepts and principles
relating to Profit, demand, cost, pricing, production, competition,
supply and many other aspects.
• Economic theory aided by allied subjects like Accounting,
Statistics and Mathematics used to solve the problems of
organizations.
• The way economic analysis can be used to to solve business
problems is the subject matter of ME.
Economics Business management
-Theory and methodology -Decision Problems

ME- Application of Economics to solve business problems

Optimal solutions to Business problems

 Nature and Scope
Nature of Managerial Economics
Applications :

• Reconciliation of Economic models to actual business behavior

and conditions. Eg. Accounting concepts like costs and profits are
aligned with economic concepts for decision making and forward
planning.
• Estimating economic relationships Eg. Measurement of
elasticities, cost-output relationships used for forecasting.
• Predicting relevant economic quantities like profit, demand,
production, costs, pricing, capital with their probabilities.
• Using economic quantities in DM and forward planning to make
policies, plans and strategies for the business organization
• Understanding external environment eg. business cycles,
National Income, Foreign trade and adjusting and adapting to the
changing environment.
 Nature and Scope
Nature of Managerial Economics
Chief Characteristics :

• ME is microeconomic in nature
• It uses “ Theory of firm” or “ Economics of the Firm” and also
Profit theory
• ME is Pragmatic and avoids abstract issues of economic theory to
make effective managerial decisions.
• ME is normative or prescriptive rather that descriptive
economics. ME is concerned with what decisions are to be made
and involves value judgments.
• Macro economics also useful to ME because understanding the
economic environment like business cycles, National Income and
Foreign trade etc.. are helpful to make decisions.
 Nature and Scope
Scope of Managerial Economics
The following topics fall under the scope of ME:
1) Demand Analysis and Forecasting : Demand analysis helps identify the
various factors influencing the products and forecasting helps in
planning for production and sales. Topics covered are Demand
determinants, Demand distinctions and demand forecasting.
2) Cost Analysis : Various types of costs needs to be analyzed to control
the costs and plan for pricing and profits. Topics covered are Cost
concepts and classifications, Cost -output relationships, Economies
and diseconomies of scale. And cost control and reduction.
3) Production and supply analysis: It is narrower in scope compared to
cost control. Production analysis deals with Physical terms while Cost
deals with monetary terms. Topics are production functions and their
managerial uses.
Supply analysis deals with commodities and the topics are supply
schedules , curves and functions, Law of supply and its limitations,
Elasticity of supply.
 Nature and Scope
Scope of Managerial Economics
The following topics fall under the scope of ME:
3) Pricing Decisions, Policies and practices : Price is the revenue
generation for business and the topics are price determination in
various market forms, Pricing methods, Differential pricing, Product-
line pricing and Price forecasting
4) Profit Management : Profits provide the chief measure of success for
the business Profits become difficult to manage in light of uncertainty
in costs and revenue for the business because of changes in external
and internal environment. The topics include Nature and
measurement of profit, profit policies and techniques of profit
planning like Break- Even analysis.
5) Capital Management : Capital Investments are the most difficult area
of business. Hence it is top management decision. The topics included
are Cost of Capital, Rate of return, and selection of Projects.
 Relationship with other areas
Production Management
 Production is defined as creation of utility by transforming input
in to output.
 Economics helps in analyze the input market
 Monitor Market maturity, technical maturity and competitive
maturity of products
 better coordination with R & D in terms of product and process
innovation
 to take decisions on production targets

Marketing
 Pricing
 Theory of the Firm
 Market structure
 Concepts of Goals and Goal formulation
 Relationship with other areas
Finance
 Capital Budgeting
 Investment Decision
Personnel
 Effective utilization of HR
 Manpower Planning
 Wage & Salary Administration

Operations Research

 Application of Mathematical Techniques

 Optimization Techniques
 Game Theory and Linear Programming to Optimize
 Waiting Lines/ Queuing Theory
 Allocation problem/Transportation Problem
 Inventory Models
 Role of Managerial Economist
 The Principal Objective of a Managerial Economist is to
determine the key factors which will influence the Business over
a period in future.
 These factors can be divided into 1. External 2. Internal. The
External factors lie outside the control of Management and is
Business Environment and the Internal factors are within the
scope of Management hence called Business Operations.
Business Environment
a. An analysis and forecast of external factors constituting general
business conditions. E.g. National Income and Output, Volume
of Trade, Prices
b. Outlook for National and Global economy
c. Population shifts, Regional Purchasing power
d. Demand prospects in new and current markets.
e. Effect of Social behavior on sales
 Role of Managerial Economist
Business Environment
f. Market and customer opportunities whether expand or contract
g. Overseas markets and effect of Government Legislation on
Production and Plants.
h. Availability of credit and cost of credit and the effect on
purchase behavior
i. Prices of Raw materials and finished products
j. Level of competition
k. Five-Year Plans
l. Outlook on Government policies, priorities, tax rates, Budgets
allocation
m. Global Tariffs on Exports and imports
n. RBI decisions stimulate or depress industrial production and
consumer purchasing and the effect on Company’s Cost, credit,
sales and profits
 Role of Managerial Economist
Business Operations
a. Analyze internal operations in respect of problems such as Price,
rate of operations, investment, expansion/contraction
b. Reasonable sales and profit budgets next year?
c. Production schedules and inventory policies next 6. months
d. Changes to be made in Price and wage policies
e. Availability of cash in hand and in Bank and how it should be
invested.
Specific functions
1. Sales Forecasting
2. Industrial market Research
3. Economic analysis of competitors companies
4. Pricing problems of Industry
5. Capital Projects
6. Production Programs
 Role of Managerial Economist
Specific functions
7. Security/Investment analysis and forecasts
8. Advice on Trade and Public Relations
9. Advice on Primary Commodities
10. Advice on Foreign Exchange
11. Economic Analysis on Agriculture
12. Analysis of Underdeveloped economies
13. Environmental Forecasting
14. Economic Intelligence
15. Participation in Public debates advising Government and
society
In Indian context following are the functions:
16. Macro forecasting for Demand and supply
17. Production Planning Macro and Micro levels
18. Capacity Planning and Product mix determination
19. Economics of various production lines
 Role of Managerial Economist
Specific functions
5. Economic feasibility of new production lines/process and
projects
6. Assistance in Overall development plans
7. Preparation of periodical economic reports on company’s
product lines, pricing, future growth opportunities, market
pricing, general business situation, various national and
international factors affecting industry and business
8. Preparing briefs, speeches, articles and papers for top
management for various meetings, conferences and seminars.
9. Keeping Management informed on various national and
international developments.
 Role of Managerial Economist
Specific functions
5. Economic feasibility of new production lines/process and
projects
6. Assistance in Overall development plans
7. Preparation of periodical economic reports on company’s
product lines, pricing, future growth opportunities, market
pricing, general business situation, various national and
international factors affecting industry and business
8. Preparing briefs, speeches, articles and papers for top
management for various meetings, conferences and seminars.
9. Keeping Management informed on various national and
international developments.
END OF UNIT-1