Introduction to Business Economics

1. Business Economics
 Business Economics, also called Managerial Economics, is
the application of economic theory and methodology to
business.
 Business involves decision-making. Decision making
means the process of selecting one out of two or more
alternative courses of action.
 The question of choice arises because the basic
resources such as capital, land, labour and management
are limited and can be employed in alternative uses.
 The decision-making function thus becomes one of
making choice and taking decisions that will provide the
most efficient means of attaining a desired end, say,
profit maximation

2. Introduction
 The origin of the term ‘economics’ lies in the Greek word oikon
(house) and nomos (customer law) which means ‘laws of
households’. Thus, the significance of economics to households.
Adam Smith (1723-1790) in 18th century defined economics as
“an enquiry into the nature and causes of the wealth of nations.
Alfred Marshall (1842-1924) defined economics as “the study of
mankind in the every day business of life”.
Lionel Robbins (1898-1984) defined economics as : “the science
which studies human behavior as a relationship between ends
and scares means which have alternative uses”.

3. Managerial Economics:
 Definition: "Managerial Economics is the integration
of economics theory with business practice for the
purpose of facilitating decision making and forward
planning by management”
Spencer and Siegelman.

6. Significance of Managerial Economics:
Managerial economics provides a number of
tools and techniques. With the help of these
he can capture the essential relationships that
represent the real situating.
It provides most of the concepts that are
needed for the analyses of business
problems.
It is helpful in making decisions.

7. Scope of Managerial Economics:
Scope of Managerial Economics:
 Managerial Economics has a close connection with
economic theory, OR, Statistics, Mathematics and the
theory of decision making.
 It is also draws together and relates ideas form various
functional areas of management like production,
making ,finance and , project management etc.

9. Managerial Economics relationship with other
areas:
 Managerial Economics and Traditional Economics:
I. Economics and Managerial economics both deal with
identical problems. They both are concerned with
problems of scarcity and resource allocation, labor and
capital resources with a business firm are always
limited. It must find the best way in which to utilize
them for achieving the set goals.
II. Economics to managerial economics are:
• to help in understanding the market conditions
and the general economics environment with in
which the form operates.
• to provide a philosophy for understanding and
analyzing resource allocation problems.

10. Managerial Economics and Operation Research:
• Both Operation research and Managerial economics
are concerned with taking effective decision. Given the
firm’s objectives, both are concerned with what is the
best way of achieving them.
• The OR Models such as linear programming, queuing,
transportation, optimization techniques and so on are
extensively used in solving the managerial problems.
• If refers to both minimization of costs and maxization
of revenues.

11.  Managerial Economics and Mathematics:
• Mathematics provides us with a set of tools and techniques such
as algebra, calculus, exponentials, vectors, input out tables, which
help in the derivation and exposition of economic analysis.
• Mathematics is closely related to ME because it is not only
conceptual, metrical also.
• It derives its metrical property to estimate and predict the
relevant economic factors for decision making and forward
planning.
 Managerial Economics and Statistics:
• Statistics is widely used by the managerial economists.
• ME is quantifying the past economic activity as well as to predict
its future course.
• Uses statistical techniques such as averages, measure of
dispersion, correlation , regression time series, probability
• This is needed for a course for a correct judgment and decision
making.

12.  Managerial Economics and Psychology:
• Consumer psychology is the basis n which managerial
economist acts upon. How the customer reacts to a given
change in price or supply and its consequential effect on
demand/profits- is the main focus of study in managerial
economics.
• Psychology contributes towards understanding the
behavioral implications, attitudes and motivations of each
of the microeconomic variables such as consumer,
supplier/seller, investor, worker or an employee.
 Managerial Economics and Organizational Behavior:
• Organizational Behavior enables the managerial economist
to study and develop behavioral models of the firm
integrating the manager’s behavior with that of the owner.
• This future analysis the economic rationality of the firm in a
focusses way.

13.  Managerial Economics and Accountancy:
• The accountant provides accounting information relating to
costs, revenues, receivables, payables, profits/losses etc.
and this forms the basis for the managerial economist to
act upon.
• The a min objective of accounting function is to record,
classify and interpret the given accounting data.
• The managerial economist profusely depends upon
accounting data for decision making and forward planning.

14. Role of managerial economists in business:
• Making decisions and processing information are the
two primary tasks of managers.
• The purpose of learning economics theory is to help
managers know what information should be
obtained and how to process and use the
information.
• Managerial economist has therefore gained an
increasing importance in business in recent times.
• He can be very useful for successful management as
his contributing can be substantial in solving the
problems of decision making and forward planning.

15. Responsibilities of Managerial Economist:
• His objective should coincide with that of the business.
• He must help in achieving maximize profits on the firms
invested capital.
• Try to make as accurate forecasts on basic data on the
market conditions, general economic environment,
government policies etc.
• He should also forecast the trend and shifts in the activities
of the importance to the firm sales, profits, demand etc.
• If due to some sudden and unaccounted factors the
presented forecast has undergone a change, it is his duty to
work out the new forecast and present it at the earliest
possible time.

16. • His caliber is generally judged by his ability to
obtain necessary information quickly by
personal contacts.
• It is even more important that he knows form
where to get the additional information quickly.
• He must be ready to take up challenging tasks.
Thus we can say that a managerial economist
plays a very important role in the decision making
process and forward planning.

17.  Short run refers to a period of shorter duration and long
run refers to the relatively period of longer duration.
 In short run additional changes cannot be initiated in
terms of expansion or hiring of additional plant and so
on.
 In short run is a period in which the firms can adjust their
production nu changing variable factors such as materials
and labor.
 They cannot change fixed factors such as technology or
capital. In long so that all factors of production including
capital can be adjusted to meet the market requirements