Managerial Economics

Founder of modern economics

Definition
Managerial economics as the integration of economic theory with business
practice for the purpose of facilitating decision-making and forward planning
by management.
Economics, Business management and managerial Economics
Economics theory and methodology
Business management – Decision problems
Managerial economics – Application of economics to solving business
problems
Optimal solutions to business problems
• Aspects of application
The application of economics to business management or the integration of
economic theory with business practice.
In economic theory, the technique of analysis is one of model building whereby
certain assumptions are made and on that basis, conclusions as to the behaviour of
the firms are drawn.
Estimating economic relationships,viz..,measurement of various types of
elasticities of demand such as price elasticity, income elasticity,cross-
elasticity,promotional elasticity, cost-output relationships,etc. The estimates of
these economic relation-ships are to be used for purposes of forecasting.
Predicting relevant economic quantities,e.g., profit,
demand,production,costs,pricing,capital, etc.,. in numerical terms together with
their probabilities.
Using economic quantities in decision-making and forward planning, that is,
formulating business policies and, on that basis, establishing business plans for
the future pertaining to profit, prices, costs, capital,etc.
Scope of Managerial economics
1.Demand analysis and forecasting
A business firm is an economic organism which transforms productive
resources into goods that are to be sold in a market.
• Cost analysis,
• A study of economic costs, combined with the data drawn from the firm’s
accounting records, can yield significant cost estimates that are useful for
management decisions.
• Production and supply
• Production analysis is narrower in scope than cost analysis. Production analysis
frequently proceeds in physical terms while cost analysis proceeds in monetary
terms.
• Pricing decisions, policies and practices
• Pricing is a very important area of managerial economics. In fact, price is the
genesis of the revenue of a firm and as such the success of a business firm
largely depends on the correctness of the price decisions taken by it.
• Profit management
• Business firms are generally organised for the purpose of making profits and, in
the long run, profits provide the chief measure of success.
• Capital management
• Of the various types and classes of business problems, the most complex and
troublesome for the business manager are likely to be those relating to the firm’s
capital investments.
Managerial Economics and Economics
1. Price elasticity of demand
2. Income elasticity of demand
3. Opportunity cost
4. The multiplier
5. Propensity to consume
6. Marginal revenue product
7. Speculative motive
8. Production function
9. Balanced growth
10. Liquidity preference
• Business economists have also found the following main areas of
economics as useful in their work:
• Demand theory
• Theory of the firm-price, output and investment decisions
• Business finance and fiscal policy
• Money and banking
• National income and social accounting
• Theory of international trade
• Economics of developing countries
Decision making managerial economics
• Decision making in management is the process of making a choice
between two or more options. This involves evaluating the pros and cons
of various choices and choosing the best option to achieve a desired
outcome. In management, decision making is about acting in a way that
meets organizational goals and objectives.
• Roles of managerial economics in decision making
Minimize risk and uncertainty
Helpful in analysis of effects of government policies.
Profit planning and control
Cost control
Measurement of the efficiency of the firm
The Fundamental concepts Affecting Business
Decisions
• Incremental reasoning
• Opportunity cost
• Contribution
• Time perspective
• Time value of money
• Risk and uncertainty
• Incremental reasoning
Most important
Most frequently used
Incremental reasoning involves estimating the impact of decision alternatives.
• Basic concepts in incremental reasoning are
• Incremental cost
Change in total cost due to change in level of output
Incremental revenue
change in total revenue due to change level of output
Opportunity cost
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The incremental concept
• Incremental concept is closely related to the marginal costs and marginal
revenues, for economic theory.
• Incremental concept involves estimating the impact of decision alternatives on
costs and revenues, emphasizing the changes in total cost and total revenue
resulting from changes in price, products, procedures, investments or whatever
may be at stake in the decision.
1. It increases revenue more then cost
2. It decreases some costs to a greater extent then it increases others
3. It increase some revenues more then it decreases others
4. It reduces costs more then revenues.
Marginasalim
Marginalism is the insight that people make economic decisions over specific
units or increments of units, rather than making categorical, all-or-nothing
decisions. Marginalism began with the Marginal Revolution in economics in
the 1870s and quickly came to form a foundational aspect of economic
thinking.
Equi-marginal concept
This principle deals with the allocation of the available resource among the
alternative activities. According to this principle, an input should be so allocated
that the value added by the lest unit is the same in all cases. This generalization is
called the Equi-marginal.
For example, a firm employing ten workers will say that the tenth worker is the
marginal worker. A firm producing one thousand units of its product may decide
to produce ten more units and the tenth unit over and above the 1009 units
becomes the marginal unit.
 Time perspective
• 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 really
important problem in decision-making is to maintain the right balance between
the long-run and short-run considerations.
• Example: ABC is a firm engaged in continuous production of X commodities
(long run). In the production process, it is having daily an ideal time (free
time) for few hours. In that ideal time, firm can take an order for
manufacturing other similar goods instead of wasting time.
 Discounting principle
• One of the fundamental ideas in economics is that a rupee tomorrow is
worth less than a rupee today. This seems similar to saying that a bird in
hand is worth two in the bush.
• Example : In the business, everybody prefers to do cash sale only rather
than the credit sale and even they are ready to give cash discount for cash
sale. The reason is we will get a rupee today and today's rupee is more
valuable than the tomorrow's rupee.
Opportunity cost principle
Opportunity cost is a concept in Economics that is defined as those
values or benefits that are lost by a business, business owners or
organisations when they choose one option or an alternative option over
another option, in the course of making business decisions.
Applications of Opportunity Cost
• Determining factor prices
• Determining economic rent
• Consumption pattern decisions
• Determining factor prices
• Product plan decisions
• Decisions about national priorities
 Micro and macro economics
• ‘Economics’ is defined as the study of how the humans work together to
convert limited resources into goods and services to satisfy their wants
(unlimited) and how they distribute the same among themselves.
Economics has been divided into two broad parts i.e. Micro Economics
and Macro Economics. Here, in the given article we’ve broken down the
concept and all the important differences between micro economics and
macro economics, in tabular form, have a look.
• MICROECONOMICS
• The term ‘micro’ means small. The study of an individual consumer or a
firm is called microeconomics (also called the Theory of Firm). Micro
means ‘one millionth’.
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• Microeconomics deals with behaviour and problems of single individual and
of micro organization. Managerial economics has its roots in microeconomics
and it deals with the micro or individual enterprises. It is concerned with the
application of the concepts such as price theory, Law of Demand and theories
of market structure and so on.
• MACROECONOMICS
• The term ‘macro’ means large. The study of ‘aggregate or total level of
economic activity in a country is called macroeconomics. It studies the flow
of economics resources or factors of production (such as land, labour, capital,
organisation and technology) from the resource owner to the business firms
and then from the business firms to the households.
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• It deals with total aggregates, for instance, total national income total
employment, output and total investment. It studies the interrelations among
various aggregates and examines their nature and behaviour, their
determination and causes of fluctuations in the. It deals with the price level in
general, instead of studying the prices of individual commodities. It is
concerned with the level of employment in the economy. It discusses
aggregate consumption, aggregate investment, price level, and payment,
theories of employment, and so on.
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