Introduction To Managerial Economic

Premier University
[B.B.A]
Course Teacher: Assistant Professor. Anupam Das
Course Title: Managerial Economic
Presentation Subject: Introduction to Managerial Economic
Semester: 7th Section: “A” Batch :22nd
Group Name: D’14

Company
LOGO
Prepared By
NO ID Name Position
1 1022114412 Md. Ariful Islam Saimon Chy Captain
2 1022114397 Shanta Dey Captain
3 1022114384 Md.Shazzad Hossain
4 1022114413 Md. Rasel
5 1022114372 Md.Shahadat Hossain
6 1022114383 Moutushi Malik
7 1022114406 Md.Towky Uddin
8 1021114362 Imteaj Ibna Hossain
9 1022114418 Farzana Yasmin
10 1022114428 Asma Abida
11 1022114423 Udita Dewan
12 1022114402 Syeda Mehnaz Ahmed
13 1022114403 Julfia Japrin
14 1022114407 Jimy Das

Chapter Objective
• Having gone through this unit, you will be able to:
• Know the need of economics for manager
• Learn how does economics contribute to
managerial functions
• Familiar with the Managerial Economics
• Study how relevant economic theories facilitates
decision making.
• Clarify the scope of managerial economics in
operational and environmental issues.
• Recognize the role of managerial economics in
business decision making.
• Comfort with the theory of the firm, constraints
of the theory and limitations.

Economics’
A social science that studies how individuals, governments, firms and
nations make choices on allocating scarce resources to satisfy their
unlimited wants.
• The philosopher Adam Smith (1776) defines the subject as "an
inquiry into the nature and causes of the wealth of nations"
• “Economics is a study of man in the ordinary business of life. It
enquires how he gets his income and how he uses it. Thus, it is on the one
side, the study of wealth and on the other and more important side, a part
of the study of man”. -----Alfred Marshall
• A recent review of economics definitions includes a range of those in
principles textbooks, such as descriptions of the subject as the study of:
• - the economy - the coordination process
• - the effects of scarcity - the science of choice
• - human behavior - human beings as to how they coordinate
wants and desires, given the decision-making mechanisms, social
customs, and political realities of society.
• “Economics, is essentially the study of Logic, Tools, and Techniques of

Personal Profile
Micro Economics and Macro Economics
• Economics can generally be broken down into: microeconomics,
which focuses on individual consumers. Macroeconomics, which
concentrate on the behavior of the aggregate economy.
• The prefix “micro,” meaning “small,” in the word
“microeconomics” refers to the basic, small-scale economic
behaviors and decisions that economists does in this field study.
• It analyzes the market behavior of individual consumers and
firms in an attempt to understand the decision-making process of
firms and households. It is concerned with the interaction between
individual buyers and sellers and the factors that influence the
choices made by buyers and sellers. In particular, microeconomics
focuses on patterns of supply and demand and the determination of
price and output in individual markets.

Difference Between Micro and Macro Economics
The prefix “macro-,” meaning “big,” in the word “macroeconomics”
refers to how economists in this field analyze the structure and
function of large-scale economies as a whole, whether regional,
national or global.
Macroeconomics studies the behavior of the aggregate economy,
examines the complex interplay between factors such as national
income and savings, gross domestic product, gross national product,
consumer and producer price indexes, consumption, unemployment,
foreign trade, inflation, investment and international finance.
‘Managerial Economics is the combination of both Micro and Macro
concepts of Economics study in specified areas where required for
the business managers and management. However, practically and
theoretically, it mostly highlights on the Micro study of economic
behavior of business entities and economy

Difference Between Micro and Macro
Economics
Difference Between Micro and Macro
Economics
Micro Macro
Study of individual economic units of an economy Study of economy as a whole and its aggregates.
Deals with individual income, individual prices and individual
output, etc.
Deals with aggregates like national income, general price level
and national output, etc.
Its Central problem is price determination and allocation of
resources.
Its central problem is determination of level of income and
employment.
Its main tools are demand and supply of a particular
commodity/factor.
Its main tools are aggregate demand and aggregate supply of
economy as a whole.
It helps to solve the central problem of what, how and for whom to
produce in the economy
It helps to solve the central problem of full employment of
resources in the economy.
Discusses how equilibrium of a consumer, a producer or an
industry is attained.
Concerned with the determination of equilibrium level of income
and employment of the economy.
Price is the main determinant of microeconomic problems. Income is the major determinant of macroeconomic problems.
Examples: individual income, individual savings, price
determination of a commodity, individual firm's output,
consumer's equilibrium.
Examples: National income, national savings, general price level,
aggregate demand, aggregate supply, poverty, unemployment etc.

Positive Economics Vs Normative Economics
‘Positive economics’ based on objective/ describe analysis. Most
economists today focus on positive economic analysis, which uses
what is and what has been occurring in an economy as the basis
for any statements about the future. For example, a positive
economic statement would be: "Increasing the interest
rate will encourage people to save." This is considered a positive
economic statement because it does not contain value judgments
and its accuracy can be tested.

Positive Economics Vs Normative Economics
‘Normative economics’ that incorporates subjectivity/
Prescribe/suggest within its analyses. It is the study of "what ought to
be" rather than what actually is. Normative economics deals heavily in
value judgments and theoretical scenarios. It is the opposite of positive
economics. For example, a normative economic statement would be,
"We should cut taxes in half to increase disposable income levels".
Managerial Economics is a part of normative economics as its
focus is more on prescribing choice and action and less on explaining
what has happened.

Why do the Managers need to
know Economics?
O The emergence of managerial economics can be
attributed as a separate course of management
studies can be attributed to at least Four factors:
O Complexity of decision making due to market
condition and business environment
O Increasing use of economic logic, concepts, theories
and tools of economic analysis in the process of
business decision making.
O Rapid increase in demand for professionally trained
managerial manpower.
O To achieve the objective to the optimal extent by
ensuring maximum utilization of limited or given
resources.

How Economics Does Contributes to
Managerial Functions?
Baumol has pointed out Three main contributions of
economic theory to Business economics.
O Firstly, Contribute to the management science is
‘Building Analytical Models’
O Secondly, Contribute to business analysis ‘a set
of analytical methods’
O Thirdly, Offers ‘clarity to the various concepts
used in business analysis’, which enables to
avoid conceptual pitfalls.

Managerial Economics
‘Managerial Economics is the study of economics theories, logic
and tools of economic analysis that are used to seek solution to the
practical problem of business for decision making.’
Economic theories and techniques of economic analysis are
applied to analyze business problems, evaluate business options and
opportunities with a view to arriving at an appropriate business
decision.
“Managerial economics is concerned with the application of
economic concepts and economic analysis to the problems of
formulating rational managerial decision”- Mansfield
Managerial Economics is often called “Business
Economics or Economics for Firms or Applied Economics”

Business Decisions and Economic Analysis
Business Decision Making is essentially a process of selecting
the best alternative opportunities open to the firm.
In this area of decision-making economic theories and tools
of economic analysis contribute a great deal.
Economic theories state the functional relationship between
two or more economic variables under certain given conditions.
How Economic Theories Facilitates Decision Making In
Business Problems
Relevant Economic theories to the business problems facilitate decision
making in THREE ways.
Firstly, it helps clear understanding of various Economic Concepts
(Cost, Price, demand etc.) used in business analysis.
Secondly, it helps in ascertaining the relevant variables and specifying
the relevant data (What variables need to be considered in estimating the
demand for two different products)
Thirdly, economic theories state general relationship between two or
more economic variables and events. Also contributes a good deal to the
validity of decision.

The Scope of Managerial Economics
Both micro and macro economics are applied to business
analysis and decision making directly and indirectly. The parts
of micro and macro economics that constitute managerial
economics depend on the purpose of analysis.
In other words, managerial economics is economics
applied to the analysis of business problems and decision
making.
The areas of business issues to which economics
theories can be directly applied may be broadly divided into two
categories:
a) Operational or Internal Issues
b) Environmental or External Issues

Microeconomics Applied to Operational
Issues
Operational problems are of internal nature. They include all those problems which arise within the business
organization and fall within the purview and control of the management. Some of the basic internal issues are: (i) choice
of business and the nature of product, i.e., what to produce; (ii) choice of size of the firm, i.e., how much to produce; (iii)
choice of technology, i.e., choosing the factor-combination; (iv) choice of price, i.e., how to price the commodity; (v) how
to promote sales; (vi) how to face price competition; (vii) how to decide on new investments; (viii) how to manage profit
and capital; (ix) how to manage inventory, i.e., stock of both finished gods and raw materials. The microeconomic
theories which deal with most of these questions are following:
•Theory of Demand
Demand theory explains the consumer’s behavior. It can be helpful in the choice of commodity: type of commodity,
quantity, time of consuming a commodity; consumer’s response towards the change in price of commodity, their
income, taste and fashions, etc.
•Theory of Production and Production Decisions
Production theory explains the relationship between inputs and outputs. It helps in determining the size of the firm, size
of the total output and the amount of capita and labor to be employed.
•Analysis of Market Structure and Pricing Theory
Analysis of market structure explains optimum price and output relation under different market structures. Pricing theory
explains hoe prices are determined under different market conditions; when price discrimination is desirable, feasible
and profitable. It also helps in determining the optimum size of the firm.
•Profit Analysis and Profit Management
Profit theory guides firms in the measurement and management of profit, in making allowances for the risk premium, in
calculating the pure return on capital and pure profit and also for future profit planning.
•Theory of Capital and Investment Decisions
The major issues related to capital are (i) choice of investment project (ii) assessing the efficiency of capital, and (iii)
most efficient allocation of capital. Knowledge of capital theory can contribute a great deal in investment-decision
making, choice of projects, maintaining capital intact, capital budgeting, etc.

Microeconomics Applied to Operational
Issues
Macroeconomics Applied to Business Environment
Environmental issues pertain to the general business environment in which a business operates. They are related to the
overall economic, social and political atmosphere of the country. The factors which constitute economic environment of a
country include the following factors:
•the type of economic system of the country
• general trends in production, employment, income, prices
• general trends in the working of the financial institutions that is banks, financial corporation, insurance companies etc.
•magnitude and trends in foreign trade
•trends in labour and capital market
•social factor like the value system, property rights, customs and habits
•government economic policies that is monetary policy, fiscal policy, price policy etc.
•social organizations like trade unions, consumers co-operatives and producer union.
•political environment is constituted of some factors such as democratic, socialist and otherwise .
•the degree of openness of the economy and the influence of MNCs on the domestic market.
The major macroeconomic or environmental issues which figure in business decision-making, particularly with regard to
forward planning and formulation of the future strategy, may be described under the following three categories:
•Issues Related to Macro Variables – investment climate, trends in output & employment, price trends, etc.
•Issues Related to Foreign Trade – trade relations with other countries exports, imports, fluctuation in international market,
exchange rate, inflows and outflows of capital.
•Issues Related to Government Policies: pollution, creation of slums, etc.
Briefly Speaking, microeconomic theories including theory of demand, theory of production, theory of price discrimination,
theory of profit and capital budgeting and macroeconomic theories including theory of national income, theory of economic
growth and fluctuations, international trade and monetary mechanism, policies of government, by and large, the scope of
managerial economics.

Theory of The Firm / Nature of the
Firm
The basic model i.e; the nature of business is called the ‘theory
of the firm’.
 Firms exist because the production are lower and returns to
the owners of labor and capital are higher than if the firm did
not exist.
 In order to earn profits, the firm organizes the factor of
production to produce good and services that will meet the
demand of individual consumers and other firms.
 The concept of the firm plays a central role in the theory
and practice of managerial economics.
 Thus a significant part of managerial economics is
focused on Production, Cost, and the Organization of firms in
marketplace.

Slide Title
Objective of the Firms’
In its simplest version, the firm is thought to have profit maximization as
its primary goal. The firm’s owner-manager is assumed to be working
to maximize the firms shorts run profits.
Today the emphasis on profits has been broadened to encompass
uncertainty and the time value of money. In this more complete model,
the primary goal of the firm is long-term expected value maximization,
which is now considered the primary objective of business.
Short-run: Consider the period where economic variable cannot be
changed. It is generally for less than one year
Long-run: Consider the time period where there is no fixed economic
variable. It is usually for more than one year. The reason is that
economic variable is very difficult to predict

Decision Criteria for Maximization of the
Firm’s Net Worth
• Decision criterion for pursuit of the maximization of the
firm’s net worth is modified as the firm’s time horizon
moves from the present period to a future period and as
the state of information changes from certainty to
uncertainty. These criteria are summarized in the table
below, where the four scenarios are provided by the
intersection of the conditions shown by the rows and
columns of the table. The decision criterion for
maximization of the firm’s net worth is shown in the
interior of the table for each of the four scenarios.

Table: Decision Criteria for
Maximization of the Firm’s Net Worth
under Four Scenarios
The State of
Information
Certainty
Uncertainty
Time Horizon
Present Period Future Period
Maximize short-run profits Maximize present value of
profits
Maximize expected value of
profits
Maximize expected present
value of profits

The decision criteria for maximization of
the firm’s net worth under the four
scenarios are:
• Scenario 1: The Present Period with Certainty
• For the firm operating in an environment of certainty and with its time horizon falling
within the present period, short run profit maximization is the appropriate decision
criterion to maximize the firm’s net worth.
• Scenario 2: Future Periods with Certainty
• For the firm operating in an environment of certainty and with its time horizon falling in
a future period, maximization of the present value of profits is the appropriate
decision criterion to maximize the firm’s net worth.
• Scenario 3: The Present Period with Uncertainty
• For the firm operating in an environment of uncertainty, and with its time horizon falling
within the present period, maximization of the expected value of profits is the
appropriate decision criterion to maximize the firm’s net worth.
•
•
• Scenario 4: Future Periods with Uncertainty
• For the firm operating in an environment of uncertainty and with its time horizon falling
in a future period, maximization of the expected present value of profits is the
appropriate decision criterion to maximize the firm’s net worth.

Findings
• What is the most common objectives of business firms? There is no definite answer to this
question. However, profit maximization is regarded as the most common and theoretically most
plausible objective of the business firms. Traditionally, economists have assumed that the
objective of the firm is to maximize profit. But Profit in which Period? This Year? For the next five
years?
• As both current and future profits are important, it is assumed that the goal is to maximize
the present and discounted value of all future profits subject to legal, moral, contractual, financial
and technological constraints.
• To maximize the discounted value of all future profits is equivalent to maximizing the value
of the firm, i.e.; value maximization.

Meaning of Profit
The word ‘Profit’ has different meaning to businessman,
accountants, tax collectors, workers, investors and economists.
For all practical purposes, there are Two Types of Profit;
Accounting Concept: Profit is the surplus of revenue over and
above all paid-out costs, including both manufacturing and
overhead expenses (explicit cost or book cost) known as
‘Accounting profit or Business profit’.
• Accounting Profit = Total Revenue – Explicit Costs (Wages,
Rent, Interest, materials’ cost)
• Economic Concept: It considers Implicit cost or imputed
cost as well, known as ‘Opportunity cost or Transfer costs’
beside accounting profit known as ‘Economic Profit or Pure
Profit of Just Profit’

Opportunity
The opportunity cost may be defined as the expected returns from the second best use of
the resources “Opportunity cost is the next best
“OppAorltteurnnitayt icvoes fto irse tghoen nee” xt best
Alternative foregone”
Cost
Example:
If we have $20 we can spend it on an “economic textbook” or we can enjoy a meal in a restaurant.
If wIef wspee hnadv teh a$t2 $02 w0e o nca an tsepxetbnodo ikt ,o tnh ea no p“epcoortnuonmityic c toesxtt biso tohke” roers wtaeu rcaannt emnejoayl wa em ceaanl nino ta a rfefosrtda utora pnat.y .
If we spend that $20 on a textbook, the opportunity cost is the restaurant meal we cannot afford to pay.
•Moving from Point A to B will lead to
an increase in services (22-25).
But, the opportunity cost is that output of goods
falls from 15 to 11.
•Therefore, the opportunity cost of
increasing consumption of services is
the 4 goods foregone
At point C, the economy is inefficient. We
can increase both goods and services without
any opportunity cost.

Profit in Market Economy
Profit’ plays Two primary roles in the free-market system.
Firstly, It act as a Signal to producers to increase or decrease the
rate of output, or to enter or leave an industry.
Secondly, Profit is a reward for entrepreneurial activity,
including risk taking and innovative in developing new products and
reducing production cost.
Firms can earn economic profit if they have monopoly power in
a market. In general, such profits are not socially useful.
The Concept of Discounting:
The present value of an amount available after some time is less than the
present value of the same amount available today. The mathematical
technique for adjusting for the time value of money and computing
present values is called discounting. The concept of discounting is most
useful to investment planning or capital budgeting.

Alternative Objectives’ of Firm
Today’s Real World managers’ don’t always consistent with
the profit maximization goal. Beside this, managers
pursue alternative objectives and are seen as important.
They identified alternatives are
 Maximizing Total Sales Revenue
 Maximization of Firm’s Growth Rate
 Maximization of Manager’s Utility function
 Making a satisfactory rate of Profit
 Long-run Survival of the Firm
 Entry-Prevention and Risk Avoidance
 Maximizing employment tenure and department
budget

Managerial Decision Making Process or the
Role of Managerial Economics in Managerial
Decision Making
Economic Concepts • Decision Sciences
Management decision Problem
Optimal Solutions to Managerial Decision Problems
Figure: The Role of Managerial Economics in Managerial Decision Making
(Decision Making Model)

Constraints
When everything may be possible but situation may not suitable to do this, this is
called constraints. For example, a firm can produce 600 units but market
demand 500 units, this is constraints.
Constraints of the theory of the firm
Managerial decisions are often made in the light of
constraints imposed by:
– technology
– resource scarcity
– contractual obligations and
– Government laws and regulations.

Limitations:
When fails to produce the required number of units that is
demanded, this is limitation. For example, a firm
produces 300 units but market demand 600, this is
limitation.
Its extremely difficult to determine whether managers
actually attempt to maximize firm value or merely attempt
to satisfy stockholders.
Managers maximize the value of the firm subject to
constraints imposed by resource limitations, technology
and society.

Introduction To Managerial Economic

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