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1.  ME consists of that part of economic theory
which helps the business manager to take
rational decisions
 Economic theory helps to analyse practical
problems
 ME integrates economic theory with business
practice
 ME bridges the gap between abstract theory and
business practice

2.  Deals with the use of economic concepts and
principles for decision-making in a business
 Otherwise called Business Economics or Economics
of the Firm
 It is economics applied in decision-making
 So also called Applied Economics

3. The integration of economic theory with
business practice for the purpose of
facilitating decision-making and forward
planning by management

4. SPENCER AND SIEGELMAN
Operational Issues
- arise in the daily operation
- issues that arise in relation to
implementation of plans already
made
- day-to-day management of
men and materials
- alterations and adjustments
in plans made

5. SPENCER AND SIEGELMAN
Forward Planning
 Establishing plans for future regarding
production, pricing, capital, profit, raw
materials, labour etc.
 Needs forecast of future market situations
 Future is always uncertain
 This uncertainty makes decision-making
difficult
 Economic theories help to overcome this
difficulty

6. Economics provides tools to analyse
market conditions, demand, supply
 Also helps to understand external
forces influencing business like
business cycles, fluctuations in
national income, government
policies on taxation, foreign trade,
labour relations, industrial licensing,
price control etc.

7.  Micro-economic in nature
 Based on the theory of the firm
 Pragmatic-helps decision making
 Normative rather than positive-positive-what
is normative-what ought to be-ethical
economics, prescriptive economics
 Both conceptual and metrical
 Macro-economics is useful to managerial
economist
 Bridges the gap between pure theory and
practice

8.  Both science and art
 Has a multi-disciplinary approach
 Helps to take operational decisions and
forward planning
 A social science
 Not an exact science

9. Traditional economics is the study of
concepts, principles and theoretical
aspects. Managerial economics deals
with the application of economic
theory for business decision-making
Economics includes both micro
economics and macro economics
whereas managerial economics is
micro in character

10. Economics is both positive and
normative science and
managerial economics is only
normative science
Economics deals with
theoretical aspects only whereas
managerial economics deals
with practical aspects

11. Economics studies both individuals
and firms whereas managerial
economics is limited to firms
Economics considers only the
economic aspects of a problem,
whereas managerial economics
considers economic and non-
economic aspects

12. Economics deals with all the
distribution theories , viz., rent,
wages, interest and profit.
Managerial economics mainly uses
profit theory
Managerial economics is mainly
concerned with the process of
decision-making whereas decision-
making is not a concern of
economics

13. Scope of economics is very wide
whereas the scope of managerial
economics is narrow as it deals with
only a branch of traditional
economics
Economics is a very old subject
whereas managerial economics is a
new and developing subject which
evolved only after the second world
war

14.  Demand Analysis
 Production Function
 Cost Analysis
 Pricing Policies
 Profit Management
 Capital Budgeting
 Inventory Management
 Linear Programming and Theory of Games
 Environmental Issues

15.  Helps find answer to the following questions:
 What to produce?
 What inputs and production techniques?
 How much output to produce and its price
 Size and location of new plant
 When should an existing plant be replaced?
 How should the available capital be allocated?
 How much for advertisement?-Effective media?-
When to advertise? etc.

16.  Helps build suitable tool-kit from traditional
economics
 Incorporates ideas from other subjects
 Estimates economic relationships
 Predicts relevant economic quantities
 Understanding various influencing factors
 External
 internal

17.  Basis of Business Policies
 Model Building
 Integrating Agent
 Helps meeting social obligations

18.  To collect data
 To analyse economic trends
 To act as an advisor to the firm
 To forecast market trends

19.  Maximisation of profit
 To make accurate forecasts
 To make changes in forecasts, if needed
 To keep the management informed of
economic trends
 Rapport with data sources
 Prove himself inevitable to the top
management

20. Decision-making is a function
of choice
A decision is needed only
when there are two or more
alternatives from which one
is to be chosen

21.  Bayard O. Wheeler
Decision-making is the process of
selecting a particular course of
action from among a number of
alternatives. As applied to
business, a choice is made among
alternative ways of using resources
to accomplish predetermined
objectives.

22. Defining and analysing the
problem
 Only when the problem is analysed
properly, all the aspects of the problem
can be understood
Identifying alternative solutions
 A problem can be solved in different
ways
 Hs to search for and identify each
possible solution or alternative

23. Evaluating alternatives
The merits and demerits of each
alternative must be studied
Selecting the best alternative
Selection depends on the cost of
the alternatives, feasibility and
constraints on them

24. Communicating and
implementing the decision
Decisions taken should be
effectively communicated to
those persons who are to
implement them

25. Follow-up
It helps to evaluate the
effectiveness of the decision
taken and implemented
Helps to revise the past decision,
if needed or to make a better
decision in future

26. Programmed and Non-
programmed decisions
Programmed decisions are of a
routine nature
These decisions are taken for
simple, common and frequently
occurring problems

27. Programmed and Non-
programmed decisions
These decisions are taken on the
basis of set procedures
 These decisions are taken by lower
level executives

28. Programmed and Non-
programmed decisions ctd…
Non-programmed decisions are
highly important and
unstructured
They are non-repetitive in nature
There is no standard procedure
for handling such problems

29. Major and Minor decisions
Major decisions have direct
bearing on the achievement of
the goals of the concern and so
these decisions are made very
carefully
They are decided by top
executives
Minor decisions are made in the
course of execution of major

30. Routine and Strategic decisions
Routine decisions are for
carrying out day-to-day activities
They have only a minor impact
on the business
These decisions are made at
middle and lower levels of
management

31. Routine and Strategic decisions
ctd…
 Strategic decisions are of long-term
nature and involve commitment of
large funds
 As these decisions affect the entire
organisation, they are considered as
basic decisions
 They are taken by top level
management

32. Individual and Group decisions
Individual decisions are taken on
routine problems and there is an
already set procedure to solve
these problems
Group decisions are taken in the
interest of the organisation as a
whole

33. Analytical and Adaptive
decisions
Analytical decision is taken when
the problem is complex but its
output is certain
Adaptive decision is taken when
the problem is complex but the
output is uncertain

34. Mechanical and Judgemental
decisions
Mechanical decisions are
applicable for simple problems
the result of which are certain
Judgemental decisions are taken
for simple problems the result of
which are vague

35. Technical decisions
These decisions are pertaining to
the production process

36. Managerial decisions
These are decisions connected
with the integration and co-
ordination of all the activities of
an organisation to achieve the
organisational goals

37. Institutional decisions
These are higher level decisions
like expansion, diversification,
issue of new shares, acquisition,
mergers, closure of divisions etc.

38. All those economic concepts,
theories and tools that can be
used to analyse business
environment and to take
decisions on business problems
come under the scope of
managerial economics

39. Theory of Demand
It explains the consumer’s
behaviour
It explains the why, how, when
and how much of the demand of
a product
The theory helps to understand
the change in consumer
behaviour when the price of the
commodity, consumer’s income,

40. Theory of Production
 Otherwise called theory of firm
 It helps to understand the effect on
average cost and marginal cost
when the rate of production is
varied
 It examines how the total output
increases when only one factor of
production is increased or when all
the factors are increased
simultaneously

41. Theory of Production ctd…
 It also shows how much one factor
of production can be substituted by
another and how optimum and
equilibrium points can be attained
 The theory is of use in planning the
size of the firm, volume of
production and the proportion of
the factors of production

42. Price Theory
 This theory is of use in determining
the price policy of a firm
 The theory explains how prices are
determined under different market
situations
 It also helps to know how different
prices can be charged for the same
product in different markets

43. Price Theory ctd…
What price policy a new firm
should pursue in a rather
competitive market or a less
competitive market
A successful price policy spells
the future of any firm

44. Theory of Profit
Profit theory helps in measuring,
managing and planning future
profit
It gives a guideline to calculate
the required return on capital
employed and in making
allowances for risk element

45. Theory of Capital and
Investment
A sound knowledge of capital
theory helps in choosing
investment proposals, efficient
allocation of capital and the
evaluation of the efficiency of
the capital invested etc.

46. Macroeconomic Theories
They help to understand the
external factors that are beyond
his control and to take suitable
decisions
A business concern cannot
survive unless it adjusts its
decisions in accordance with
external factors

47. Macroeconomic Theories ctd…
 The businessman must know the
macroeconomic theories like
Theory of national Income
Theories of economic growth and
fluctuations
Theory of international trade and
monetary mechanism
Government policies relating to
taxation, labour relations etc.