MANAGERIAL ECONOMICS Managerial economics has its roots in

Nature & Scope of Managerial Economics microeconomics and it deals with the micro or
individual enterprises.
I. Introduction to Managerial Economics
It is concerned with the application of the
Managerial economics provides us a basic insight
concepts such as price theory, Law of Demand
into seeking solutions for managerial problems.
and theories of market structure and so on.
Managerial economics, as the name itself implies,
is an offshoot of two distinct disciplines: IV. Macroeconomics
Economics and Management.
The study of ‘aggregate’ or total level of
In other words, it is necessary to understand economics activity in a country is called
what these disciplines are, at least in brief, to macroeconomics.
understand the nature and scope of managerial
economics. It studies the flow of economics resources or
factors of production (such as land, labor, capital,
II. Introduction to Economics organization and technology) from the resource
owner to the business firms and then from the
Economics is a study of human activity both at
business firms to the households.
individual and national level.
It deals with total aggregates, for instance, total
Adam Smith, the Father of Economics, defined
national income total employment, output and
economics as the study of nature and uses of
total investment. It studies the interrelations
national wealth.’
among various aggregates and examines their
Dr. Alfred Marshall, one of the greatest nature and behavior, their determination and
economists of the nineteenth century, writes causes of fluctuations in the (?).
“Economics is a study of man’s actions in the
It deals with the price level in general, instead of
ordinary business of life: it enquires how he gets
studying the prices of individual commodities. It
his income and how he uses it.” Thus, it is one
is concerned with the level of employment in the
side, a study of wealth; and on the other, and
economy.
more important side; it is the study of man.
It discusses aggregate consumption, aggregate
The definition given by AC Pigou endorses the
investment, price level, and payment, theories of
opinion of Marshall. Pigou defines Economics as
employment, and so on. Though macro-
“the study of economic welfare that can be
economics provides the necessary framework in
brought directly and indirectly, into relationship
term of government policies, etc., for the firm to
with the measuring rod of money.”
act upon dealing with analysis of business
Prof. Lionel Robbins defined Economics as “the conditions, it has less direct relevance in the
science, which studies human behavior as a study of theory of firm.
relationship between ends and scarce means
V. Management
which have alternative uses”. With this, the focus
of economics shifted from ‘wealth’ to human Management is the science and art of getting
behavior.’ things done through people in formally
organized groups. It is necessary that every
Lord Keynes defined economics as ‘the study of
organisation be well managed to enable it to
the administration of scarce means and the
achieve its desired goals.
determinants of employments and income.”
Management includes a number of functions:
III. Microeconomics
Planning, Organizing, Staffing, Directing, and
The study of an individual consumer or a firm is Controlling (POSDiCon).
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.

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The manager while directing the efforts of his It makes use of statistical and analytical tools to
staff communicates to them the goals, objectives, assess economic theories in solving practical
policies, and procedures; coordinates their business problems.
efforts; motivates them to sustain their
enthusiasm; and leads them to achieve the Study of Managerial Economics helps in
corporate goals. enhancement of analytical skills, assists in
rational configuration as well as solution of
VI. Managerial Economics problems.

Managerial Economics refers to the firm’s While microeconomics is the study of decisions
decision making process. It could be also made regarding the allocation of resources and
interpreted as “Economics of Management.” prices of goods and services, macroeconomics is
Managerial Economics is also called as the field of economics that studies the behavior of
“Industrial Economics” or “Business Economics.” the economy as a whole (i.e. entire industries and
economies). Managerial Economics applies
VII. Meaning and Definition microeconomic tools to make business decisions.
Managerial Economics is “the applications of It deals with a firm.
economics theory and methodology to business The use of Managerial Economics is not limited
administration practice.” to profit-making firms and organizations. But it
Managerial Economics bridges the gap between can also be used to help in decision-making
traditional economics theory and real business process of non-profit organizations (hospitals,
practices in two ways. educational institutions, etc). It enables optimum
utilization of scarce resources in such
1. First, it provides a number of tools and organizations as well as helps in achieving the
techniques to enable the manager to become goals in most efficient manner.
more competent to take decisions in real and
practical situations. Managerial Economics is of great help in price
analysis, production analysis, capital budgeting,
2. Secondly, it serves as an integrating course to risk analysis and determination of demand.
show the interaction between various areas in
which the firm operates. Managerial Economics uses both Economic
theory as well as Econometrics for rational
Managerial Economics can be defined as managerial decision making.
amalgamation of economic theory with business
practices so as to ease decision-making and Econometrics is defined as use of statistical tools
future planning by management. for assessing economic theories by empirically
measuring relationship between economic
Managerial Economics assists the managers of a variables. It uses factual data for solution of
firm in a rational solution of obstacles faced in economic problems.
the firm’s activities.
Managerial Economics is associated with the
It makes use of economic theory and concepts. It economic theory which constitutes “Theory of
helps in formulating logical managerial Firm.”
decisions.
Theory of firm states that the primary aim of the
The key of Managerial Economics is the micro- firm is to maximize wealth. Decision making in
economic theory of the firm. It lessens the gap managerial economics generally involves
between economics in theory and economics in establishment of firm’s objectives, identification
practice. of problems involved in achievement of those
objectives, development of various alternative
Managerial Economics is a science dealing with
solutions, selection of best alternative and finally
effective use of scarce resources. It guides the
implementation of the decision.
managers in taking decisions relating to the
firm’s customers, competitors, suppliers as well
as relating to the internal functioning of a firm.

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  and the goods or services which
consumers might not purchase and
consume in future. In order to decide the
amount of goods and services to be
produced, the managers use methods of
demand forecasting.

X. How To Produce

The firm has now to choose among different

alternative techniques of production. It has to
The following figure tells the primary ways in make decision regarding purchase of raw
which Managerial Economics correlates to materials, capital equipment, manpower, etc.
managerial decision-making. The managers can use various managerial
economics tools such as
VIII. Scope of Managerial Economics

Managerial Economics deals with allocating the  production and cost analysis (for hiring
scarce resources in a manner that minimizes the and acquiring of inputs);
cost. As we have already discussed, Managerial  project appraisal methods( for long term
Economics is different from microeconomics and investment decisions),etc. for making
macro-economics. Managerial Economics has a these crucial decisions.
more narrow scope-it is actually solving
XI. For Whom To Produce
managerial issues using micro-economics.
Wherever there are scarce resources, managerial  The firm, for instance, must decide which
economics ensures that managers make effective is it niche market-domestic or foreign?
and efficient decisions concerning customers,
 It must segment the market. It must
suppliers, competitors as well as within an
conduct a thorough analysis of market
organization. The fact of scarcity of resources
structure and thus take price and output
gives rise to three fundamental questions:
decisions depending upon the type of
1. What to produce? market.

2. How to produce? XII. Managerial Economics Continued

3. For whom to produce? Managerial economics helps in decision-making

as it involves logical thinking. Moreover, by
IX. What To Produce studying simple models, managers can deal with
To answer these questions, a firm makes use of more complex and practical situations. Also, a
managerial economics principles. general approach is implemented.

The first question relates to what goods and Managerial Economics take a wider picture of
services should be produced and in what firm, i.e., it deals with questions such as what is a
amount/quantities. firm, what are the firm’s objectives, and what
forces push the firm towards profit and away
The managers use demand theory for deciding from profit.
this. The demand theory examines consumer
behavior with respect to the kind of purchases In short, managerial economics emphasizes upon
they would like the firm, the decisions relating to individual firms
and the environment in which the firm operates.
 to make currently and in future;
 the factors influencing purchase and It deals with key issues such as what conditions
consumption of a specific good or service; favor entry and exit of firms in market, why are
 the impact of change in these factors on people paid well in some jobs and not so well in
the demand of that specific good or other jobs, etc. Managerial Economics is a great
service; rational and analytical tool.

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Managerial Economics is not only applicable to Managerial economist is required to have an art
profit-making business organizations, but also to of utilizing his capability, knowledge and
non-profit organizations such as hospitals, understanding to achieve the organizational
schools, government agencies, etc. objective. Managerial economist should have an
art to put in practice his theoretical knowledge
XII. Nature of Managerial Economics regarding elements of economic environment.

Managers study managerial economics because it Managerial Economics for administration of

gives them insight to reign the functioning of the organization
organization.
Managerial economics helps the management in
If manager uses the principles applicable to decision making. These decisions are based on
economic behavior in a reasonably, then it will the economic rationale and are valid in the
result in smooth functioning of the organization. existing economic environment.

XIII. Managerial Economics is a Science Managerial economics is helpful in optimum resource

allocation
Managerial Economics is an essential scholastic
field. It can be compared to science in a sense that The resources are scarce with alternative uses.
it fulfils the criteria of being a science in Managers need to use these limited resources
following sense: optimally. Each resource has several uses. It is
manager who decides with his knowledge of
 Science is a Systematic body of economics that which one is the preeminent use
Knowledge. It is based on the methodical of the resource.
observation. Managerial economics is also
a science of making decisions about scarce XV. Continuation
resources with alternative applications. It
is a body of knowledge that determines or Managerial Economics has components of
observes the internal and external microeconomics
environment for decision making.
Managers study and manage the internal
 In science any conclusion is arrived at environment of the organization and work for the
after continuous experimentation. In profitable and long-term functioning of the
Managerial economics also policies are organization. This aspect refers to the
made after persistent testing and trailing. microeconomics study.
Though economic environment consists of
The managerial economics deals with the
human variable, which is unpredictable,
problems faced by the individual organization
thus the policies made are not rigid.
such as main objective of the organization,
Managerial economist takes decisions by
demand for its product, price and output
utilizing his valuable experience and
determination of the organization, available
observations.
substitute and complimentary goods, supply of
inputs and raw material, target or prospective
 Science principles are universally
consumers of its products, etc.
applicable. Similarly policies of
Managerial economics are also Managerial Economics has components of
universally applicable partially if not macroeconomics
fully. The policies need to be changed
from time to time depending on the None of the organization works in isolation. They
situation and attitude of individuals to are affected by the external environment of the
those situations. Policies are applicable economy in which it operates such as
universally, but modifications are government policies, general price level, income
required periodically. and employment levels in the economy, stage of
business cycle in which economy is operating,
XIV. Managerial Economics requires Art exchange rate, balance of payment, general
expenditure, saving and investment patterns of

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the consumers, market conditions, etc. These XVII. Managerial Economics and Accounting
aspects are related to macroeconomics.
Managerial economics is also closely related to
Managerial Economics is dynamic in nature accounting, which is concerned with recording
the financial operations of a business firm.
Managerial Economics deals with human-beings
(i.e. human resource, consumers, producers etc.). In fact, a managerial economist depends chiefly
The nature and attitude differs from person to on the accounting information as an important
person. Thus to cope up with dynamism and source of data required for his decision-making
vitality managerial economics also changes itself purpose.
over a period of time.
For instance, the profit and loss statement of a
XVI. Managerial Economics and Micro Economics firm show well the firm has done and whether
the information it contains can be used by
All the firms operating in the market have to take managerial economist to throw significant light
under consideration the constituent of the on the future course of action that is whether the
economic environment for its proper functioning. firm should improve its productivity or close
This economic environment is nothing but the down.
Microeconomics elements.
Therefore, accounting data require careful
Microeconomics is a broader concept as compare to interpretation, reconstruction and adjustments
Managerial Economics. before they can be used safely and effectively.

Microeconomics forms the foundation of It is in this context that the link between
managerial economics. Almost all the concepts of management accounting and managerial
Managerial Economics are the perceptions of economics deserves special mention. The main
Microeconomics concepts. task of management accounting is to provide the
sort of data, which managers need if they are to
Managerial economics can be perceived as an
apply the ideas of managerial economics to solve
applied Microeconomics.
business problems correctly. The accounting data
should be provided in such a form that they fit
Demand Analysis and Forecasting, Theory of
easily in to the concepts and analysis of
Price, Theory of Revenue and Cost, Theory of
managerial economics.
Supply and Production are major barebones of
Microeconomics that underpins the Managerial
Economics.

Managerial Economics applies the theories of

Microeconomics to resolve the issues of the
organization and for decision making.

All Managers want to carry out their function of

decision making with maximum efficiency. Their
business planning can be effectively planned and
performed with comprehensive knowledge and
understanding of microeconomic concept and its
applications.

Optimum decision making to achieve the

objective of the organization i.e. for profit
maximizing or for cost minimizing, is possible
with proper compliance of microeconomic know
how, regardless of the technological constraints
and given market conditions.

Microeconomic Analysis is important as it is

applied today dilemma and concerns.
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