Introduction to Managerial Economics

Dr.R.Gayathri
Faculty, SOM
SASTRA
Plan for this week
 Course introduction
 Scope, goals, and topics
 Preliminaries: background concepts
 How do markets work?
 How do customers value products?
 What are the relevant production and
cost measures for decision making?
 How does competition affect business
decisions in different market
structures?
 What prices should be set?
 What would be the impact of changes
in interest rates on costs, accounting,
or capital budgeting?
 How important to managerial and
marketing decisions are changes, in
foreign exchange rates, in technology,
in incomes, in government
regulations, in sources of energy, in
the balance of payments?
 What is Managerial Economics?
Managerial Economics is an Applied
Economics in the sphere of business
management. It is an application of
economic theory and methodology to
decision-making problems faced by the
business firms.
Definition of Managerial Economics
“Managerial Economics is economics applied in
decision-making. It is a special branch of
economics bridging the gap between the
economic theory and managerial practice. Its
stress is on the use of the tools of economic
analysis in clarifying problems in organizing and
evaluating information and in comparing
alternative courses of action.”
-W. W. Haynes
“ManagerialEconomics is the integration of
economic theory with business practice for
the purpose of facilitating decision-making
and forward planning by management.”
- Spencer & Siegelman
 What is Economics? Con’t..
Economics is the study
 scarcity and choice
unlimited wants with limited resources
Allocation of resource, costs and consumer
benefits
 co-ordination of activities which result from
specialization

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Circular flow of income in the economy
BASIS FOR MICROECONOMICS MACROECONOMICS
COMPARISON
Meaning The branch of The branch of
economics that studies economics that studies
the behavior of an the behavior of the
individual consumer, whole economy, (both
firm, family is known national and
as Microeconomics. international) is known
as Macroeconomics.

Deals with Individual economic Aggregate economic

variables variables
Business Applied to operational Environment and
Application or internal issues external issues
Scope Covers various issues like demand, Covers various issues like,
supply, product pricing, factor national income, general
pricing, production, consumption, price level, distribution,
economic welfare, etc. employment, money etc.

Importance Helpful in determining the prices Maintains stability in the

of a product along with the prices general price level and
of factors of production (land, resolves the major
labor, capital, entrepreneur etc.) problems of the economy
within the economy. like inflation, deflation,
unemployment and
poverty as a whole.
Limitations It is based on unrealistic It has been analyzed that
assumptions, i.e. In 'Fallacy of Composition'
microeconomics it is assumed that involves, which
there is a full employment in the sometimes doesn't proves
society which is not at all possible. true because it is possible
that what is true for
aggregate may not be true
for individuals too.
 Characteristics of Managerial Economics
Prof. D .M .Mithani has mentioned the following broad
salient features of Managerial Economics
 It involves an application of Economic theory – especially, micro
economic analysis to practical problem solving in real business
life. It is essentially applied micro economics.
 It is a science as well as art facilitating better managerial
discipline. It explores and enhances economic mindfulness and
awareness of business problems and managerial decisions.
 • It is concerned with firm’s behaviour in optimum allocation of
resources. It provides tools to help in identifying the best course
among the alternatives and competing activities in any
productive sector whether private or public.
 Cont..,
 Managerial economics is concerned with the analysis of
finding optimal solutions to decision making problems
of businesses/firms (micro economic in nature).
 Managerial economics describes, what is the observed
economic phenomenon (positive economics) and
prescribes what ought to be (normative economics

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 Cont…,
 Managerial economics is based on strong economic
concepts. (conceptual in nature)
 Managerial economics analyses the problems of the firms in
the perspective of the economy as a whole
( macro in nature)
 It helps to find optimal solution to the business problems
(problem solving)
 Managerial economics is a practical subject therefore it is
pragmatic.

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Micro Economics Applied to Business
Environment
 Consumer behavior- maximization of satisfaction
 Utility analysis
 Indifference curve analysis
 Production function
 Determination of price under different market
conditions
 Cost of capital and return on capital-choice of
investment projects
Macro Economics Applied to Business
Environment

 The type of economic system- capitalist,

socialist or mixed economic system.
 General trends in production,
employment, income, prices, saving and
investment.
 Volume, composition and direction of
foreign trade.
 Structure of and trends in the working of
financial institutions- Banks, NBFCs,
insurance companies an other financial
institutions.
 Economic policies of the government- Fiscal
policy, Monetary policy, EXIM- policy,
 Industrial policy, Price policy etc.
 State’s attitude towards private sector
 Political stability.
 Economic
Conditions
Market Factor
Conditions Prices

Managerial
Problems

Managerial Decision

Company’s Market
Performance Conditions
Organizational Structure and Environmental Scan

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Decision making
It must be done amid
ever-changing
factors:
•Unclear
information
•Often
conflicting
points of view.
Decision making Process
 Important areas of decision making;
a) Selection of product.
b) Selection of suitable product mix.
c) Selection of method of production.
d) Product line decision.
e) Determination of price and quantity.
f) Decision on promotional strategy.
g) Optimum input combination.
h) Allocation of resources.
i) Replacement decision.
j) Make or buy decision.
k) Shut down decision.
l) Decision on export and import.
m) Location decision.
n) Capital budgeting.
 Role of a Manager
A Manager is a person who directs
resources to achieve a stated goal and he/she
has the responsibility for his/her own actions as
well as for the actions of individuals, machines
and other inputs under the manager’s control.

Managerial economics is the study of how

scarce resources are directed most efficiently
to achieve managerial goals. It is a valuable tool
for analyzing business situations to take better.
 Specific functions to be performed by a managerial Economist :
1. Production scheduling

2. Sales forecasting

3. Market research

4. Economic analysis of competing companies

5. Pricing problems of industry

6. Investment appraisal

7. Security analysis

8. Advice on foreign exchange management

9. Advice on trade

10. Environmental forecasting

The major objectives of the firm are

 To achieve the Organizational Goal

 To maximize the Output
 To maximize the Sales
 To maximize the Profit of the Organization
 To maximize the Customer and Stakeholders
Satisfaction
 To maximize Shareholder’s Return on Investment
 To maximize the Growth of the Organization
 Nature of Managerial Economics
1 . Managerial
economics is concerned with the analysis of finding optimal
solutions to decision making problems of businesses/firms (micro
economic in nature).
2. Managerial economics is a practical subject therefore it is pragmatic.
3. Managerial economics describes, what is the observed economic
phenomenon (positive economics) and prescribes what ought to be
(normative economics)
4. Managerial economics is based on strong economic concepts.
(conceptual in nature)
5. Managerial economics analyses the problems of the firms in the
perspective of the economy as a whole ( macro in nature)
6. It helps to find optimal solution to the business problems (problem
solving)
 Nature Of The Firm
 A firm is an association of individuals who
have organized themselves for the purpose of
turning inputs into output. The firm organizes the
factors of production to produce goods and
services to fulfill the needs of the households.
Each firm lays down its own objectives which is
fundamental to the existence of a firm.
Concepts that aid in decision making
Incremental concept
Concept of Time perspective
The discounting Principle
The concept of Opportunity cost
The equi- marginal Principle
 Case let
Government intervention In Germany
in 2009 there was considerable debate
about the extent to which the
government should be intervening in
the economy. For example, its citizens
were worried about the future of
Opel, a German car brand that was
part of the ailing General Motors.
Some wanted the government to make
sure jobs were saved no matter what.
Others, however, were more hesitant
and worried about becoming the
government becoming too
interventionist.
Traditionally since the Second World War the
German government has seen itself as a referee in
market issues and has avoided trying to control
parts of the economy. It would regulate anti-
competitive behavior, for example, but not try to
run many industries. However in the recession of
2009 when the economy was shrinking the
government was forced to spend more to
stimulate demand and had to intervene heavily to
save the banking sector from collapse. The
government also had to offer aid to businesses to
keep them alive.
Questions
1.What are the possible benefits of a
government intervening in an
economy?
2.What are the arguments against
government intervention in an
economy?
3.What prompted greater intervention
by the German government in 2009?
4. What would determine whether the
German continued to intervene on this
scale in the future?
Issues related to Macro Variables

 General trends in economic activities of the

country
 Investment climate
 Trends in output
 Trends in price - level (state of inflation)
 Consumption level and its pattern
 Profitability in business expansion
Issues related to Foreign Trade

 Trade relation with other countries

 Sector and firms dealing in exports and imports
 Exchange rate fluctuations
 Inflow and outflow of capital
 Trends in international prices of various goods
and services
 International monetary mechanism
 Rules, regulations and policies of WTO
 Issues related to Government Policies
• Regulation and control of economic activities of

private sector business enterprises

Enforcing the government rules and regulations for
imposing of social responsibility
Striking balance between firm’s objective of profit
maximization and society’s interest
Policy and regulatory measure for reducing social
costs in terms of environmental pollution,
congestion and slums in cities, basic amenities of life
such as means of transportation and
communication, water, electricity supply etc.
Relationship of Managerial Economics
with Other Disciplines
 Economics and Econometrics
 Mathematics and Statistics
 Operational Research
 Accountancy
 Psychology and Organization
Behavior
 Management Theory
Questions