Managerial Economics

1. ECONOMICS
1. Analyzes how a society’s institutions and
technology affect prices and the allocation of
resources among different uses.
2. Explores the behavior of the financial
markets, including interest rates & stock
prices.
3. Examines the distribution of income &
suggests ways that the poor can be helped
without harming the performance of the
economy.
4. Studies the business cycle and examines
how monetary policy can be used to moderate
the swings in unemployment and inflation.

2. ECONOMICS
5. Studies the patterns of trade among nations
and analyzes the impact of trade barriers.
6. Looks at growth in developing countries and
proposes ways to encourage the efficient use
of resources.
7. Asks how government policies can be used to
pursue important goals such as rapid
economic growth, efficient use of resources,
full employment, price stability and a fair
distribution of income.

3. 1 - 3
Classification of Human Wants
• On the basis of degree of urgency wants are classified into three groups*:
1. Necessaries
(a) Necessaries for life-Physiological needs.
(b) Necessaries for efficiency-Goods which promote the ‘work efficiency’
.Books for a teacher, tools for a carpenter increases the efficiency.
( c) Conventional Necessaries-Desired due to social customs or force of habit.
During marriages, festivals or funerals
2. Comforts-Goods and services which make life easy, comfortable and
pleasant.
3. Luxuries- Consumed for their ‘snob-appeal’. Considered as the symbol of
prestige in the society.

4. 1 - 4
ECONOMICS IS THAT BODY OF PRINCIPLES
AND METHODS WHICH HELPS THE MAN TO
MAKE THE BEST UTILISATION OF THE
AVAILABLE SCARCE RESOURCES.

5. 1 - 5
Economic Problems
• The problem of scarcity is the problem of “Economics”. When
there is ‘scarcity’ of resources, there is the necessity of making
a “wise choice”.
• When there is a problem of “insufficiency” of certain thing,
there is the need of “proper allocation”. Therefore a problem
pertains to the branch of Economics only when there is the
necessity of making a “wise choice” or a “proper allocation”.
Thus an economic problem always deals with ‘inadequacy’ or
‘scarcity’ of means.
• It is concerned with the rational ‘choice or allocation’ of scarce
means of all economic agents.

6. Central Problem of Economics
The problem of ‘scarcity and choice’ gives rise
to three different economic problems, they
are:
 What to produce? The problem of allocation
 How to produce? The problem of choosing
appropriate production technique.
 For whom to produce? The problem of
factor prize determination.

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Natural
resources
Materials that come
from nature
(water, soil, wood, coal)

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Human
Resources
People working to
produce goods and
services

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Capital
resources
Goods made by people and
used to produce other
goods and services
(machines, tools, buildings)

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Producers
People who use
resources to make
goods and/or
provide services

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Goods
Things that people
make or use to
satisfy needs and
wants

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Services
Activities that
satisfy people’s
needs and wants

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1. _______ ________ People working to
produce goods and services
2. __________ People who use resources to
make goods and/or provide services
3. ________ _________ Materials that
come from nature (water, soil, wood, coal)
4. _________ Things that people make or use
to satisfy needs and wants
5. _________ Activities that satisfy people’s
needs and wants
6. _________ _________ Goods made by
people and used to produce other goods and
services (machines, tools, buildings)

14. 14
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.”

15. SCOPE OF MANAGERIAL ECONOMICS
 Managerial econ is based on microeconomics.
 Microeconomics
 Microeconomics is the study of how individual
households and firms make decisions and how they
interact with one another in markets.
 Macroeconomics
 Macroeconomics is the study of the economy as a
whole.

16. Scope of Managerial Economics
Micro Macro
Theory of demand
Theory of Production
Analysis of market
structure
Profit
analysis&
Manag.
Theory of
capital and
Investment
Manag.
Issue related to
macro variables
Issue related to
Foreign trade
Issue related to
Govt. policies

17. EXAMPLE: INCREASE IN OIL PRICE
 Micro effect: vehicle users, electronic power
generators
 Macro effect: inflation, unemployment

18. 1 - 18
NATURE
OF
MANAGERIAL ECONOMICS

19. 1 - 19
òManagerial Economics is supposed to enrich the
conceptual & Technical skill of a manager facing
business decision problems.
òManagerial Economics is the application of economic
analysis to evaluate business decisions.
òConstantly matching ends to means i.e Economic
òOptimal Economic Activity is to maximize the
attainment of ends, given the scarce means, & to
minimize the use of resources.
òDecision - making by Management is truly economic in
nature -Involves choice from among a set of alternatives.

20. 2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Relationship to other business
disciplines
• Marketing: Demand, Price Elasticity
• Finance: Capital Budgeting, Break-Even Analysis,
Opportunity Cost, Economic Value Added
• Management Science: Linear Programming, Regression
Analysis, Forecasting
• Strategy: Types of Competition, Structure-Conduct-
Performance Analysis
• Managerial Accounting: Relevant Cost, Break-Even
Analysis, Incremental Cost Analysis, Opportunity Cost

21. 2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
MANAGERIAL BUSINESS DECISIONS
ò Financial decisions: i.e costing, budgeting, accounting, auditing, tax
planning, portfolio composition, dividend distribution etc.
ò Production decisions: Quantity & quality of product, choice of
technology, product-mix, plant location & layout, production
scheduling, maintenance, pollution control etc.
ò Personnel Decisions: Recruitment, selection, training, placement,
promotion, transfer, retirement etc.
ò Marketing decisions: Sales volume, sales force, sales promotion,
marketing research, customer service, packages, advertising etc.
ò Miscellaneous decisions: Residuary items like purchasing, inventory
control, information system, data processing, public relations etc.
ò All Managerial decisions are economic in nature & involve some
degree of choice.

22. 2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Economics and Managerial
Decision Making
• Questions that managers must answer:
• What are the economic conditions in a
particular market?
• Market Structure?
• Supply and Demand Conditions?
• Technology?
• Government Regulations?
• International Dimensions?
• Future Conditions?
• Macroeconomic Factors?

23. 2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Economics and Managerial
Decision Making
• Questions that managers must answer:
• Should our firm be in this business?
• If so, what price and output levels
achieve our goals?

24. 2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Economics and Managerial
Decision Making
• Questions that managers must answer:
• How can we maintain a competitive advantage
over our competitors?
• Cost-leader?
• Product Differentiation?
• Market Niche?
• Outsourcing, alliances, mergers,
• acquisitions?
• International Dimensions?

25. 2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Economics and Managerial
Decision Making
• Questions that managers must answer:
• What are the risks involved?
• Risk is the chance or possibility that
actual future outcomes will differ from
those expected today.

26. Opportunity Cost
Definition – the cost expressed in terms of
the next best alternative sacrificed
Helps us view the true cost of decision
making
Implies valuing different choices

28. Fundamental Concepts
1. The Opportunity Cost
2. Marginal Principle
3. Incremental Principle
4. Time Perspective Principle
5. Discounting Principle
6. The Equi-Marginal Principle