skills

1. Learning Objectives
• Define managerial economics
– Relationship to microeconomics and related fields
• Cite important types of decisions regarding
allocation of scarce resources
• Provide examples of how changes affect
company’s ability to earn an acceptable return
• Cite and compare the three basic economic
questions from the standpoint of a country and a
company

2. Economics and Managerial
Decision Making
• Economics is “the study of the behavior
of human beings in producing, distributing
and consuming material goods and
services in a world of scarce resources.”
(McConnell, 1993)

3. Economics and Managerial
Decision Making
• Management is the discipline of
organizing and allocating a firm’s scarce
resources to achieve its desired
objectives. Involves the ability to organize
and administer various tasks in pursuit of
certain objectives.

4. Economics and Managerial
Decision Making
• Managerial economics is the use of
economic analysis to make business
decisions involving the best use
(allocation) of an organization’s scarce
resources.

5. Introduction
• Spencer & Siegelman define Managerial
Economics as “the integration of economic
theory with business practice for the purpose of
facilitating decision-making and forward planning
by management”
• Mansfield defines as “Managerial Economics is
concerned with the application of economic
concepts and economic analysis to the problems
of formulating rational managerial decisions”

6. Economic Theory
•Micro Economics
•Macro Economics
Managerial Economics
Decision Sciences
•Econometrics
•Mathematical Economics
Helps Executives
To reach optimal solutions
to all management
decision problems

7. Introduction to ME
» Business decisions are taken in a fast changing socio-
economic environment.
» Almost all decisions, in one way or the other, relate to
economic variables like demand, price, supply, stock,
input, output, finance, profit and the like.
» Under Managerial economics we will concentrate on these
economic decision variables and the economic decision
process.
» Managerial economics does not provide ready made
solutions to business problems.
» It provides a tool-box of analysis and technique of thinking
which can be helpful in conceptualising the problems faced
by the management.
» M E is supposed to enrich the conceptual and technical
skill of a manager facing business decision problems.

8. Economic Analysis
• Economic Problem and Economic Analysis
Economic Problem is the problem of choice
making and valuation.
Scarcity is at the root of economic problem.
We make choices between ends, between
means, between use of means and satisfaction
of ends.
We constantly match ends to means; this is
called economic activity.

9. Nature of Managerial Economics
• It is micro-economic in character. Its unit of study is
individual and not aggregates.
• It is pragmatic in nature. It avoids abstract issues of
economic theory and considers particular environment of
decision-making.
• It is normative i.e., prescriptive rather than descriptive. It
is concerned with what decisions ought to be made.
• It also uses macroeconomics as the same provides an
understanding of the environment in which the business
must operate.

10. Difference between Economics and Managerial
Economics
Economics
1. It deals with the body of
principles of economic theory
itself.
2. It is both micro as well as
macro economics.
3. It deals with firms as well as
individuals.
4.It incorporates simplified models
of theory.
5. It is quite abstract as most of
the models are based on
‘Ceteris Paribus’ assumption.
6. It is wider in scope.
Managerial Economics
Economic Principles are applied
to problems of firms.
It is applied micro economics.
It deals only with firms.
It modifies and enlarges models
to suit specific conditions.
It embodies complexities of real
life situation in a competitive
environment.
It is narrower in scope.

11. Scope of Managerial Economics
The following topics generally fall under
Managerial Economics:
Demand Analysis and Forecasting
Cost Analysis
Production & Supply Analysis
Pricing Decisions, Policies & Practices
Profit Management and
Capital Management

12. Business Decisions
• Business decisions are classified into
categories depending upon the managerial
function to which they relate to.
• Financial decisions: Costing, budgeting,
accounting,auditing,tax-planning, portfolio
composition, capital structure, dividend
distribution etc.

13. Contd…..
• Production Decisions: Quantity and quality
of product, choice of technology, product-
mix, plant location and lay out, production
scheduling, maintenance, pollution control
etc.
• Personnel Decisions: Recruitment,
selection, induction, training, placement,
promotion, transfer, retirement or
retrenchment of staff.

14. Contd….
• Marketing Decisions: Sales volumes, sales
force, sales promotion, market research,
customer service, packaging,
advertisement, new product positioning.
• Misc Decisions: Purchasing, inventory
control, information system, data
processing, public relations etc.

15. Managerial Economics
• ME concentrates on the decision process,
decision model and decision variables at the firm
level.
• The firm is a part of an industry which exists in a
given socio-economic environment of business.
• The executives and managers,
individually/jointly take, make and execute
decisions.
• Their operation reflects the behaviour and
culture of the firm.

16. Subject Matter of ME
Concepts/techniques Topics of ME
Demand Analysis Demand decisions
Prod-cost analysis Input-outputdecisions
Mkt structure Ana Price-output decision
Firm’ behaviour ana Profit Max. &other
Project Appraisal Investment decisions
Risk/uncertainty Economic forecasting

17. Managerial Economics and Other
Subjects
Managerial Economics is said to be
closely related to other subjects like:
Economics – Micro & Macro
Mathematics
Statistics
Accounting &
Operations Research

18. Decision Sciences
• Mathematics, Statistics, econometrics are used
in economic analysis.
• Equations, graphs, diagrams, flow charts etc are
used.
• Intuitive appeal and logical reasoning will be
required.
• Regression may help the manager to forecast
his sales based on past record but the manager
must make sure that the user has not undergone
any changes in Ts&Ps.

19. Operation research
• Linear Programming as well as goal
programming models are used in
managerial decisions.
• Calculus and Multiplier techniques of
optimisation in specific situations is used.

20. Accountancy
• The information on costs, inventories,
receivables, revenue and profits are
provided by the accountant.
• Accounting profit Vs. economic profit and
BEP and shut down concept of economics
will be used.

21. Psychology and OB
• Consumer behaviour is entirely based on
psychology.
• Behavioural models of the firm are drawn
heavily from the organisational behaviour.

22. Economics and Managerial
Decision Making
• Questions that managers must answer:
– What are the economic conditions in a particular
market?
• Market Structure?
• Supply and Demand Conditions?
• Technology?
• Government Regulations?
• International Dimensions?
• Future Conditions?
• Macroeconomic Factors?

23. Economics and Managerial
Decision Making
• Questions that managers must answer:
– Should our firm be in this business?
– If so, what price and output levels achieve our
goals?

24. Economics and Managerial
Decision Making
• Questions that managers must answer:
– How can we maintain a competitive advantage over
our competitors?
• Cost-leader?
• Product Differentiation?
• Market Niche?
• Outsourcing, alliances, mergers,
• acquisitions?
• International Dimensions?

25. Uses of Managerial Economics
Managerial Economics accomplishes several
objectives:
 It presents the aspects of traditional economics
which are relevant for business decision-making
 It helps in reaching optimal managerial decisions in
a dynamic business environment.
 It incorporates useful ideas from other disciplines.
 It co-ordinates areas of finance, marketing etc.
 It makes a manager more competent in the dynamic
competitive world.

26. Role of a Managerial Economist
Normally Managerial Economist performs the following
kind of specific functions:-
 Forecasting of demand and Supply
 Production Planning
 Capacity planning
 Product-mix determination
 Economic feasibility of new production lines.
 Pricing decisions
 Economic Analysis of Competing companies
 Industrial Market Research
 Preparation of periodic economic reports
 Keeping management informed of various national /
international developments on economic matters.
 Participating in public debates

27. Review of Economic Terms
• Microeconomics is the study of individual
consumers and producers in specific markets.
– Supply and demand
– Pricing of output
– Production processes
– Cost structure
– Distribution of income and output

28. Review of Economic Terms
• Macroeconomics is the study of the aggregate
economy.
– National Income Analysis (GDP)
– Unemployment
– Inflation
– Fiscal and Monetary policy
– Trade and Financial relationships among nations

29. Review of Economic Terms
• Scarcity is the condition in which
resources are not available to satisfy all
the needs and wants of a specified group
of people.

30. Review of Economic Terms
• Resources are factors of production or
inputs.
– Examples:
• Land
• Labor
• Capital
• Entrepreneurship

31. Review of Economic Terms
• Opportunity cost is the amount or
subjective value that must be sacrificed in
choosing one activity over the next best
alternative.

32. Review of Economic Terms
• Because of scarcity, an allocation decision must
be made. The allocation decision is comprised
of three separate choices:
– What and how many goods and services should be
produced?
– How should these goods and services be produced?
– For whom should these goods and services be
produced?

33. Review of Economic Terms
• Economic Decisions for the Firm
– What: The product decision – begin or stop
providing goods and/or services.
– How: The hiring, staffing, procurement, and
capital budgeting decisions.
– For whom: The market segmentation
decision – targeting the customers most likely
to purchase.

34. Review of Economic Terms
• Three processes to answer what, how,
and for whom
– Market Process: use of supply, demand, and
material incentives
– Command Process: use of government or
central authority, usually indirect
– Mixed Process: use of both private and
public entities in production process.

35. Review of Economic Terms
• Entrepreneurship is the willingness to
take certain risks in the pursuit of goals.

36. Basic Concept, Tools and
Techniques of Analysis
Certain concepts, tools and techniques which
are constantly used in economic analysis are:-
 Assumption of ‘Ceteris Paribus’
 Variables
 Functions
 Schedule
 Graphs
 Slope

37. MICRO ECONOMIC ANALYSIS
1. Derived from the Greek word ‘Mikros’ meaning small.
2. Its approach is individualistic.
3. The subject matter of microeconomics mainly consists of –
Pricing, Distribution and Welfare.
Microeconomics
Pricing Distribution Welfare
Demand theory
Production
theory
Pricing theory Theories of
Rent
Wages
Interest
Profit

38. IMPORTANCE & USES OF MICROECONOMICS
1. It explains price determination and Allocation of resources.
2. It has direct relevance in Business Decision- making.
3. It serves as a guide for business / production planning.
4. It serves as a basis for prediction.
5. It is useful in determination of economic policies of Government.
6. It explains the phenomena of international trade.

39. LIMITATIONS OF MICROECONOMICS
1. Most microeconomic theories are abstract.
2. Most of the theories are static based on ‘ceteris paribus’
assumption.
3. It normally assumes ‘laissez faire’ policy.
4. It cannot explain the functioning of the economy at large.
5. Its at times misleading as it tries to generalise from individual
behaviour.

40. MACRO ECONOMIC ANALYSIS
1. Derived from the Greek word ‘makros’ meaning ‘large’
2. It is aggregative in nature.
3. It deals with the behaviour of the economy as a whole.
4. Its subject matter involves national income, total savings, total
consumption, total investment, money supply, unemployment,
economic growth etc.

41. USES AND LIMITATIONS OF MACROECONOMICS
1. Explains working of the whole economic system.
2. Knowledge helps in policy making and understanding.
3. Helps preparing economic plans & predictions.
4. Helps international comparisons.
5. Explains economic dynamism.
LIMITATIONS
• It ignores individual behaviour.
• It has tendency of excessive generalisation.
• Macro policies may not produce the same results at micro levels.
• Macroeconomic predictions are not fully reliable as they could be
based on inaccurate/incomplete information.
• Macroeconomic analysis lacks precision.

42. DIFFERENCE BETWEEN MICRO & MACRO ECONOMICS
MICRO ECONOMICS
1. Individualistic unit of
study.
2. Subject matter – Product
& Factor pricing, welfare
theory.
3. Adopts slicing method i.e,
dividing economy into
small parts and then
analysing behaviour.
4. Variables are considered
to be independent.
5. Scope is limited.
6. It is concerned with
individual welfare.
MACRO ECONOMICS
1. Aggregative unit of study.
2. Subject matter – National
Income, international
trade, money & banking.
3. Adopts lumping method
i.e., all units are
combined and then
behaviour is analysed.
4. Variables are considered
interdependent.
5. Scope is wider.
6. It is concerned with
aggregate welfare.