Mefa Unit - I-1

Managerial Economics And
Financial Analysis
By
Ch.Sophiapragathi
MBA,MCOM (Osmania )
UNIT-I
INTRODUCTION
Managerial Economics refers to the firm’s
decision making process. It could be also
interpreted as “Economics of Management”.
Managerial Economics is also called as

“Industrial Economics” or “Business
Economics”.
• 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 is a stream of management

studies that emphasizes primarily solving business
problems and decision-making by applying the
theories and principles of microeconomics and
macroeconomics.
Managerial economics is a discipline which deals with
the application of economic theory to business
management. It deals with the use of economic
concepts and principles of business decision making
DEFINITIONS
• Adam Smith's Definition of Economics as
“an inquiry into the nature and causes of the wealth of
nations
Jean Baptiste Say
Economics Is The Science Of Production ,Distribution,and
Consumption Of Wealth
John Stuart Mill
Economics Is A Science Which Traces The Laws Of Such Of
The Phenomena Of Society As Arise From The Combined
Operations Of Mankind For The Production Of Wealth
E.F.Brigham and J.L. Pappas
• Managerial Economics is “the applications of

economics theory and methodology to
business administration practice”.
C.I.Savage & T.R.Small
therefore believes that

• managerial economics “is concerned with
business efficiency
Nature of managerial economics
Scope : Managerial Economics
• Demand Analysis & Demand Forecasting
• Theory Of Production
• Theories Of Cost And Revenue
• Market Structure And Price Theory
• Theory Of Profit Management
• Theory Of Capital
• Micro And Macro Economics
• Market Management
Basic Economic Principle
• Opportunity Principle
• Marginal Principle
• Incremental Principle
• Equi – Marginal Principle
• Time Perspective Principle
• Discounting Principle
• Risk And Uncertainty
What Is Opportunity Cost?
• Opportunity costs represent the potential benefits

that an individual, investor, or business misses out
on when choosing one alternative over another.
• Opportunity cost is the forgone benefit that would
have been derived from an option not chosen.
• To properly evaluate opportunity costs, the costs
and benefits of every option available must be
considered and weighed against the others.
What Is the Marginal Cost of Production?
The marginal cost of production is the change in total

production cost that comes from making or producing
one additional unit.
To calculate marginal cost, divide the change in
production costs by the change in quantity.
The purpose of analyzing marginal cost is to determine
at what point an organization can achieve
economies of scale to optimize production and overall
operations. If the marginal cost of producing one
additional unit is lower than the per-unit price, the
producer has the potential to gain a profit.
What Is Incremental Cost?
• Incremental cost is the total cost incurred due

to an additional unit of product being produced.
• Incremental cost is calculated by analyzing the
additional expenses involved in the production
process, such as raw materials, for one
additional unit of production.
• Understanding incremental costs can help
companies boost production efficiency and
profitability.
Time Perspective Concept
• The time perspective concept states that the decision maker
must give due consideration both to the short run and long run
effects of his decisions.
• He must give due emphasis to the various time periods.
• It was Marshall who introduced time element in economic
theory.
• The economic concepts of the long run and the short run have
become part of everyday language.
• Managerial economists are also concerned with the short run
and long run effects of decisions on revenues as well as costs.
• The main problem in decision making is to establish the right
balance between long run and short run.
DISCOUNTING PRINCIPLE
• This concept is an extension of the concept of time
perspective. Since future is unknown and incalculable,
there is lot of risk and uncertainty in future.
• Everyone knows that a rupee today is worth more
than a rupee will be two years from now.
• This appears similar to the saying that “a bird in hand
is more worth than two in the bush.”
• This judgment is made not on account of the
uncertainty surrounding the future or the risk of
inflation.
Equi-Marginal Concept:
• One of the widest known principles of

economics is the equi-marginal principle.
• The principle states that an input should be
allocated so that value added by the last unit
is the same in all cases.
• This generalization is popularly called the
equi-marginal.
RISK AND UNCERTAINITY
• Managerial decisions are actions of today which bear fruits in future

which is unforeseen.
• Future is uncertain and involves risk. The uncertainty is due to
unpredictable changes in the business cycle, structure of the
economy and government policies.
• This means that the management must assume the risk of making
decisions for their institution in uncertain and unknown economic
conditions in the future.
• Firms may be uncertain about production, market prices, strategies
of rivals, etc.
• Under uncertainty, the consequences of an action are not known
immediately for certain.
THANK YOU

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Managerial Economics And

Managerial Economics is also called as

• Economics is the study of the production, distribution

• Managerial economics is a stream of management

• Managerial Economics is “the applications of

C.I.Savage & T.R.Small

therefore believes that

• Opportunity costs represent the potential benefits

The marginal cost of production is the change in total

• Incremental cost is the total cost incurred due

• One of the widest known principles of

• Managerial decisions are actions of today which bear fruits in future

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