1. The Organisation that is successful is the one
that can best deal with surprises.
MANAGERIAL ECONOMICS
An Analysis of Business Issues
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3. Aims
This course / subject reviews economic principles
in the context most relevant to business :
– Production processes,
– demand patterns, cost structures,
– market conditions
– pricing policies, and
– the impact of all the above on business decisions
Cases and problems illustrate how economic
concepts can be applied in business to the
problems of the organisation.

4. This module deals with:
•Meaning and definition of Managerial
Economics
• The nature, scope and significance of
Managerial Economics
• The place of Managerial economics in the
Economics discipline i:e Micro and Macro
economics.
• How do managers make their decisions?
Role of Managerial Economists
•Decision making process

5. What is Managerial Economics?
Douglas - “Managerial economics is .. the
application of economic principles and
methodologies to the decision-making process
within the firm or organization.”
Pappas & Hirschey - “Managerial economics
applies economic theory and methods to business
and administrative decision-making.”
Salvatore - “Managerial economics refers to the
application of economic theory and the tools of
analysis of decision science to examine how an
organisation can achieve its objectives most
effectively.” 6

6. What is Managerial Economics?
Milton H Spencer and Louis Siegleman
“It is the integration of economic theory with
business practice for the purpose of facilitating
decision making and forward planning by the
management.”
It is the study of allocation of resources
available to a firm among its activities.
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7. These Definitions Cover mainly
two aspects of management i:e
• Forward planning
•Decision making.
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8. Nature & characteristics of ME
Micro in nature: Deals with a firm
Application of Micro concepts:
Demand & Supply analysis, Cost Prod analysis
Application of Macro Concepts:
National Income, Price levels, Investments
Conceptual & Metrical
Best decision tool for management
Pragmatic & Realistic
Normative/Prescriptive
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9. Economics
Macroeconomics Microeconomics
Money, finance, banking “Sector” economics
concerned with the nation Managerial economics
International Economics
Regional Economics
Economic Development

10. The Use of Economic Models
Positive Economics:-
Positive Economics:-
Derives useful theories with testable
Derives useful theories with testable
propositions about WHAT IS.
propositions about WHAT IS.
Normative Economics:-
Normative Economics:-
Provides basis for value judgments on
Provides basis for value judgments on
economic outcomes. WHAT SHOULD
economic outcomes. WHAT SHOULD
BE or WHAT OUGHT TO BE
BE or WHAT OUGHT TO BE
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11. What is the purpose of economic analysis?
What is the purpose of economic analysis?
Why do we want to apply economic analysis to
Why do we want to apply economic analysis to
business problems?
business problems?
For the academic economist: to understand, to make
predictions about firm’s behavior
The “positive” approach to theory: What is?
For the businessperson: “to assist decision-making”,
to provide decision-rules which can be applied
The “normative” approach to theory: What should be?
These purposes are different, they can lead to
misunderstanding.
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12. Scope of ME
An analysis of scarcity of resources &
choice making poses 3 basic questions:
1. What to produce & how much to?
2. How to produce?
3. Whom to produce?
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13. Scope of ME
Basic Questions Related concepts
What to produce & How Product decision: Demand
much to produce? & its elasticity, forecasting
How to produce? Input-Output decision:
Production & Cost
analysis, Capital Budgeting
Whom to produce? Segment decision:
Consumer Behaviour-
Pricing & Profit decision
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14. Scope of ME
The scope covers the following areas in
ME.
Demand analysis
Production & Cost analysis
Pricing & Output Theory
Profit management
Investment &Capital Budgeting
Market Competition
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15. Importance / Significance of ME
Knowledge of ME helps in making wise
choices.
It is goal oriented
Aims at maximum achievement of
objectives
Helps in decision making.
Helps in model building
Provides concepts to solve business
problems
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16. Role of ME in Managerial Decision Making
Role of ME in Managerial Decision Making
Managerial decision problems
Managerial decision problems
Product price and output
Product price and output
Make or buy
Make or buy
Production technique
Production technique
Internet strategy
Internet strategy
Advertising media and intensity
Advertising media and intensity
Investment and financing
Investment and financing
Economic concepts
Economic concepts Quantitative Decision making
Quantitative Decision making
Theory of consumer behaviour tools
tools
Theory of consumer behaviour
Theory of firm Numerical analysis
Numerical analysis
Theory of firm
Theory of market structures
Theory of market structures Statistical analysis
Statistical analysis
Theory of pricing
Theory of pricing Forecasting
Forecasting
Demand & Supply analysis
Demand & Supply analysis Optimisation
Optimisation
Managerial Economics
Managerial Economics
Use of economics concepts and
Use of economics concepts and
decision making tools to solve
decision making tools to solve
managerial decision problems
managerial decision problems
Optimal solutions
Optimal solutions

17. How Can Managerial Economics Assist
How Can Managerial Economics Assist
Decision-Making?
Decision-Making?
1. Adopt a general perspective, not a
sample of one
2. Simple models provide stepping stone to
more complexity and realism
3. Thinking logically
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18. Why Managerial Economics?-
The need for ME
A powerful “analytical engine”.
A broader perspective on the firm.
• what is a firm?
• what are the firm’s overall objectives?
• what pressures drive the firm towards profit and
away from profit
The basis for some of the more rigorous
analysis of issues in Marketing and Strategic
Management.
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19. Role of managerial Economist
Making decisions & processing
information are the two tasks of
managers.
It involve two kinds of decisions. They are
1. Specific decisions
2. General decisions
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20. Specific decisions
Production scheduling
Demand forecasting
Market research & Marketing decisions
Economic analysis of the industry
Investment appraisal
Cost decisions
Inventory decisions
Pricing and related decisions
Analysis & forecasting environmental factors
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21. General Decisions
Learn about the general eco conditions
of the economy & advise mgt
Understand consumer behaviour and
advise mgt
Input cost analysis
Find other opportunities for business
expansion
Update mgt on govt’s economic policies
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22. Responsibilities of Managerial Economist
Set objectives in line with organization's
Make accurate forecasting
Maximizing firm’s profits
Use of specialized skills and tech to solve
business problems
Bring synthesis in policies pertaining to prod,
investment, stock, price, cost etc
Study & interpret economic data
Ready to undertake special assignments
Alert mgt timely in all respects
Working for the whole business concern 25

23. Difference b/n ME & Traditional Economics
Traditional eco. ME
Deals with study of Deals with application of
concepts, principles & economic principles to
theory aspects of the business problems
economics Includes only micro
Includes both micro & macro concepts of economics
concepts of eco. It is a normative science
Both positive & Normative Considers both eco & Non-
Considers only eco factors eco factors affecting
affecting a problem problem
Doesn't depend upon Very much depends on
process of decision making decision making

24. Difference b/n Micro & Macro economics
Micro economics Macro economics
Deals with individual firm. Deals with economy as
whole.
Studies behaviour of a firm
Studies behaviour of large
or small groups of firms. aggregates in the economy.
Gives micro-scopic view of Gives a complete view
the economy. about the economy.
Individualistic approach. Aggregate methodological
Concerned with problems of appr.
micro variables like indv dd, Concerned with problems of
ss . macro variables like national
income, price, investments
Deals with indv income &
output. Deals with national income
& output.
deals with problems of deals with problems of
pricing, income distribution pricing, income of the nation
of a firm.

25. Relation to other branches of knowledge
ME has a close linkage with other
disciplines & field of study. They are:
1. Economics
2. Theory of Decision Sciences
3. Operation research
4. Statistics
5. Accounting
6. Mathematics

26. ME – Science or Arts
ME is both science and an Art.
As Science: Science is the systematic study of body
of knowledge. As science ME has the systematic
approach to deal with any problem concerning the
organization and approaches step by step to
resolve it.
As Art: Deals with process of getting things done.
The process of decision making varies from person
to person and it is art to handle the crisis.
Economist has to advise & assist the firm in taking
right decisions Hence, he should be an expert in the
field.

27. Difference b/n ME & Traditional
Economics
Traditional economics Managerial economics
Deals with study of Deals with application of
concepts, principles & economic principles to
theory aspects of the business problems
economics Includes only micro
Includes both micro & concepts of economics
macro concepts of eco. It is a normative science
Both positive & Normative Considers both eco & Non-
Considers only eco factors eco factors affecting
affecting a problem problem
Doesn't depend upon Very much depends on
process of decision making decision making

28. Difference b/n Micro & Macro economics
Micro economics Macro economics
 Deals with individual firm. Deals with economy as whole.
 Studies behaviour of a firm or Studies behaviour of large
small groups of such firms. aggregates in the economy.
 Gives micro-scopic view of the Gives a complete view about the
economy. economy.
 Individualistic approach. Aggregate methodological appr.
Concerned with problems of
 Concerned with problems of micro
macro variables like national
variables like indv dd, ss . income, price levels, etc.
 Deals with indv income & output. Deals with national income &
 Primarily deals with problems of output.
pricing, income distribution of a Primarily deals with problems of
firm. pricing, income distribution of
the nation

29. Relation to other branches of knowledge
ME has a close linkage with other
disciplines & field of study. They are:
1. Economics
2. Theory of Decision Sciences
3. Operation research
4. Statistics
5. Accounting
6. Mathematics

30. ME – Science or Arts
ME is both science and an Art.
As Science: Science is the systematic
study of body of knowledge. As science
ME has the systematic approach to deal
with any problem concerning the
organization and approaches step by step
to resolve it.
As Art: Deals with process of getting things
done. The process of decision making
varies from person to person and it is art