Managerial economics

1. Managerial Economics
Definition

2. Scope of ME
• Economics has two major branches:-
• Microeconomics & macro economics
• Both are applied to business analysis and
decision making
• Hence ME comprises both Micro and
Macroeconomic theories
• ME is in fact economics applied to the analysis
of business problems and decision making

3. DEFINITION
• ME is defined as the study of economic
theories, logic and tools of economic analysis
that are used in the process of business
decision – making.

4. Microeconomics applied to
operational Issues
• Operational Issues are internal
• Problems which arise within the business
organisation &within the purview and control
of the management
i. Choice of business & nature of the product
i.e., what to produce
ii. Choice of size of the firm, i.e,. How produce
iii. Choice of technology

5. • Choice of price
• How to promote sales
• How to face price competition
• How to decide on new investment
• How to manage profit and capital
• How to manage an inventory, i.e., stock of
both finished goods and raw materials

6. Macroeconomics applied to
Business Environment
• A business operates in different enviornment
• They are related to the overall economic,
social and political atmosphere of a country
• 1) The type of economic system
• 2)General trends in N.I., employment, prices,
saving and investment
• 3)Structure of and trends in the working of
financiaj institutions

7. • 4) Magnitude of and trends in foreign trade
• 5)Trend in labour supply and strength in
capital market
• 6) Govt’s econonomic policies
• 7) Social factors like value system of the
society, customs, habits etc
• 8) Socio-economic organisations like trade
unions,consumers’ associations etc

8. • 9) Political environment like democratic,
authoritarian, socialist etc
• 10) The degree of globalisation and the
influence of MNCs on the domestic market
• A single firm cannot manage all these alone
• All the firms together may influence these
factors

9. • Before taking any business decisions, the
managers have to be aware of the prevailing
business environment
• ME is concerned only with the Eco.
Environment
• Microeco. theories like demand, production,
price determination etc and macroeco.
theories like N.I., eco. Growth etc form the
scope of ME

10. DECISION MAKING
• *World is becoming more and more complex
• *Business decisions also complex- Largescale
industries, Diversification,
Expansion,mergers,MNCs etc.
• *Increase in Inter-firm ,inter- industry,
international rivalry, competion risk etc.
• *Family training & experience- insufficient.

11. • *Business decisions require a clear
understanding of market conditions,
competition, market fundamentals &
business environment.
• * Economic theories & analytical tools have
been used in business decision making
• *Baumol- three contributions
• 1.Building analytical models, which help to

12. • Recognise structure of Managerial problems,
eliminate the minor details that might
obstruct D making, and help to concentrate on
the main issue.
• 2. A set of analytical methods which may not
be applied directly to specific B problems but
they do enhance the analytical capabilities of
the business analyst.

13. • 3.Eco. Theories offer clarity to the various
concepts used in business analysis, which enables
the managers to avoid conceptual pitfalls
• * the managers have to take a number of
decisions in conformity with the goals of the firm
often under uncertainty and risk
• *If market conditions can be predicted the degree
of uncertainty and risk can be reduced.
*Economics offers models, tools and techniques
to predict the future course of action

14. Steps in Decision-Making
• D.M is a process of selecting the best out of
alternative opportunities open to the firm
• *Four main Phases
• 1.Determining and defining the objective to
be achieved
• 2.Collection and analysis of business related
data and other information regarding
economic, social, political and technological

15. • Environment foreseeing the necessity and
occasion for decision
• 3.Inventing,developing and analysing possible
course of action
• 4. Selecting a possible course of action
• *steps 2 &3 are v. crucial for B.D.M
• *Eco. Theories facilitate B.D.M at least in
three ways

16. • 1. It gives a clear understanding of various
cost concepts like cost, dd, prices etc
• 2.It helps in ascertaining the relevant variables
and specifying the revelant data.
• 3.Eco. Theories state the general relationship
b/n two or more variables and also events

17. Basic concepts inD.M
• * Managerial decisions are taken at different
levels of sofistication.
• * To handle complex business issues some
fundamental economic concepts will have to
be used.

18. Incremental Concept
• It is similar to marginal concept but with a
difference
• The firms find it difficult to calculate MC& MR
because they produce and sell their products
in bulk and not in terms of units and there I
large increase in total cost and total revenue.
• Such an increase in total cost and total
revenue is called I C & I R

19. • I C has three major concepts
• 1. Present explicit costs- it includes FC & VC
• 2.Opportunity cost – refers to expected
income forgone from the second best use f
the resources involved in the present decision
• 3.Future costs include depreciation &
advertising costs f the product is not sold as
was expected

20. Incremental Revenue
• It is the increase in revenue due to a
successfully implemented business decision

21. Incremental Reasoning in B D
• The use of incremental concept in B D is called
incre. Reasoning and is used in accepting or
rejecting a business proposition
• It is used where large values of cost and
revenue are involved because :
• 1. The marginal concept used in business
analysis is generally associated with one unit
of output produced or sold whereas most

22. • Business decisions involve large volume and
value
• 2.Pricise calculation of marginal value is
neither practical nor necessary in real life
business considerations

23. Discounting Concept
• It is related to the time value of money
• Cash in hand has a greater value than the
same amount of cash expected in future
• It gives liquidity and convenience in
transaction
• It provides an opportunity for investment &
earning a higher income in future
• Discounting is a method of finding the
present value of future income

24. • Present Value (PV)= R
• Where R is the return expected after one year
and r is the current market rate of interest
• In this formula, 1/(1+r) is the discounting rate
for one year.
• EG. An income of Rs. 100 is expected after one
year and the market rate of interest is 10%.
• PV= 100/1+0.10=Rs. 90.91.

25. • It means that an amount of Rs.90.91 invested
today will bring Rs. 100 after one year at 10%
rate of return
• The formula for calculating(PV) of an income
receivable in the nth yearis
• PV of R in nth year= R/(1+r)n

26. Opportunity Cost CONCEPT
• Human wants are unlimited and resources
• scarce – alternative uses
• Scarcity and alternative uses give rise to the
concept of Opportunity Cost. It is the foregone
income expected from the second best
opportunity of using the resources.

27. Time Concept
• It refers to the duration of time period
extending from the relevant past to the
foreseeable future, taken in view while taking
a business decisions.
• Relevant past means period of experience and
trends which are relevant for business dec.
with long run implications.
• Time perspective differs
• Some have short – run outcome and involve

28. • Short-run perspective. Eg. A decision to buy
explosive materials for the forthcoming
festival is short-run perspective and
investment in plant, building , spending on
labour welfare activities, Introduction of a
new product , advts etc have long-run
repercussions
• The dec. makers must decide on an
appropriate future for projecting a product.

29. Equi-marginal Concept
• It is originally associated with conception
theory and the law is called ‘the law of Equi-
marginal utility’.
• It states that a utility maximizing consumer
distributes his consumption expenditure b/n
various goods and services he/she consumes
in such a way that the marginal utility derived
from each unit of expenditure on various
goods and services is the same.

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