Managerial economics analyzes how managers use economic theories to address business problems and make rational decisions to achieve firm objectives. A manager faces choices regarding products, inputs, revenue distribution, and expansion/maintenance. Objectives may include profit maximization, sales revenue maximization, or market share growth. Economic concepts like scarcity, opportunity cost, and marginal analysis help managers optimize resource allocation. Demand analysis considers how price, income, substitute prices, and other factors affect quantity demanded. The law of demand states that higher prices reduce demand and vice versa. Market demand is the total quantity demanded in the market. Market research has found exceptions to the law of demand in certain consumer behaviors.

1. Managerial
Economics

2. WHAT IS ECONOMICS?
• Economics is the study of allocation of scarce
resources among alternate uses.
• Economics is the study of how individuals and
groups make decisions with limited resources as
to best satisfy their wants, needs and desires.
• Economics is on one side the study of wealth
and on the other and more important side, a part
of the study of man.

3. ECONOMICS
MACRO MICRO

4. Macro Economics Micro Economics
• Studies the economic • Studies the behavior of
system in aggregate an individual decision
making unit like an
• Looks at the total individual/household/
output of a nation and firm
the way the nation
allocates its resources
of land, labour, capital,
etc. to promote trade
and growth

5. MACRO ECONOMICS RELATES TO ISSUES SUCH
AS
• NATIONAL INCOME • GOVERNMENT
• SAVINGS EXPENDITURE - To
• INVESTMENT curtail Fiscal Deficit
– Raise taxes
• EMPLOYEMENT
– Cut spending
• TAX COLLECTIONS – Borrow
• FOREIGN TRADE – Print
• MONEY SUPPLY • Easiest politically
• Results in inflation
• PRICE LEVEL • It is a tax on those holding
money

6. Managerial Economics
Analyses the process
Through which a manager uses economic theories
to address the complex problems of business world
and then, take ‘rational’ decisions
in such a way that
the perceived objectives of the firm may be attained

7. THE MANAGER OF A FIRM FACES THE
FOLLOWING BASIC ISSUES
– Choice of product
– Choice of inputs
– Distribution of the firm’s revenues
– Rationing
– Maintenance and expansion

8. OBJECTIVES OF A FIRM
 Maximization of Profit
 Maximization of sales revenue
 Maximization of growth rate
 Maximization of managers utility function
 Making satisfactory rate of profit

9. GOALS OF A FIRM
Market share
Customer satisfaction
ROI
Technological advancement
Long run survival
Entry prevention & risk avoidance
Social/Environmental concerns

10. BASIC ECONOMIC CONCEPTS
1. CHOICES AND DECISIONS
– RESOURCES
• MONEY
• MACHINE
• MATERIALS
• LABOUR
• TIME
• SKILL
• TECHNOLOGY
– CHOICES – ALTERNATE USES
• WHETHER TO STUDY FULL TIME MBA OR MCA OR LAW
• WHETHER TO KEEP MONEY IN SB OR TD OR INVEST IN BUSINESS OR SHARES
– OPPORTUNISTIC COST

11. BASIC ECONOMIC CONCEPTS
2. HUMAN ACTION – PURPOSEFUL BEHAVIOUR
3. SCARCITY
– If anything is scarce, it is a subject of economics.
Otherwise, it is not a subject matter of economics.
4. TRADE OFF
– Economics is about trade off
– If you get one thing, you cannot get another thing.
You have to give up one for the other.

12. BASIC ECONOMIC CONCEPTS
5. INCREMENTAL CONCEPT
– While adding a new business/buying new input/adopting new process
6. DISCOUNTING CONCEPT
– If a decision affects costs and revenues in the long run, they should be
discounted. A rupee in future is less in value
7. TIME PERSPECTIVE
– Short term and long term impact due to decisions say pricing decision
8. MARGINAL CONCEPT
– Marginal utility of the product. Marginal utility is derived from the additional unit
consumed.

13. BASIC ECONOMIC CONCEPTS
9. EFFCIENCY AND PRODUCTIVITY
• How well resources are used in order to get maximum output.
• Productivity means with one of input, how much output you get.
– Productivity per worker
– Productivity per machine
10. MEANS = RESOURCES = INPUT
TIME, MONEY, LAND, LABOUR, CAPITAL, NATURAL RESOURCES
11. UTILITY
Subjective benefit a particular person gets by using a particular goods
12. GOOD (ECONOMIC GOOD)
• BRINGS UTILITY
• DOES NOT MEAN THAT IT BRINGS THE SAME BENEFIT TO EVERY BODY

14. BASIC ECONOMIC CONCEPTS
13. MODEL
• Theoretical abstract representation over relationship between two or more
economic variables.
• Out put depends on in put (capital, labour, etc)
• Every model has four fundamentals
– Theory
– Variables
– Assumptions
– Causation
Example: Inflation
• Causation: Increasing money supply (Value of money falls, prices increase)

15. BASIC ECONOMIC CONCEPTS
14. ECONOMIC PROFIT Vs. ACCOUNTING PROFIT
• Accounting profit ignores opportunity cost
• Economic profit is arrived at after taking into account opportunity cost.
EXAMPLE
An individual sets up a shop in a building owned by him and puts in work by himself. The business makes a profit of Rs. 2 lacs. No rent for his premises and
no salary for his work were paid.
ACCOUNTING PROFIT Rs.2,00,000
LESS NOTIONAL RENT Rs.1,44,000
NOTIONAL SALARY Rs. 96,000
Rs.2,40,000
--------------
ECONOMIC PROFIT/LOSS (-) Rs. 40,000
--------------
• POSITIVE ECONOMIC PROFIT = Revenue exceeds all costs including opportunity cost.
– For economic purposes, economic profit and not accounting profit has to be used.
– Opportunity cost is subjective. Accountants want documents to account.

16. BASIC ECONOMIC CONCEPTS
15. NORMAL PROFIT
• Suppose one has invested capital. How much interest he will get on
his investment under competitive condition.
• Interest on the capital + risk premium
16. EXCESS PROFIT -- GETTING MORE THAN NORMAL PROFIT
• You cannot get excess profit in the long run because competition
will emerge.
• Govt. also steps in to prevent excess profit being made by various
measures ,
EXAMPLE: Micro Finance, Financing against gold jewellery.

17. INCREMENTAL CONCEPT EXAMPLE
• You want to purchase a machine costing
Rs.10,00,000/-. When you approached a nationalised
bank, they offered to lend to the extent of 80% of
the cost of machine at an interest rate of 10%. You
do not have margin money of Rs.2,00,000/-. When
you approached a private sector bank, they agreed
to lend 90% of the cost of the machine but @ 12%.
What is the incremental cost in terms of % of interest
on the incremental amount of Rs.1,00,000 borrowed
for one year

18. Working for incremental financing cost
• Financing cost = Loan amount x Interest rate
• First case = 8,00,000 x 0.10 = 80,000
• Second case = 9,00,000 x 0.12 = 1,08,000
• Incremental Financing Cost = 1,08,000 – 80,000
= 28,000
Incremental amt. borrowed= 1,00,000
Incremental Financing cost % = Incremental cost/
Incremental borrowing
28,000/1,00,000 = 0.28 = 28%

19. DISCOUNTING CONCEPT EXAMPLE
• You are in a position to invest Rs.1 crore in a project. You have
choice of two projects and have to choose the most profitable
project. Discounting rate/Cost of funds is 15%. Cash inflow
over a 5 year period is as follows:
• Year Project A Project B
• I 10,00,000 0
• II 10,00,000 5,00,000
• III 10,00,000 5,00,000
• IV 10,00,000 10,00,000
• V 10,00,000 32,50,000
• Which project you will choose?

20. Working for discounting concept
example
CASH FLOW PRESENT VALUE YEAR CASH FLOW PRESENT VALUE
PROJECT ‘A’ PROJECT ‘B’
10,00,000 8,69,565 I 0 0
10,00,000 7,56,144 II 5,00,000 3,78,072
10,00,000 6,57,516 III 5,00,000 3,28,758
10,00,000 5,71,753 IV 10,00,000 5,71,753
10,00,000 4,97,176 V 32,50,000 16,15,824
50,00,000 33,52,154 TOTAL 52,50,000 28,94,507
Present Value = Cash flow/r to the power of n

21. CIRCULAR FLOW OF ACTIVITY
• HOUSEHOLDS OWN AND CONTROL RESOURCES AND SELL THEM TO
BUSINESSES
• BUSINESSES USE THE RESOURCES TO MAKE FINISHED PRODUCTS
• BUSINESSES TAKE FINISHED PRODUCTS AND SELL THEM TO
HOUSEHOLDS
GOODS AND SERVICES
HOUSEHOLDS BUSINESSES
RESOURCES

22. CIRCULAR FLOW OF ACTIVITY Continued
• HOUSEHOLDS PURCHASE GOODS AND AVAIL
SERVICES RESULTING IN EXPENDITURE – FLOW
OF PAYMENTS TO BUSINESSES FROM
HOUSEHOLDS.
• HOUSEHOLDS/INDIVIDUALS WORK FOR
BUSINESSES, RENT THEIR PREMISES TO
BUSINESSES AND INVEST IN BUSINESSES. ALL
THESE ACTIVITIES GENERATE INCOME – FLOW OF
PAYMENTS TO HOUSEHOLDS FROM BUSINESSES.
• THE FLOW OF PAYMENTS IN AN ECONOMY IS A
CIRCULAR FLOW

23. DEMAND ANALYSIS
• DETERMINANTS OF DEMAND
• PRICE
• INCOME
• PRICES OF RELATED GOODS i.e. SUBSTITUTE AND
COMPLEMENTARY GOODS
• ADVERTISING AND SALES PROMOTION

24. DETERMINANTS OF DEMAND Contd….
• POPULATION
• AVAILABILITY OF CREDIT
• SEASON OF THE YEAR
• WEATHER
• ONE’S STATUS
• GEOGRAPHIC LOCATION OF THE BUYERS
• EXPECTED FUTURE TREND IN PRICES
• CHANGES IN CONSUMER TASTES
• NEEDS AND PREFERENCES
• CHANGES IN CONSUMER CREDIT FACILITIES

25. MEANING OF DEMAND
• Demand in economics means desire to buy
backed by adequate purchasing power.
• Mere desire or wish cannot buy goods. The
demand for goods, therefore, denotes that
someone is able and willing to buy the goods.
• Example: Car

26. THE LAW OF DEMAND
• The relation of price to sales is known in economics as the
‘Law of Demand’.
• The Law of Demand states that “higher the price, lower the
demand and vice versa, other things remaining the same”.
• Law of Demand states, ceteris paribus (keeping other
factors constant), there is an inverse relationship between
price and quantity demanded.
• In simple terms it means, an increase in price will tend to
reduce the quantity demanded and a fall in price will lead
to an increase in the quantity demanded.

27. DEMAND SCHEDULE
• PRICE QUANTITY
DEMANDED
• Rs.500 1,000 units
• Rs.400 1,200 units
• Rs.300 1,500 units
• Rs.200 2,000 units

28. DEMAND CURVE
• The Law of Demand or the Price-Quantity Relationship is also
portrayed graphically in the form of a chart which is called the
‘Demand Curve’.
• It is a convention among economists to portray price-quantity
relationship by representing physical quantity on the horizontal (X)
axis and the price on the vertical (Y) axis.
• The Demand Curve slopes downward from left to right indicating
that when price rises, less is demanded and when price falls, more
is demanded. This kind of a slope is also called as ‘negative slope’.
• The demand curve concentrates exclusively on the price-quantity
relationship. The relationship between quantity demanded and
other variables are not shown by the ‘Demand Curve’.

29. DEMAND FUNCTION
• The price-quantity relation is also expressed
algebraically in the form of the following
equation:
Q = f(P)
which means that quantity demanded is a
function of price.

30. CHARACTERISTICS OF LAW OF DEMAND
• INVERSE RELATIONSHIP
• PRICE IS AN INDEPENDENT VARIABLE AND
DEMAND IS A DEPENDANT VARIABLE
• OTHER THINGS REMAIN THE SAME
• REASONS UNDERLYING THE LAW OF DEMAND
• Income Effect
• Substitution Effect

31. EXCEPTIONS TO THE LAW OF DEMAND
• GIFFEN GOODS
• LUXURY OR VEBLEN GOODS - GOODS
PURCHASED FOR THEIR ‘SNOB APPEAL’ or
OSTENTATION. Example: Diamonds, art work,
BMW car
• FEAR OF FUTURE CANGE - SPECULATIVE
MARKET

32. INDIVIDUAL DEMAND AND MARKET DEMAND
• INDIVIDUAL DEMAND
• The quantity demanded by an individual
purchaser at a given price is known as individual
demand.
• MARKET DEMAND
• The total quantity demanded by all the
purchasers together is known as market demand.

33. MARKET DEMAND - EXAMPLE
Price Quantity demanded in dozen by Total
per A B C D E
dozen
eggs
Rs.
48 1 3 0 0 0 4
46 2 4 1 0 0 7
44 3 5 3 1 0 12
42 4 6 5 2 1 18
40 5 7 6 3 2 23
38 6 8 7 4 3 28
36 7 9 8 5 4 33

34. MARKET RESEARCH AND LAW OF DEMAND
• Law of demand is not the last word on
consumer behavior. Rather, sales executives
have often found the Law of demand
irrelevant for their purposes. Market research
has propounded, on the basis of empirical
investigations, certain propositions and
hypotheses.
• Some of them are as follows:

35. MARKET RESEARCH AND LAW OF DEMAND Contd….
• The more confidence a person has in price information as a
predictor of quality, the more likely he will be to choose a
high priced rather low priced item.
• A person who perceives himself as experienced in
purchasing a product will generally choose a low priced
item, but an inexperienced person will select a high priced
one.
• A person who selects a high priced item will (a) believe it is
more difficult to judge product quality and (b) feel that he
has less ability to make accurate quality judgments than
one who chooses a low priced item.

36. MARKET RESEARCH AND LAW OF
DEMAND Contd….
• Consumer is not rational always. Consumer behavior is
baffling. Sometimes, low price results in low sales and
when the price is increased, sales increase. The reason:
Higher price was essential if the products real
advantages were ever to be noticed.
• Consumer’s purchasing behavior is mostly repetitive.
This is against the formulation advocated in economic
theory that the consumer tries to reach the optimum
in every transaction and every time.