2. The BIG Picture
Income spent Revenue earned
Product R
e
Goods demand Market v
Goods supplied
e
n
Households u Firms
e
Inputs supplied Inputs demand
Factor
Income earned Market Factor costs
3. Managerial and business
economics
The terms mostly used interchangeably
Lately, the term managerial economics has
become more popular and is displacing the other
term
With modifications the principles of managerial
economics can be applied to the management of
non-business, non-profit organizations like schools,
hospitals, government organizations
Business economics was focused primarily to
business decision making
Managerial economics applies to both business
and non business decision making, as well as to
public and private organizations/ institutions.
4. Nature of managerial economics
Decision making and forward planning
Business manager’s prime function is decision making and
forward planning
It implies selecting one of the many alternative decisions.
Forward planning means establishing plans or future
The question of choice arises due to scarcity of resources
and their possible alternative uses.
Thus decision making function is one of making choices for
the most efficient use of resources or desired ends.
Once a decision is made or a goal is set, forward planning
has to be made to achieve the targets in terms of
production, pricing, capital, raw materials, labour etc.,
Thus decision making and forward planning go hand in hand.
5. Decision making and uncertainty
Uncertainty is the typical characteristic of decision making
This feature not only makes decision making and forward
planning complicated
If there was no uncertainty in future, or knowledge about
future was perfect, plans could be formulated without and
without any need for subsequent revision.
When plan execution begins, new facts come to light
requiring alterations in past decisions and plans.
Managers are thus engaged in continuous process of
decision making through an uncertain future
Adjusting to uncertainty is managers main challenge.
6. Managerial economics and
decision making
Economic theory is of considerable help to managers in
fulfilling the function of ‘decision-making’ in an uncertainty
frame-work.
This is because economics deals with a number of concepts
and principles relating to profit, demand, cost, supply,
pricing, production, competition,, business cycles, national
income, etc.,
This help is enhanced when economics is aided by disciplines
like accounting, statistics, and mathematics. The two
together aid the process of business decision making and
planning
The subject-matter of managerial economics revolves around
as to how economic analysis can be used in solving business
problems
7. Definition of managerial
economics
According to McNair and Meriam, Business economics
consists of the use of economic models/modes of thought to
analyze business situations.
Spencer and Siegelman have defined, Managerial economics
as “ the integration of economic theory with business
practice for the purpose of facilitating decision-making and
forward planning by management”
Managerial economics may therefore be defined as the
discipline which deals with the application of economic
theory to business management.
Managerial economic is a bridge between economics and
business management. It aims to offer optimum solutions to
business problems.
8. Aspects of application
1.Reconciling traditional theoretical concepts of economics in
relation to
actual business behavior and conditions. For instance, firms may
not always aim at profit maximization.
2. Managerial economics attempts to reconcile accounting
concepts with the economic concepts
3. Estimation of economic relationships like various types of
elasticity's of demand and supply, cost output relationships,
etc. These relationships are used for forecasting purposes.,
4. Predicting relevant economic quantities, for example, profit,
demand, production, costs, pricing, capital etc. both in
numerical terms and with probabilities
9. Continued
5. Formulating business policies on the basis of
economic data and decision making processes.
Understanding significant external forces constituting
the environment in which the business is operating
and to which it must adjust, for example business
cycles, fluctuations in national income and
government policies
In short managerial economics shows how to apply
economic concepts and theories to business
decision making and planning with the help of real
world examples and case studies. It breaths life
into abstract concepts of economics.
10. Chief characteristics
Managerial economics is micro-economic in
character
Uses broadly theory of the firm concepts
Also seeks to apply profit theory which
forms part of distribution theories
Is pragmatic as it avoids difficult abstract
issues of economic theory.
But involves dealing with real life
complications of business world
11. Chief characteristics
continued
Belongs to normative economics rather than positive
economics. It is prescriptive rather than descriptive. It
involves judgement as to what is good/bad for business.
Managerial economics deals with which decision needs to be
made on the basis of its merits and demerits. Economic
theory does not go into judging decisions. Managerial
economics tells what the aims and objectives of a firm
should be. Then it tells how best these can be achieved
Managerial economics is therefore described as ‘normative
micro-economics of the firm’
Macro-economics is also useful to managerial economics as it
provides an intelligent understanding of the environment in
which the business must operate.
12. Scope of managerial
economics
Demand analysis and forecasting
Cost analysis
Production and supply analysis
Pricing decisions, policies nd practices
Profit management, and Capital
management