Nature and Scope of Managerial Economics in relation with other disciplines – Role and Responsibilities of Managerial Economist – Goals of Corporate Enterprises: Maximization of profit - Value of enterprise

1. PREPARED BY
MS. JISSY.C
ASSISTANT PROFESSOR
MANAGERIAL ECONOMICS
Ms.Jissy.C,AssistantProfessor
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2.  UNIT – I
Nature and Scope of Managerial Economics in relation with
other disciplines – Role and Responsibilities of Managerial
Economist – Goals of Corporate Enterprises: Maximization of
profit - Value of enterprise.
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Ms.Jissy.C,AssistantProfessor

3.  Introduction of Economics
The word 'economics' comes from two Greek words, 'eco'
meaning home and 'nomos' meaning accounts. The subject
has developed from being about how to keep the family
accounts into the wide-ranging subject of today.
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4. ECONOMICS
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Those activities of mankind are studied which are concerned with
earnings and spending of money.
For the successful handling of these activities certain laws and rules
are formulated which are known as various theories of economics.
Use of these rules & tools provided for analysing business conditions
and applying them for arriving at various economic decision is known as
managerial economics

5.  DFINITIONS OF ECONOMICS
Economics is a social science . Its basic function is to study
how people – individual house holds, firms and nations
maximizing their gains from their limited resources and
opportunities.
 In economic terminology it is called as “maximizing
behaviour” or more approximately “optimizing behaviour” .
 Optimization means selecting best out of available
resources with the objective of maximizing gains from given
resources.
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6.  TWO TYPES OF ECONOMICS
Macroeconomics Derived from the greek word mikros
meaning “Large”.
Micro Economics Derived from the greek word makros
meaning “Small”
Microeconomics studies economic relationship or economic
problems at the level of an individual- an individual firm, an
individual household or an individual consumer. E.g. Study of
TISCO
Macroeconomics studies economic relationships or economic
problems at the level of the economy as a whole. E.g. Study
of Unemployment, inflation, Per capita income
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7.  INTRODUCTION OF MANGERIAL ECONOMICS
Managerial Economics is economics applied to decision
making. It is a special branch of economics, bridging the gap
between pure economic theory and managerial practice.
 The science of Managerial Economics has emerged only
recently. With the growing variability and unpredictability of
the business environment, business managers have become
increasingly concerned with finding rational and ways of
adjusting to an exploiting environmental change.
 The problems of the business world attracted the attentions
of the academicians from 1950 onwards. Managerial
economics as a subject gained popularity in the USA after
the publication of the book “Managerial Economics” by Joel
Dean in 1951.
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8.  Definition of Managerial Economics
According to Spencer and Siegelman, “ Managerial
Economics may be defined as the integration of economic
theory with business practice for the purpose of facilitating
decision making and forward planning by management.”
According to McNair and Meriam, “ Business Economics
consists of the use of economic modes of thought to analyse
business situation.”
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9.  Managerial Economics in relation with other disciplines
 Managerial Economics and Theory of Decision Making:
 Managerial Economics and Operations Research:
 Managerial Economics and Statistics:
 Managerial Economics and Accounting
 Managerial Economics and Mathematics:
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10.  Nature of Managerial Economics
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11. Principles of Managerial Economics
The great macroeconomist N. Gregory Mankiw has given ten
principles to explain the significance of managerial
economics in business operations.
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12.  Scope of Managerial Economics
 Managerial economics is widely applied in organizations to deal with
different business issues. Both the micro and macroeconomics equally
impact the business and its functioning.
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13.  Role and Responsibilities of Managerial Economist
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14. Functions of Managerial Economist
 Demand Forecasting
 Capital Budgeting
 Risk Analysis
 Prices And Competitive Strategies
 Profit Planning
 Government Regulation
 Cost Analysis
 Strategic Planning
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15. Meaning Of Firm
A firm is a commercial enterprise, a company that buys and
sells products and/or services to consumers with the aim of
making a profit.
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GOALS/OBJECTIVES OF A
BUSINESS FIRM
National
Goals
Human
Goals
Social
Objectives
Economic
Objectives
Organizational
Objectives

16. Profit Maximization
Long-term Survival
Sales-Maximisation Goals
Balance Growth
Multi-purpose Goals
Cost Minimization
Creation of Customers
Self Sufficiency
Financial Soundness
Innovation
Early Prevention & risk avoidance
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17. Long run Survival
Capture Business
Market Leadership
Market share Expansion
Higher rate of growth
Service to society
Good Corporate Citizenship
Supply of quality goods
Avoidance of Profiteering an anti- Social pratices
Providing Employment
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18. Fair deal to employees
Job Satisfaction
Workers Participation
Social justice
National Priorities
Export Promotion
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19.  Profit Maximization
Profit maximization is the short run or long run process by
which a firm may determine the price, input,
and output levels that lead to the highest profit. Neoclassical
economics, currently the mainstream approach
to microeconomics, usually models the firm as maximizing
profit
 An assumption in classical economics is that firms seek to
maximise profits.
 Profit = Total Revenue (TR) – Total Costs (TC).
 Therefore, profit maximisation occurs at the biggest gap
between total revenue and total costs.
 A firm can maximise profits if it produces at an output where
marginal revenue (MR) = marginal cost (MC) 19
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21.  If the firm produces less than Output of 5, MR is greater
than MC. Therefore, for this extra output, the firm is gaining
more revenue than it is paying in costs, and total profit will
increase.
 At an output of 4, MR is only just greater than MC;
therefore, there is only a small increase in profit, but profit is
still rising.
 However, after the output of 5, the marginal cost of the
output is greater than the marginal revenue. This means
the firm will see a fall in its profit level because the cost of
these extra units is greater than revenue.
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22.  Profit Maximisation for a monopoly
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23.  In this diagram, the monopoly maximizes profit where
MR=MC – at Qm. This enables the firm to make
supernormal profits (green area). Note, the firm could
produce more and still make normal profit. But, to
maximize profit, it involves setting a higher price and lower
quantity than a competitive market.
 Note, the firm could produce more and still make a normal
profit. But, to maximize profit, it involves setting a higher
price and lower quantity than a competitive market.
 Therefore, in a monopoly profit maximization involves
selling a lower quantity and at a higher price.
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24.  Profit Maximization in Perfect Competition
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25.  In perfect competition, the same rule for profit maximisation
still applies. The firm maximises profit where MR=MC (at
Q1).
For a firm in perfect competition, demand is perfectly elastic,
therefore MR=AR=D.
 This gives a firm normal profit because at Q1, AR=AC.
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26. Limitations of Profit Maximisation
 In the real world, it is not so easy to know exactly your marginal revenue
and the marginal cost of last goods sold. For example, it is difficult for
firms to know the price elasticity of demand for their good – which
determines the MR.
 It also depends on how other firms react. If they increase the price, and
other firms follow, demand may be inelastic. But, if they are the only firm
to increase the price, demand will be elastic
 However, firms can make a best estimation. Many firms may have to
seek profit maximisation through trial and error. e.g. if they see
increasing price leads to a smaller % fall in demand they will try to
increase price as much as they can before demand becomes elastic
 It is difficult to isolate the effect of changing the price on demand.
Demand may change due to many other factors apart from price.
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27.  Firms may also have other objectives and considerations. For example,
increasing the price to maximize profits in the short run could encourage
more firms to enter the market; therefore firms may decide to make less
than maximum profits and pursue a higher market share.
 Firms may also have other social objectives such as running the firm like
a cooperative – to maximize the welfare of stakeholders
 Profit satisfying. This occurs when there is a separation of ownership and
control and where managers do enough to keep owners happy but then
maximize other objectives such as enjoying work.
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28.  Difference between Economics & Managerial Economics
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Economics Managerial Economics
I. Deals with both Micro & Macro
Economics
II. Deals with both individuals & firms
III. Wide Scope
IV. Deals with theoretical aspects
V. Both Positive & normative science
V I .Deals with all theories of
distribution ,namely rent
I. Deals with Micro Economics
II. Deals with firms & not with
individuals
III. Limited Scope
IV. Deals with practical aspects
V. Only a normative Science
VI. Deals with profit theory only

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