This document provides definitions and explanations of key concepts in economics. It discusses how economics was defined by Adam Smith, Alfred Marshal, and Lionel Robbins. It also defines microeconomics as focusing on individual units while macroeconomics looks at aggregates. Economic decisions around production, exchange, and consumption are explained. Managerial economics is introduced as integrating economics, decision sciences, and business administration to examine how firms can achieve goals. Micro and macroeconomics are applied to managerial issues and business environment respectively. The scope and applications of managerial economics are outlined.

1. ECONOMICS - DEFINITION
 The word economics originates from the Greek words ‘oikos’and
‘nomos’which mean household and management respectively.
 Prof. Adam Smith defined economics as a study of production,
exchange and consumption of wealth.
 Prof. Alfred Marshal defined economics as the study of mankind in
the ordinary business of life.
 Prof Lionel Robbins defined economics as a social science which
deals with optimum allocation of scarce resources with alternative
uses.

2. MICRO AND MACRO ECONOMICS
Prof. Ragnar Frisch has classified economics in to Microeconomics
and Macroeconomics.
Microeconomics: it deals with the behaviour of individual economics
units such as individuals, firms, buyers, sellers and so on. Therefore
it is called the worm’s eye view of the economy
Macroeconomics: deals with aggregates of the economy at large such
as national income, general price index, total employment and
unemployment, wage rate, money supply, savings and so on. Therefore
it is called the bird’s eye view of the economy.

3. ECONOMIC DECISIONS
 Production decisions: Since the resources are limited producers
should decide what to produce (commercial goods or social
goods) ; how to produce( to use capital intensive or labour
intensive techniques) and how much to produce( quantities based
on price, inputs, demand etc.)
 Exchange decisions: who is the target group of buyers for each
product (whole sale or retail, domestic or international) and at
what prices?
 Consumption decisions: what to buy (based on taste and
preferences) and how much to buy (based on income, price, price
of relative goods etc

4. MANAGERIAL ECONOMICS
 Managerial Economics refers to the study that integrates economic
theory , decision sciences ,and the functional areas of business
administration studies; and it examines how they interact with one
another as the firm attempts to achieve its goals most effectively.
Significance:
 Reduce the risk and increases predictability thus helping them make
better decisions.
 To make decisions regarding using these limited resources in the
most efficient and economic way.

5. NATURE OF MANAGERIAL ECONOMICS
1. Managerial economics is concerned with the analysis of finding optimal
solutions to decision making problems of businesses/firms (micro
economic in nature).
2. Managerial economics is a practical subject therefore it is pragmatic.
3. Managerial economics describes, what is the observed economic
phenomenon (positive economics) and prescribes what ought to be
(normative economics)
4. Managerial economics is based on strong economic concepts.
(conceptual in nature)
5. Managerial economics analyses the problems of the firms in the
perspective of the economy as a whole ( macro in nature)
6. It helps to find optimal solution to the business problems (problem
solving)

6. APPLICATION OF MANAGERIAL ECONOMICS
 It gives a clear understanding of various economic concepts used
in business analysis.
 It helps in ascertaining the relevant variables and specifying the
relevant data.
 Economic theories state the general relationship between two or
more economic variables and events.
 Application of the relevant economic theory provides consistency
to business analysis and helps in arriving at right conclusions.
 Contributes a good deal to the validity of decision

7. SCOPE OF MANAGERIAL ECONOMICS
 In general managerial economics is economics applied to the
analysis of business problems and decision making.
Micro Economics Macro Economics
Applied to operational or internal issues Applied to business environment
Demand and Supply theory Economic system in the country
Theory of production and production
decisions
National income, employment, prices, saving
and investment, etc
Analysis of market structure and pricing
theory
Working of financial and non-financial
institutions
Profit analysis and profit management Magnitude of and trends in foreign trade
Theory of capital and investment decisions Labour supply and strength of the capital
market
Industrial policy, monetary policy, fiscal policy
Political environment and system -
Degree of globalization -
Political environment and system

8. CIRCULAR FLOW OF ECONOMIC ACTIVITY

9. MANAGERIAL ECONOMICS AND OTHER
DISCIPLINES
Managerial economics has its relationship with other
disciplines for propounding its theories and concepts for
managerial decision making.
Managerial economics is closely related to certain subjects like
 Statistics
 Mathematics
 Accounting and
 Operations research.

10. THEORY OF FIRM
 Reasons for the existence of the firm – Transaction Cost,
Principle Agent Conflict and combining &organizing resources.
 Primary objectives of the firm – Profit Maximization
 Value of the Firm – Future profit and discounts
 Limitations of the Firm – Not covers maximization of sales,
maximization of management utility and satisfying behaviour.
 Constraints in which it operates.

11. OBJECTIVES OF THE FIRM
 To achieve the Organizational Goal
 To maximize the Output
 To maximize the Sales
 To maximize the Profit of the Organization
 To maximize the Customer and Stakeholders Satisfaction
 To maximize Shareholder’s Return on Investment
 To maximize the Growth of the Organization

12. CONSTRAINTS ON THE OPERATION OF THE FIRM
 Procuring suitable inputs like raw materials, technology etc.
 Acquiring skilled labour or workforce
 Storage facilities or warehousing facilities
 Capital requirements
 Legal constraints, environmental restrictions etc.

13. ECONOMIC PRINCIPLES RELEVANT TO
MANAGERIAL DECISION MAKING
1. Opportunity Cost Principle - Opportunity cost of availing an
opportunity is foregone income expected from second best
opportunity of using the resources.
Economic profit = Actual earning – opportunity cost
2. Marginal Principle and Decision rule - Extra Cost/Revenue
MC = TCn-TCn-1
MR = TRn-TRn-1
MR>MC suggests that the production can be carried on if MR is more
than MC as the firm is earning profit
MR=MC, in this case the firm will be producing profit maximizing
output.

14. ECONOMIC PRINCIPLES RELEVANT TO MANAGERIAL
DECISION MAKING
3. Incremental costs can be defined as the costs that arise due to a
business decision, in other words when the total cost of production
increases due to a business decision is called as incremental cost.
4. Production possibility curve
5. Discounting Principle and decision process

15. IMPORTANT QUESTIONS
1. Define opportunity cost. Explain its importance in managerial economics.(2012)
2. Explain consumer equilibrium under cardinal utility analysis. (2012, and 2014)
3. What is the use of incremental analysis in business decision making.(2010)
4. Define Managerial Economics. Explain its scope.(2013)
5. Distinguish between incremental and marginal analysis.
6. Briefly explain the objectives of the firm.(2016)
7. Give the significance of Marginal concept in Decision making.(2016)
8. Explain the concept of Production possibility curve by linking it to opportunity
cost.(2015)
9. Compare the contrast of microeconomics with macroeconomics(2007)
10. Critically examine profit maximization vs sales maximization(2014)

16. IMPORTANT QUESTIONS
1. Distinguish between micro economics, macro economics and
managerial economics.
2. What is managerial economics? Why to study managerial
economics?
3. Describe the circular flow of economic activity of India.
4. Discuss the Theory of the firm.
5. How does managerial economics relate with other disciplines
for propounding its theories?
6. Identify the areas of decision making where managerial
economics
7. prescribes specific solutions to business problems.
8. Discuss the role and responsibilities of a managerial economist.