A short presentation on Managerial economics and applied economic theory. It describes how managers take decision for optimized business goals and targets by micro economic analysis theory, tools and approaches.

1. Managerial
Economics
Applied Economic Theory by
Microeconomic Analysis of Business

2. Abstract of Presentation
Key points discussed in presentation:
1. What is managerial economics?
2. Economics tools, Methods and Approaches used by managers.
3. Theory of the firm and Demand theory
4. Production and Cost analysis
5. Pricing analysis
6. Capital budgeting
7. Game theory
Prepared by: Jay H. Shah, Department of Technology Management, CSPIT, CHARUSAT 2

3. What is Managerial Economics?
“Managerial economics is ultimately a short-hand for applying
microeconomic theory to business problems.”
• Managerial economics is one of the most applied fields of economic
theory.
• Managers and Economist, both are concerned about Money and Profit.
• Business decisions are based on non-transactional data or data collected
in advance to market transactions.
• Business managers rely on applied economics to inform their decision
making process.
Prepared by: Jay H. Shah, Department of Technology Management, CSPIT, CHARUSAT 3

4. What is Managerial Economics?
• Managerial analysis uses techniques such as regression and correlation
analyses to optimize business decisions based on the business' stated
goals and objectives and available resources.
• Managerial economics is one of the strongest tools of financial
management and managerial decision-making.
• It includes numerous tools and techniques for managers to achieve
optimization under constraints and satisfy the objectives of the firm.
Prepared by: Jay H. Shah, Department of Technology Management, CSPIT, CHARUSAT 4

5. Applications of Managerial Economics
Managerial economics is an economic tool kit for business leaders
and managers. The following theories, techniques, and approaches are
used by business managers to optimize firm profits and market share.
• Theory of the firm
• Demand theory
• Production and cost analysis
• Capital budgeting
• Game theory
Prepared by: Jay H. Shah, Department of Technology Management, CSPIT, CHARUSAT 5

6. The Theory of Firm
Managerial economics builds on the theory of the firm. The theory of the
firm is a microeconomic approach to business analysis of inputs, production
methods, output, and prices.
• Focuses on profit maximization, demand and price, production and factor
utilization, and cost minimization.
• Emphasizes the optimization of quantity, price, costs and profits in a single
time period for a single kind of product produced in a single facility.
• With its focus on optimization, remains relevant for small farms, small natural
resource producers, or small factories serving local markets
• Not useful for mid to large size businesses with multiple products, production
facilities, and markets.
Prepared by: Jay H. Shah, Department of Technology Management, CSPIT, CHARUSAT 6

7. Demand Theory
Demand theory refers to the amount of product that a buyer is
willing and able to buy at a specified price.
• Business managers are responsible for forecasting and estimating the
demand for a product within the marketplace and producing the
product in appropriate volume.
• Customers who once demanded a single, easily-produced product are
increasingly demanding a combination of physical units and bundles of
associated support services and quality attributes.
• Managerial economics offers tools to create a demand forecast that
represents the quantity of both units and support services demanded as
a function of price.
Prepared by: Jay H. Shah, Department of Technology Management, CSPIT, CHARUSAT 7

8. Production & Cost Analysis
• Production and cost analysis refers to the microeconomic techniques
used to analyse production efficiency, optimum factor allocation,
economies of scale, and cost function.
• Production and cost analysis incorporates the expenses associated with
raw materials, components, subassemblies, communications,
transportation, and customer support services. Business managers work
to add more value to the products that their companies produce.
• Business managers often face transfer pricing problems as they
determine product price points.
Prepared by: Jay H. Shah, Department of Technology Management, CSPIT, CHARUSAT 8

9. Capital Budgeting
• Capital budgeting refers to the
branch of managerial economics
that is concerned with investment
decisions and capital purchasing
decisions.
• Capital budgeting is the analytical
process of determining the optimal
investment of scarce capital so as to
realize the greatest profit from that
investment.
• Capital budgeting ranks proposed
investments in order of their
potential profitability.
Prepared by: Jay H. Shah, Department of Technology Management, CSPIT, CHARUSAT 9
There are two main criteria for
selecting potential business
investments:
1) Business managers, engaged in
capital budgeting, generally have a
minimum desired rate of return
specified as the cut-off point to
determine whether or not a
project should be accepted or
rejected.
2) Business managers, engaged in
capital budgeting, generally
experience constraint from top
management regarding the total
amount of potential investment.

10. Capital Budgeting
The postponability method1)
• when business managers purchase new equipment and replacements based
on their level of urgency. Investments are not made if they can be postponed
until a later point.
The payback method2)
• The payback method is used to measure the worth of an investment project.
• The payback method focuses primarily on profitable near-future earnings
rather than long-term profits with uncertain profits.
Prepared by: Jay H. Shah, Department of Technology Management, CSPIT, CHARUSAT 10
Business managers, engaged in capital budgeting, take hold of
stockholders' funds and work to maximize their earning potential through
four main strategies:

11. Capital Budgeting
Financial statement method3)
• Based on the accounting information and book values.
• Business managers hope that the figures they generate will eventually match the
accounts after the project is completed.
Discounted cash flow technique4)
• The discounted cash flow technique recognizes that the use of money has a cost.
• Money spent or received today has a different value than money spent or received
in the future.
Prepared by: Jay H. Shah, Department of Technology Management, CSPIT, CHARUSAT 11
Business managers, engaged in capital budgeting, take hold of
stockholders' funds and work to maximize their earning potential through
four main strategies:

12. Game Theory
Game theory is a decision-making tool for business managers. Game
theory refers to a mathematical method for analysing a conflict.
• The opposing interests in the game are called players. The alternative is not
between two decisions to be made but between two or more strategies to be
used against the opposing interest. The value of the game is called the average
gain. Each player supports a strategy that maximizes his or her average gain.
• Game theory allows capital budgeters to consider all possible forecasts for
proposed investment projects.
• Game theory is potentially limited by the inputs used in analysis, and is limited
by the facts utilized in the game. Incorrect or misleading information will
result in inaccurate analysis of the potential gains of a project.
Prepared by: Jay H. Shah, Department of Technology Management, CSPIT, CHARUSAT 12

13. Morden Development In Managerial Economics
• Managerial economics is, in many ways, geared to the business managers and
decision-making needs of traditional firms.
• Corporations are increasingly part of global net- works of product research and
design, production, and distribution.
• Firms are moving from linear, centralized, hierarchical structures to
decentralized, cooperative, and team-based structures.
• Customer support services are increasingly critical to winning market
segments or shares and serves to differentiate one competitor from another.
• These customer support services factor into the expense and profit forecasts
made by business managers.
Prepared by: Jay H. Shah, Department of Technology Management, CSPIT, CHARUSAT 13

14. Concluding
• Managerial Economics, which applies economic theory and methods to
business and administrative decision-making and managerial problems,
is a vital tool for effective economic forecasting and profit optimization.
“Management without economics has no roots.”
&
“Economics without management bears no fruits.”
Prepared by: Jay H. Shah, Department of Technology Management, CSPIT, CHARUSAT 14