Microeconomics examines the behavior of individuals and firms when making decisions given scarce resources. Businesses use microeconomic principles to make decisions regarding labor, productivity, types of goods and services offered, supply and demand, economic utility, and pricing. These decisions are vital for businesses to make a profit by using economic theories to predict what is best. Microeconomics tells us that as wages increase, businesses will demand less labor. It also tells us that businesses will set productivity at the highest efficient level and will increase supply of goods that have higher prices and demand. Managerial economics helps businesses estimate relationships between economic variables, predict economic quantities, understand external factors, and formulate business policies.

1. (ISTIUQ AHMED, JU EMBA)
Purpose and significance of microeconomics in business decision making
Microeconomics
Microeconomics looksatthe behaviorof individualsandfirmswhenmakingdecisionsgivenscarce
resources.The goal inmicroeconomicsisto understandthe behaviorof individual units(i.e.businesses
and consumers) enoughtopredictsuccess.
Businesses,inparticular,use microeconomicprinciplestomake decisionsregardingthe following
factors:labor,productivity,typesof goodsandservicesoffered,supplyanddemand,economicutility,
and pricing.
Making Economical BusinessDecisions
Because goodsandservicesare limited,aproducerneedstoknow whattoproduce,whoto produce for,
and howto produce givenscarce resources.These businessdecisionsare vital tomakingaprofit,and
economicsisa wayfor businessestouse theoriesof humanbehaviortopredictwhatisbestfor their
business.
Economicsisdividedintotwofields:macroeconomicsandmicroeconomics.Thislessonaddresses
microeconomicsandhowitaffectsbusinessdecisions.
Conceptof Business Economics
> Economicsreferstothe applicationof economictheory,lawsandtoolsof analysisof decision science
to examine how anorganizationcanachieve its objectivesmostefficiently.
> It istakenas an appliedmicro-economics.
> It can be broadlydefinedasthe studyof economictheories,logicandtoolsof economicanalysisthat
are usedinthe processof businessdecisionmaking
Labor Decisions
Individual businessesdemand labor,andthisdemandisheavilyinfluencedbywages. Wagesare what
businessespayworkers,andthisincludesfringe benefitslike vacationtime,insurance,andprofessional
development.Businessesmustdecidehow manylaborhoursto demandgivencertain wages.
Microeconomicprinciplestellusthat,all otherthingsbeingequal,aswagesincrease businessesdemand
lesslabor.
• For example,saywidgetsare producedata wage of $15 perhour. Asthat wage increasesto$20, a
businesswillreduce the number of laborhoursdemanded.All otherfactorsremainingthe same,a
businessonlyhassomuchmoneybudgetedforlaborhours.

2. Productivity Decisions
Productivity isdefinedasthe outputof a goodor service pertime spent,suchasthe numberof widgets
producedina labor-hour.Productivityisafunctionof the relationshipbetweenoutputsandinputs,
giventhe available technology.
Microeconomicprinciplestellusthatbusinesseswillsetproductivityatthe highestlevel of economic
efficiency,wherethe productionforone goodorservice cannotbe made betteroff withoutreducing
productionof another.
Types of Goods and Services Offered
The typesof goodsand servicesofferedbybusinessesare influencedbywhatconsumersare willingto
pay forthem.As price increasesforone goodor service,businessesswitchproductiontothatgoodor
service,oftendecreasingthe productionof lessprofitabletypesof goodsandservices.
Microeconomicprinciplestellusthatall otherthingsbeingequal,asthe price of a goodor service
increases,businessesincrease the supplyof thatgoodor service anddecrease the supplyof others.
Supply and Demand Decisions
Supplydecisionsmightseemtobe controlledbybusinesses;however,demandincreaseswhen
consumersagree topay more for a good or service.These higherpricesmeanabusinesswill increase
productionandprovide more supplyof the goodor service.
Microeconomicprinciplestellusthat,all otherthingsbeingequal,asthe price of a good or service
increases,businesseswill increase the supplyof thatgoodor service.
Economic Utility
Economicutility isthe amountof satisfactionprovidedbyconsumingagoodor service ascomparedto
itsalternatives.Whenthe price of agoodor service decreases,consumers have more utilityandare
likelytopurchase more goodsorservices.Whenthe price of a goodincreases,consumershave less
utilityavailable andmaysubstitute anothergoodorservice.
Role of Economics in Business Decision Making
> Decisionmakingis animportantfunctionof abusinessexecutive.
> It isa processof selectingaparticularcourse of actionfromamong numberof alternative course of
action.
> If all the factors of productionare easilyavailable,thenthere isnoneedof decision
making.
> But,the factors of productionare limitedandcanbe usedformany purpose and
there are unlimitedendsof afirm. So,the questionof choice makingarises.

3. > Decisionswill have tobe made inconditionof uncertaintyandmustformulate plansforthe future. In
such situation,managerial economicsisof considerable help.
Estimating Economic Relationship
> It isnecessaryforthe firmto studythe internal &external factorsinorderto
make effectivebusinessdecisions.
> The internal &external factorscreate risk& uncertaintiesinthe decision
makingprocess.
> The firmhas to implementfuture plansbyestablishingrelationshipbetween
economicvariableslike:
> Demand& itsDeterminants
> Cost& its determinants
> Profit&its determinants.
> Hence,managerial economicshelpsinestimatingeconomicrelationship
betweendifferenteconomicvariablesforbetterdecisionmakingprocess.
Predicting economic quantities
> Predictionof economicquantitiesimpliesthe calculationof the valuesof economicvariablesof the
firm.
> Withthe helpof variousmathematical &statistical methods,the firmcan
forecastvariouseconomicvariables
> E.g. profit, price,demandetc.
> For doingsuchforecastingactivitiesmanagerial economicsplays avital role. Helpful inunderstanding
external factors.
> The importance of managerial economicsliesnotonlyinsolvingthe problems
of the firmbutit isalso relatedtothe studyof environmentalfactors.
> External factorsincludeslike political factors,sociocultural factors, environmental factorsetc.have
deepeffectonthe firm’sdecisionmaking
process.
> Firmhas to formulate plansonthe basisof these externalfactors.
> Hence Managerial economicshelpstogenerate decisionsbymakingthese

4. external factorsfavorable tothe firm.
Basis of business policies
> Managerial economicshelpthe firmtoestablisheconomicrelationship
betweenvariables&forecastthe valuesof these variablesthrough
mathematical &statistical techniques.
> The firmformulatesbusinesspoliciesonthe basisof predictedeconomic
quantities.
> Inthisway managerial economicsservesasabasisof businesspoliciesof the
firms.