This document provides an introduction to managerial economics. It outlines the roles and responsibilities of a managerial economist in business, including market research, business forecasting, capital budgeting, production scheduling, advising management, and more. It also discusses the relationships between managerial economics and other functional areas of business, such as economics, statistics, mathematics, accounting, and operations research. Finally, it covers some fundamental principles of managerial economics, including opportunity cost, incremental cost, time perspective, discounting, and the equi-marginal principle.

1. MODULE 1
INTRODUCTION TO
ECONOMICS

2. Role and Responsibilities Of a
Managerial Economist In Business
Ref:
Mithani: page no. 6 to 8
P.L. Mehta: page no. 8 to 12

3.  Market research
 Preparation of business forecast
 Capital budgeting & choice of investment
 Production scheduling
 Briefing the management on current
domestic & global issues
 Minimize the cost of production
 Security management analysis

4.  Advice on foreign exchange market
 Analyze environmental factors.

5. RELATIONSHIP OF MANAGERIAL
ECONOMICS WITH FUNCTIONAL
AREAS OF BUSINESS

6. M.E. & ECONOMICS
 M.E. described as economics applied to
decision making
 Special branch bridging gulf b/w pure
economic theory & managerial practice
 Microeconomics – main source of concepts
& analytical tools for M.E.
 Macroeconomics – responsible in the area
of forecasting for M.E.

7. Contd…
 Economic concepts useful & frequently
applied
– Price Elasticity of Demand
– Income Elasticity of Demand
– Opportunity Cost
– Theory of the Firm
– Demand Theory
– Theory of International Trade
– Money & Banking, etc.

8. M.E. & Statistics
 M.E. requires collection of quant data
which can be used to measure certain
functional relationships for making
decisions
 For example, pricing decisions
 Uncertainty of future events solved by
Theory of Probability

9. M.E. & Mathematics
 Metric in Character; estimates economic
relationships
 Predicting relevant economic quantities to use
them in making decisions and forward planning
 Knowledge of Geometry, Trigonometry &
Algebra with Logarithms, Exponentials, Vectors,
Determinants & Matrix Algebra, Differential &
Integral Calculus are very essential to M.E.

10. M.E. & Accounting
 Closely related; concerned with recording
the financial operations of a business firm
 Accounting info – one of the principal
sources of data required for making
decisions
 For example, Profit & Loss Statement of a
firm
 Main task is to provide data; applying
ideas of M.E. to solve problems

11. M.E. & OR
 Important problems solved with OR
techniques
 Problems –
– Allocation problems
– Competitive problems
– Waiting Line problems
– Inventory problems

12. FUNDAMENTAL PRINCIPLES OF
MANAGERIAL ECONOMICS

13. Opportunity Cost
 Attributed to alternative uses of scarce resources
 Natural & Man-made resources are scarce in
relation to demand to satisfy needs, wants; have
alternative uses
 For Example, a firm has 100 million & it has
three alternatives
– Expand size of firm
– Set up a new production unit
– To buy shares in another firm

14. Contd…
 Expected Annual Returns from the alternatives
20 million, 18 million & 16 million
 Rationally alternative 1 is the best
 Hence the 2nd alternative has to be sacrificed
 The returns of 18 million is called annual
opportunity cost of an annual income of 20
million
 Opportunity Cost of availing an opportunity is
the expected income foregone from the 2nd best
opportunity of using the resources

15. Incremental Cost
 Applied to business decisions involving a
large increase in total cost & revenue
 Incremental costs are costs arising due to
business decision
 For example, setting up a new plant by a
firm.
 This decision increases the total cost from
100 to 115 million

16. Contd…
 3 major components
– Present explicit costs
– Opportunity costs
– Future costs
 Fixed & Variable Cost
 Depreciation & advertising cost

17. Time Perspective
 All decisions taken with a certain time perspective
 It refers to duration of time period from the relevant
past to the foreseeable future while making a decision
 Relevant past – period of past experience & trends for
long run decisions
 All decisions do not have same time perspective
 For example, decision to buy explosive materials for
manufacturing characters – short run time perspective
 Investment in plants, building, machinery, land, etc. –
long run repercussions
 Should assess & determine in advance & make decisions
accordingly

18. Contd…
 For example, setting up a new
Management Institute, short time
perspective would be unwise and for
buying explosive materials a long run one
would be unwise

19. Discounting
 A rupee tomorrow is worth less than a
rupee today
 For example, suppose a person is offered
to make a choice between a gift of Rs.
100 today or Rs. 100 next year
 The question is “How much money today
is equal to Rs 100 one year hence?”
 The Rs. 100 would have to be discounted
at 8 percent

20. Contd…
 If a decision affects costs and revenues at
future dates, it is necessary to discount
the costs & revenues to present values
before a valid comparison of alternatives
is possible

21. Equi-Marginal Principle
 Originally associated with consumption
theory
 It suggests that available resources should
be so allocated b/w alternative options
that the MPG from the various activities
are equalized
 For example, a firm has a total capital of
100 million; option of spending on three
projects