UNIT -1

BASICS OF MANAGERIAL ECONOMICS

LESSON 1- Introduction to Economics

INTRODUCTION :
This lesson introduces you to the basic concepts of Economics. After going through this
lesson you will come to know how Economics is helpful for Managers in their Decision
making process.

Objectives:
To analyze the concept of managerial economics

To understand the concept of economics in decision making

Nature, scope and characteristics of managerial economics

How managerial economics differ from economics

Managerial economics and other subjects

Steps in decision making

Condition affecting decision making

Tools and techniques of decision making

Good morning students,

As an MBA student you need to study Managerial Economics which is concerned with
decision making by managers. As you all are aware that the main job of managers is
decision making only. Before making a decision one has to take into accounts so many
things. And here comes the importance of managerial economics.

Meaning of Economics:
Economics can be called as social science dealing with
economics problem and man’s economic behavior. It deals with economic behavior of
man in society in respect of consumption, production; distribution etc. economics can be
called as an unending science.
There are almost as many definitions of economy as there
are economists. We know that definition of subject is to be expected but at this stage it is
more useful to set out few examples of the sort of issues which concerns professional
economists.
Example:
For e.g. most of us want to lead an exciting life i.e. life full of excitements,
adventures etc. but unluckily we do not always have the resources necessary to do
everything we want to do. Therefore choices have to be made or in the words of
economists “individuals have to decide-----“how to allocate scarce resources in the
most effective ways”.
For this a body of economic principles and concepts has been developed to explain how
people and also business react in this situation.

Economics provide optimum utilization of scarce

resources to achieve the desired result. It provides the basis for decision making.

Economics can be studied under two heads:

1) Micro Economics

2) Macro Economics

Micro Economics:
It has been defined as that branch where the unit of study is an
individual, firm or household. It studies how individual make their choices about what to
produce, how to produce, and for whom to produce, and what price to charge. It is also
known as the price theory is the main source of concepts and analytical tools for
managerial decision making.
Various micro-economic concepts such as demand, supply,
elasticity of demand and supply, marginal cost, various market forms, etc. are of great
significance to managerial economics.

Macro Economics:
It’s not only individuals and forms who are faced with having to
make choices. Governments face many such problems. For e.g.
How much to spend on health
How much to spend on services
How much should go in to providing social security benefits.
This is the same type of problem facing all of us in
our daily lives but in different scales.
It studies the economics as a whole. It is aggregative in character and
takes the entire economic as a unit of study. Macro economics helps in the area of
forecasting. It includes National Income, aggregate consumption ,investments,
employment etc.

Following are the various economic concepts which are useful for managers for decision
making:
• Price elasticity of demand
• Income elasticity of demand
 • Cost and output relationship
• Opportunity cost
• Multiplier
• Propensity to consume
• Marginal revenue product
• Production function
• Demand theory
• Theory of firm—price, output and investment decisions
• Money and banking
• Public finance and fiscal and monetary policy
• National income
• Theory of international trade

For Self Assessment:

1. Make a list in your own words of some of the economic decision that
• you are facing
• your family has to take
• your country has to take
2. Take any quality newspaper, go through it and make notes on the
following:
• Micro economic
• Macro economic (problems and issues you find)

Meaning of managerial economics:

It is another branch in the science of
economics. Sometimes it is interchangeably used with business economics.
Managerial economic is concerned with decision making at the level of firm.
It has been described as an economics applied to decision making. It is
viewed as a special branch of economics bridging the gap between pure
economic theory and managerial practices.
It is defined as application of economic theory and
methodology to decision making process by the management of the business
firms. In it economic theories and concepts are used to solve practical
business problem. It lies on the borderline of economic and management. It
helps in decision making under uncertainty and improves effectiveness of the
organization.
The basic purpose of managerial economic is to show how economic
analysis can be used in formulating business plans.

Definitions of managerial economics:

In the words of Mc Nair and Merriam,” ME consists of use of economic

modes of thought to analyze business situation”.

According to Spencer and Seigelman—“it is defined as the integration of

economic theory with business practice for the purpose of facilitating
decision making and forward planning by the management”.

Economic provides optimum utilization of scarce resource to achieve the

desired result. ME’s purpose is to show how economic analysis can be used
formulating business planning.

Managerial Economics = Management + Economics

Management deals with principles which helps in decision making under

uncertainty and improves effectiveness of the organization.
On the other hand economics provide a set of preposition for optimum
allocation of scarce resources to achieve a desired result.

ME deals with the integration of economic theory with business practices for
the purpose of facilitating decision making and forward planning by
management.

In other words it is concerned with using of logic of economics,

mathematics, and statistics to provide effective ways of thinking about
business decision problems.
Diagrammatical representation of relationship between economics,
management and managerial economics.

Economics: Business
Theory and Management-
Methodology Decision problems

Managerial Economics—
Application of Economics
to solving business
problems

Optimal solution to
business problems