1. DISCUSSION UNIT:
NATURE AND SCOPE OF MANAGERIAL ECONOMICS
1. Economics: A science of Scarcity choice and Efficiency
• Scarcity and choice
• Scarcity and efficiency
• Micro Economics: A study of individual economic units and their interactions.
• Macro Economics: A study of economy as a whole. Ex. Indian Economy
2. Managerial Economics:
• ME: A branch of applied Micro Economics and Something more
• ME: Application of economic theory and tools of decision sciences like
mathematics and statistics in business decision making.
• ME: Applicable to profit and non-profit making organizations / companies.
• Business Issues:
 Operational or internal issues
o Choice of Business: What to produce?
o Choice of size of the firm / Co: How to produce?
o Choice of technology: How to produce i,e choice of factor / input
combination.
o How to price the commodity, how to promote sales, how to face
competition, how to decide on new investment, how to manage profits,
inventory and so on.
⇒ Micro Economic issues: Ex: Economic issues facing a particular Co.
 Environmental or external issues
o Economic system of the country
o Structure of financial institutions
o Nature and maginude of foreign trade
o Monetary, fiscal, industrial and labour policies.
o Trends on prices, production consumption and so on
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2. o Social factors like the value system of the society, property rights, and
political environment
o Degree of openness of the economy and the influence of MNCs on the
domestic market.
⇒ Macro economic issues
3. The Nature of Managerial Economics
Management Decision problems
Economic Theory Decision Sciences
Micro and Macro Mathematics
Mathematics Economics
Econometrics / Statistics
Managerial Economics
Application of tools of Economic Theory and
Decision Sciences to solve Managerial decision problems
Optimal solution
To
Managerial Decision Problems
4. Relationship of ME to Micro and Macro economics.
• To Micro Economics
 Study of individual economic units and their interactions
o Demand: Consumer behaviour
o Supply: Producer behaviour
o Interaction between consumers and producers
 Forecasting / Prediction:
• To Macro Economics:
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3.  External environment: Mainly policy Economics
5. Relationship of M.E to Decision Sciences
• Mathematics: Construct decision models for optimal behaviour of economic
Unit
• Econometrics: Applications of Statistics and Mathematics to economic
Theory
 To estimate (say demand) model
 To forecast
6. Relationship of M.E to Functional areas of Business Management studies
• Accounting
• Finance
• Marketing
• HRM
⇒ M.E: An overview course to integrate Economic Theory, Decision Sciences and
Functional Areas of Business Management studies.
7. Some Basic concepts and principles
7.1. Profit
• π = TR – TC (Details later)
• Theories of profit
 Innovation Theory:
o New products, new production techniques, new HRM Strategies, New
marketing strategies etc
→ π: Reward for innovation
 Risk-Bearing: π, reward for RB
 Monopoly Theory of π: π, reward for monopoly power
 Managerial efficiency: π, reward for exceptional management skills
→ Some elements of truth in all these theories: π, reward for innovation, risk-bearing,
monopoly power and managerial efficiency.
7.2. Time perspective in Business-Decision making:
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4. • Decision making: A task of coordinating along time scale: Past, present and
future
 Right Balance
 SR: Management of inventories
 LR: Investment in plant, building, production of new products etc.
7.3. Opportunity cost principle:
• Alternative use of the scarce resources
• OC of a decision applicable in all kinds of business decisions. Ex. Invest
ones own capital in ones own business foregone / sacrificed benefit?
• Deciding to study PGDM after Bachelor’s Degree. Foregone / sacrificed
benefit?
7.4. Marginal Principle and Decision rules (satisfaction),
• Total utility TR, TC, TR, Tπ
• MU, MC, MR, Mπ
• Consumer as a rational decision maker:
MU1 MU2 MUn
= =
P1 P2 Pn
What if not equal?
• Producer as a rational decision maker:
MRP=
1 MRP=
2 MRPn
C1 C2 Pn
What if not equal?
7.5. Plant, Firm and industry:
P: A technical unit of production
F: A legal entity owning one or more plants
I: A group of firms, producing a particular good / service
7.6. Compounding and Discounting
• Time value of money
 Future value of present sum: compounding
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5. o Let PV = Rs.95.24
r = 0.05
o FV1 = 95.24 + (95.24 x 0.05)
= 100 at the end of first year
o To generalize:
FV1 = PV + PV (r) = PV (1 + r)
FV2 = PV (1 + r) (1 + r) = PV (1 + r)2
FVn = PV (1 + r)n
When FVn = PV? How much is r?
 Present value of future sum: Discounting
PV = Present value
FV1 = Amount (Rs.100) receivable at the end of one year from now
R = 0.05 = Rate of discount
FV1 100
PV = = = 95.24
1+r 1 + 0.05
FV2 = Amount (Rs.100) receivable two years from now
FV1 100
PV = = = 90.70
2 2
(1 + r) (1 + 0.05)
For n years
FV1 FV2 +…….+ FVn
PV = =
(1 + r)2 (1 + 0.05)2 (1 + r)n
⇒ Relationship between PV & r:
PV
⇒ Higher r, Lower PV
Lower r, higher PV
0 r
If r = 0, PV of Rs.100 receivable one year from now = Rs.100
⇒ No time value for money
If r → ∞, PV → 0
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