Managerial economics is the study of how people and societies choose to employ scarce resources to produce goods and services over time and how to distribute them for consumption. It involves analyzing operational/internal issues like production, costs, and pricing using microeconomics and environmental/external issues like the economy, policies, and markets using macroeconomics. The key questions addressed are what and how to produce and for whom, from both a country and company perspective. Resources are scarce so there is a need to allocate them efficiently, which involves opportunity costs and maintaining a balance shown by the production possibility curve. Economic growth requires capital accumulation and technological progress through investing in capital goods rather than immediate consumption.

1. Mana gerial
Economics

2. Economics
It’s a study of how people- Individual, households, firms,
nation – maximize their gains from their limited resources
and opportunities
It the study of how men and society choose, with or without
the use of money, to employ scarce productive resources which
could have alternative uses, to produce various commodities
over time and distribute them for consumption now and in
the future amongst various people and groups of `society

3. … made simpler
…Social Science
…studies Human behavior in relation to optimizing
allocation of available resources to achieve given
ends.
…science which deals with wealth.
…study of the choice-making behavior of the people.
…science of scarcity and choice.
Adam Smith
Father of Modern Economics

4. Hence…
Unlimited Desires
Limited Means
Problem of Choices

5. Why do managers
need to know
Economics?

6. Role of a Manager
To meet Business Objectives
of the Firm
Needs to take
Judicious Decisions
Economics facilitates
‘Decisions’

7. Decisions…
What kind of decisions?
What kind of Environment?
•
To be or not to be
•
Complex
•
Ensuring revenue
•
Continuously evolving
•
Production planning
•
Uncertain & risky
•
Maintaining profitability
•
Incomplete knowledge
•
Pricing
•
Resource allocation
•
Etc..

8. So a manager needs…
Intelligence
Experience
Intuition
Qualitative Analysis of
Business data
Economic Law &
Economic Theories
Knowledge of
Business Environment

9. Four Stages of Change
Stage 1
Cost
Plus
Stage 2
Cost
Managemen
t
Changing Economics
•Competition
•Technology
•Customers
Stage 3
Stage 4
Revenue
Manageme
nt
Revenue
Plus

10. GAP
Economic
Theory
Business
Environment
Managerial Economics
bridges
the Gap

11. Managerial Economics Fills
The GAP
•
Economic Theories
– Cannot be applied directly Business
decision making.
– They do not offer a readymade solution to
business problems.
Economic Theories:
PROVIDE A FRAMEWORK FOR LOGICAL
ECONOMIC THINKING AND ANALYSIS

12. Managerial Economics
It is the integration of economic theory with
business practice for the purpose of
facilitating decision making and forward
planning by management.

13. Scope of
Managerial
Economics

14. Business Decision and
Economic Analysis
Objective to be achieved
Collection and analysis
Developing and analyzing
possible course of action
Determining and Evaluating the
alternative means to achieve Goals
Selecting the course of action

15. Responsibilities of a
Managerial Economist
– Profit Maximization
– To make successful forecast
– Minimising the risk involved in uncertainties
– Reassurance to the management about the
trends
– Establish and maintain contacts with data sources
– Successful decision making and forward planning

16. Launching a New Product
New Product
Operational /
Internal Issues
Environment /
External Issues

17. Operational Issues
•
•
•
•
•
•
•
•
•
•
•
Choice of Business
What to produce
Size of the Firm
Techniques of Production (Factor Combination)
Price structure of Inputs
Cost of Production
Supply position of Inputs (Raw Material)
How to promote Sales
Cost structure of Competitive Products
How to manage profit and Capital
How to manage Inventory
……………….Microeconomics

18. Environment / External
Issues
•
•
•
•
•
•
•
•
•
The type of economic system
The general trend in production, employment,
income, prices ..
Structure and trends of Financial Institutions
Trends in Foreign Trade
Trend in labour and capital market
Government economic policies
Social Organization and Social environment
Political environment
Influence of MNC’S on Domestic Markets
………………………Macroeconomics

19. Microeconomics applied to
Operational Issues
•
It studies the working of markets for particular goods &
services, and the interdependencies among them..
•
It includes all those problems which fall within the
purview and control of the management.
•
•
•
•
•
Theory of Demand
Theory of Production
Market Structure and Pricing Theory
Profit Analysis and Profit Management
Theory of Capital and Investment decisions

20. Macroeconomics applied to
Business Environment
• Macroeconomics is the study of the entire Economy in
terms of the
•
•
•
•
•
•
•
Theory of National Income
Economic Growth
International Trade
Demand and Supply of Money
Monetary and Fiscal Policy
Inflation and the general behaviour of Prices.
Globalisation

21. The Three Basic Economic
Questions ????
From the standpoint of a
Country
From the standpoint of a Company
1.
What goods and services 1. The Product decision
should be produced.
2. How should these goods 2. The hiring, staffing, procurement
and services be produced.
and capital budgeting decisions.
3. For whom should these
goods and services be
3. The market segmentation
produced.
Macroeconomics
Microeconomics

22. Chakravyuh

23. Central Problem of an
Economy
•
What to produce
•
How to produce
•
For whom to produce
•
What provision (if any) be made for Economic
Growth

24. What provision should be
made for Economic
Growth?
•
Individual and society would not like to use all its
resources for current consumption.
•
Resources should be used for producing Capital goods
for increasing the standard of living.
•
Capital accumulation and Technological progress
needs to be achieved by sacrificing current
consumptions.

25. Production Possibility
Curve
•
Resources of all kinds are scarce.
•
We do not have enough resources to produce all of the
goods and services.
•
It means, we need to "allocate" resources.
•
So that the resources are used for the rewarding kinds of
production --that is, we would like to allocate resources
"efficiently."

26. Choice and Opportunity
Cost
It’s a trade-off.
Whenever we increase the output of one we must
decrease the output of other.
The “Opportunity Cost“ of anything is the value of the
next best alternative that is given up for it.
Cost of any good or service as the value of all the other
goods or services that we must give up in order to
produce it.

27. Production Possibility Curve
At any given time, a country cannot produce more Machines
without producing less of Food.
This relationship is called the “Production Possibility
Frontier."
S
R

28. Economic Growth
P’
P
Machinery
P
Food
P
’

29. Capital Formation and
Economic Growth
•
Rate of Economic Growth
• Capital Accumulation
• Technological Progress
Growth Rate
Capital Goods
K2
K1
O
C2
C1
Consumer Goods