Managerial economics is the application of economic theory and methodology to managerial decision making. It helps managers make optimal decisions about allocating scarce resources. Some key concepts in managerial economics include opportunity cost, incremental cost, time perspective, discounting, and the equi-marginal principle. Opportunity cost refers to the next best alternative forgone in making a decision. Incremental cost is the additional cost of producing one more unit. Managers must consider both short-run and long-run time perspectives. Discounting accounts for the time value of money by calculating present values. The equi-marginal principle suggests allocating resources to equalize marginal productivity gains across activities.

1. Business
Economics
UNIT - 1
PRESENTED BY
K.BALASRI PRASAD
B.Sc(KU), M.B.A(OU), NET(UGC), (Ph.D)(MGU)
ASSISTANT PROFESSOR IN MANAGEMENT
VISHWA VISHWANI GROUP OF INSTITUTIONS 6-Apr-22
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2. COURSE NO. DSC – 102
BUSINESS ECONOMICS
COURSE OBJECTIVES : 1. The purpose of this course is to apply micro economic concepts and tools for analyzing business problems. 2. To make
students aware of cost concepts. 3. To make accurate decision pertaining to individual firms. 4. To understand tools and techniques of micro
economics. 5. To make the student understand market structure and dynamics.
UNIT - I : BUSINESS ECONOMICS NATURE AND SCOPE :
Introduction to Business Economics-Characteristics-Nature and scope, concept of opportunities
Cost- Incremental Cost- Time perspective-Discounting and Equi-Marginal Principle.
UNIT – II : DEMAND CONCEPTS & ELASTICITY OF DEMAND :
Concept of Demand, Determinants of Demand- Law of Demand- Exception to the law of demand-
Elasticity of Demand- Types of demand elasticity- Uses of demand elasticity-Concept of Supply-
Determinants of Supply-Law of Supply-Elasticity of Supply.
UNIT – III : PRODUCTION AND COST CONCEPTS :
Theory of production- Production function- Input output combination-Short run production laws,
Law of diminishing marginal returns to scale- ISO-quant curves, ISO-cost curves
UNIT – IV : BUDGET LINE :
Cost concepts- Cost classification-CVP Analysis-short run cost curves and long run cost curves
Experience curve-Economies and diseconomies to the scale- Economies of scope.
UNIT – V : MARKET STRUCTURES AND PRICING :
Concept of market structures- Perfect competition market and price determination- Monopoly and
abnormal profits- Monopolistic Competition-Price Discrimination-Oligopoly-Features of oligopoly-
Syndicating in oligopoly - Kinked demand curve- Price leadership and market positioning.
SUGGESTED BOOKS :
1. Dominik Salvotore, “(2015) Principal of Micro Economics 7th Ed. oxford University Press.
2. Dr. D N Mithani, (2018) Managerial Economics Theory and Appliocation, HPH
3. Varshiney & Maheswari, Managerial Economics, Juptan Publication, New Delhi
4. Lipsey and Crystal (2008) Economics International 15th Ed.Oxford University Press.
5. Kutosynnis (1979) Modern Micro Economics 5th Ed Mac Millan Publishers 6. Rubin field and Mehathe (Micro Economics 7th Ed. Pearson
Publishers.
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3. UNIT - I
BUSINESS ECONOMICS NATURE AND SCOPE
Introduction to Business Economics
Characteristics
Nature and scope
Concept of opportunities Cost
Incremental Cost
Time perspective
Discounting and Equi-Marginal Principle
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Economics is the science of choice in the face of unlimited
ends and scarce resources which have alternative uses.
Economics can be divided into two broad categories:
Microeconomics and Macroeconomics.
Macroeconomics is the
study of the economic
system as a whole. It
includes techniques for
analyzing changes in total
output, total employment,
the consumer price index,
the unemployment rate,
and exports and imports.
Microeconomics focuses on
the behavior of the
individual actors on the
economic stage, that is,
firms and individuals and
their interaction in markets.

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Success of a business firm largely depends upon the
efficiency in utilization of limited resources
remaining in the disposal of the business firm.
Managerial economics is evolved as an
important tool kits which is useful in the
decision making for the manager.
Due to wide recognition of the uses of economic
theories in the decision making of the business this
subject is rich in literature in these days.
Origin of Managerial Economics

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Business Economics is the discipline that deals with the
application of economic concepts, theories and methodologies
to the practical problems of businesses/firms in order to
formulate rational managerial decisions for solving those
problems.
Managerial economics borrows theories from traditional
economics i.e. microeconomics where as it borrows tools from
decision science i.e. mathematics and statistics and it tries to
find out optimum solution of business problems.
Spencer and Seligman defined Managerial economics as “The
integration of economic theory and business practice for the
purpose of facilitating decision-making and forward planning
by management.”
INTRODUCTION OF BUSINESS ECONOMICS

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“Managerial economics is concerned with the ways in which
managers should make decisions in order to maximize the
effectiveness or performance of the organizations they manage.”
- Edwin Mansfield
“Managerial economics is the study of allocation of resources
available to a firm among the activities of that unit.” - Hynes
“Managerial economics is the application of economic theory
and the tools of decision science to examine how an
organization can achieve its aims or objectives most efficiently.”
- Dominic Salvatore
INTRODUCTION OF MANAGERIAL ECONOMICS

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Managerial Economics is the
discipline, which deals with the
application of economic theory to
business management. Thus it lies
on the borderline between
economics and business
management and serves as a bridge
between these two disciplines.
INTRODUCTION OF MANAGERIAL ECONOMICS

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Microeconomics character: - Managerial
economics is microeconomics in character
because its unit of study is firm.
Choice and Allocation: - Concerned with decision-
making of economic nature. This implies that Business
Economics deals with identification of economic
choices and allocation of scarce resources on the best
alternative.
Goal Oriented: - Business Economics
deals with how decisions should be
formulated by managers to achieve the
organizational goals.
Features of Business Economics

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Conceptual and Metrical: - A rational/logical application of
quantitative techniques to business decision-making considers
hard and careful thinking about the nature of the particular
problem to be solved. Business Economics provides necessary
conceptual tools to achieve this.
Pragmatic: Business economics is more pragmatic
than traditional economics. Hence, it is called applied
microeconomics.
Normative: Business Economics belongs to normative
economics rather than positive economics. Positive economics
studies economic behavior without making judgments.
Normative economics, on the other hand, makes value
judgments and prescribes what should be done to solve
economic problems.
Features of Business Economics
Multi-disciplinary: Business Economics is an integration of
different academic disciplines.

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 It essentially applied microeconomics
 It is a science as well as art.
 It is concerned with firm’s behaviour in optimal allocation of
resources.
 Managerial economics is pragmatic i.e. it is a practical subject.
 Managerial economics is a goal-oriented and problem
solving in nature
 Managerial economics integrates theory into practice
Nature of Managerial Economics
 Managerial economics falls into normative economics.
 Managerial economics utilizes some of the theories of
macro economics.

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Demand Analysis and Forecasting:
An understanding of the forces behind demand provides the background needed to make
pricing decisions, forecast sales and formulate marketing strategies.
Production and Production Decisions:
Production theory explains the relationship between inputs and output.
It explains under what conditions costs increase or decrease;
How total output behaves when use of inputs is changed;
How can output be maximized from a given quantity of resources.
It helps the managers in determining the amount of capital and labour to be employed
keeping in view the objectives of the firm.
Market Structure and Pricing Theory:
Price theory explains how prices of outputs and inputs are determined
under different market conditions;
When price discrimination is desirable, feasible and profitable;
To what extent advertising can be helpful in expanding sales in a
competitive market.
Scope of Managerial Economics

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Analysis of Cost:
Estimates of cost are essential for planning purposes.
The factors determining costs are not always known or controllable which gives
rise to cost uncertainty.
Factors of production are scarce and they have alternative uses.
Factors of production may be allocated in a particular way to get maximum output.
Profit and Capital Management (Investment Decisions):
Profit provides the index of success of a business firm.
Profit analysis is difficult, because the uncertainty of expectations makes
realization of profit planning and measurement difficult.
Capital management means planning and control of capital expenditures.
Inventory Management:
Inventory refers to a stock of raw materials or finished
goods.
How much of the inventory is the ideal stock?
High/Low

16. Basic Problems of an Economy
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17. Scope of Managerial Economics (contd.)
Macroeconomics Applied to Business Environment
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Macroeconomic issues relate to the general business environment in
which a business operates. The factors which constitute economic
environment of a country include the following.
a. Types of economic system in the country
b. General trends in national income, employment, prices, saving and
investment.
c. Trend in labour supply and strength of the capital market
d. Government’s economic policies: industrial policy, fiscal policy, monetary
policy, price and foreign trade policies
e. Social factors like value system of the society, property rights, customs
and habits
f. Socio-economic organization like trade unions, consumers’ associations,
and producers’ unions
g. The degree of globalization of the economy and the influence on the
domestic markets

18. Marginalism
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If resources at disposal of a manager are scarce, he has to be careful
about the utilization of each and every additional unit of resources. In
order to decide on the use of an additional man-hour or machine-hour,
he needs to know what is the additional output expected there from.
A decision about additional investment has to be taken in view of
the additional return from that investment.
The term ‘marginal’ is relevant for all such additional magnitudes
of output or return.
Marginal analysis is used to assist people
in allocating their scarce resources to
maximize the benefit of the output
produced.

19. Concept of opportunities Cost
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Opportunity cost can be defined as the cost of any
decision measured in terms of the next best
alternative, which has been sacrificed.

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Opportunity costs represent the potential benefits
an individual, investor, or business misses out on
when choosing one alternative over another.
Opportunity cost refers to what you have to
give up to buy what you want in terms of
other goods or services.
The opportunity cost of a particular activity option is the
loss of value or benefit that would be incurred by
engaging in that activity, relative to engaging in an
alternative activity offering a higher return in value or
benefit.

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This is applicable even at the national level where the country
allocates higher defense expenditures in the budget at the cost of
using the same money for infrastructural projects. In order to
maximize the value of the firm, a manager must view costs from
this perspective.
The loss of other alternatives when one
alternative is chosen.
Opportunity cost, on the other hand, refers to
money that could be earned (or lost) by
choosing a certain option.

22. Incremental Cost
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Incremental cost is the total cost incurred due to an additional unit
of product being produced. Incremental Cost is also called as
Marginal Cost.
Incremental cost is the total cost incurred due to an
additional unit of product being produced. Incremental
cost is calculated by analyzing the additional expenses
involved in the production process, such as raw materials,
for one additional unit of production.
To determine the incremental cost, calculate the cost
difference between producing one unit and the cost of
producing two of them. Take the total cost of producing
two units ( Rs. 180.00) and subtract the cost of producing
one unit (Rs. 100.00) = Rs. 80.00.

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25. Time Perspective
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Time perspective theory is the idea that our perceptions of time
influence our emotions, perceptions, and actions. Most time
perspective models break down our time perspectives into
chronological categories such as: Past. Present. Future.
The time perspective concept states that the decision
maker must give due consideration both to the short run
and long run effects of his decisions.
The actual problem in decision-making is to
maintain the right balance between the long-run
and short-run considerations.

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A decision may be made on the basis of short-run
considerations, but may in the course of time offer
long-run repercussions, which make it more or less
profitable than it appeared at first.
The entrepreneur or business manager
has to review the long range effects on
costs and revenues of decisions.
A foreseeable future outcome is generally the
extension of the course of action and the results
obtained in the relevant past period in the
business trend analysis.

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Short-term time perspectives are based on the
short-run analysis of the business data and
performance.
Seasonal fluctuations in the business are observed and
decisions are carried to deal with the changing circumstance
in the course of business within a short period.
A banker would also find it necessary to maintain a
high quantum of cash flow as liquidity to honour
the demand for deposits withdrawals in the first
week of every month.
In long-run, the perception is towards growth,
development and expansion. It is related to the
long-run business planning for progress.

28. DISCOUNTING PRINCIPLE
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A present gain is valued more than a future gain.
Thus, in investment decision-making, discounting of
future value with the present one is very essential.
Process of determining the present value of a payment or
a stream of payments that is to be received in the future.
Given the time value of money, a rupee is worth more
today than it would be worth tomorrow.
If a decision affects costs and revenues in long-run,
all those costs and revenues must be discounted to
present values before valid comparison of
alternatives is possible.

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A rupee worth of money at a future date is not worth a
rupee today. Money actually has time value.
FV = PV*(1+r)t
For instance, Rs.1000 invested today at 10% interest is
equivalent to Rs. 1100 next year.

30. Equi-Marginal Principle
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This principle is also known the principle of maximum
satisfaction - by allocating available resource to get
optimum benefit .
This principle provides a basis for maximum utilization
of all the inputs of a firm so as to maximize the
profitability.
Let us assume that a consumer purchases two goods A
and B. How does a consumer spend his fixed income in
purchasing two goods in order to maximize his total
utility? The law of equi-marginal utility tells us the way
how a person maximizes his total utility.

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The Equi-marginal principle can be applied in
different areas of management. The objective is to
allocate resources where they are most productive.
This principle suggests that available resources (inputs)
should be so allocated between the alternative options
that the marginal productivity gains (MP) from the
various activities are equalized.
If a person has a thing which he can put to several
uses, he will distribute it among these uses in such
a way that it has the same marginal utility in all.

32. Important Questions
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