Economics is the study of how individuals and societies choose to use the scarce resources that nature and the previous generation have provided. The world‟s resources are limited and scarce. The resources which are not scarce are called free goods. Resources which are scarce are called economic goods.

1. The Fundamentals Of Managerial Economics
Economics maybe divided in to 1) Micro Economics and 2) Macro Economics 3) Monitory Economics and 4)
Fiscal Economics. Micro economics deals with the basic principles of economics like law of demand, law of
supply, consumption, production etc Managerial economics deals with the principles of micro economics as
applied to managerial decision making. The circle flow is a chain in which production creates income, income
leads to spending and spending in turn leads to production activity.
People have limited number of needs which must be satisfied if they are to survive as human beings. Some are
material needs, some are psychological needs and some others are emotional needs. People‟s needs are limited;
however, no one would choose to live at the level of basic human needs if they want to enjoy a better standard of
living. This is because human wants (desire for the consumption of goods and services) are unlimited. It doesn‟t
matter whether a person belongs to the middle class in India or is the richest individual in the World, he or she
wants always something more. For example bigger a house, more friends, more salary etc., Therefore the basic
economic problem is that the resources are limited but wants are unlimited which forces us to make choices.
Economics is the study of this allocation of resources, the choices that are made by economic agents. An economy
is a system which attempts to solve this basic economic problem. There are different types of economies;
household economy, local economy, national economy and international economy but all economies face the same
problem. The major economic problems are (i) what to produce? (ii) How to produce?
(iii) When to produce and (iv) For whom to produce?
Economics is the study of how individuals and societies choose to use the scarce resources that nature and the
previous generation have provided. The world‟s resources are limited and scarce. The resources which are not
scarce are called free goods. Resources which are scarce are called economic goods.
Why Study Economics?
A good grasp of economics is vital for managerial decision making, for designing and understanding public
policy, and to appreciate how an economy functions. The students need to know how economics can help us to
understand what goes on in the world and how it can be used as a practical tool for decision making. Managers
and CEO‟s of large corporate bodies, managers of small companies, nonprofit organizations, service centers etc.,
cannot succeed in business without a clear understanding of how market forces create both opportunities and
constraints for business enterprises.
Reasons For Studying Economics:
It is a study of society and as such is extremely important.
It trains the mind and enables one to think systematically about the problems of business and wealth.
From a study of the subject it is possible to predict economic trends with some precision.
It helps one to choose from various economic alternatives.

2. Economics is the science of making decisions in the presence of scarce resources. Resources are simply anything
used to produce a good or service to achieve a goal. Economic decisions involve the allocation of scarce resources
so as to best meet the managerial goal. The nature of managerial decision varies depending on the goals of the
manager. A Manager is a person who directs resources to achieve a stated goal and he/she has the responsibility
for his/her own actions as well as for the actions of individuals, machines and other inputs under the manager‟s
control.
Managerial Economics: Managerial economics is a specialized discipline of management studies which deals with
application of economic theory and techniques to business management. Managerial economics is evolved by
establishing links on integration between economic theory and decision sciences (tools and methods of analysis)
along with business management in theory and practice---for optimal solution to business/managerial decision
problems. This means, managerial economics pertains to the overlapping area of economics along with the tools
of decision sciences such as mathematical economics, statistics and econometrics as applied to business
management problems. “Managerial economics is a science which studies the economic aspects of behavior of the
firm as an enterprise, and helps to allocate scarce resources to their alternative uses in such a manner as to
optimize the firm‟s ultimate objective, as an organization and a social institution, under conditions of the
imperfect knowledge, risk and uncertainty. It provides principles, method, and techniques of analysis of economic
behaviour and at the same time prescribe ways and means to optimize economic efficiency.”
Nature and Scope of Managerial Economics: All managerial decisions are basically economic in nature. The
decisions are either directly related to Economics or have economic implications; they might not be based simply
on economic calculations, and might involve several non-economic, social, political, legal and technological
considerations as well. Managerial economics helps not only to analyze the economic content and implications of
the managerial decisions but also to integrate several other aspects leading to sound decisions.
Managerial economics incorporates elements of both micro and macroeconomics dealing with managerial
problems in arriving at optimal decisions. It uses analytical tools of mathematical economics and econometrics
with two main approaches to economic methodology involving „descriptive‟ as well as „prescriptive‟ models.
Managerial economics differs from traditional economics in one important respect that it is directly concerned in
dealing with real people in real business situations. Managerial economics is concerned more about behavior on
the practical side. Managerial economics deals with a thorough analysis of key elements involved in the business
decision making.
Most managerial decisions are made under conditions of varying degrees of uncertainty about the future. To
reduce this element of uncertainty, it is essential to have homework of research/investigation on the problem

3. solving before action is undertaken. Knowledge of managerial economics is a boon to the manager/businessman/
entrepreneur. Modern businessman never believes in luck. He bangs on skilful management and appropriate
timely economic decision making. This art is facilitated by the science of managerial economics. Other
related disciplines of Managerial Economics: Managerial economics is closely related to and draws heavily upon
several areas in economics such as Theory of the Firm, Microeconomics, Macroeconomics, Industrial Economics,
and so on. Managerial economics is basically micro in nature in that it deals with the firm‟s behaviour in three
basic areas viz. Utility analysis, Theory of the Firm and Factor pricing. Managerial Economics draws a few
aspects from Macroeconomics such as national income, technology forecasting, which are relevant to
sales/demand forecasting. While Industrial Economics analyses the economic problems of the industry as a whole,
Managerial Economics deals with the economic aspects of managerial decision making at a micro level
irrespective of the sphere of activity. Macro Economics is not only related to but is also an integral part of the
functional areas of management such as production, finance, accounting, marketing, operations research and
personnel. To illustrate, Capital budgeting might be taught in finance and accounting as well as in Economics.
While Economics would analyze the firm‟s investment decisions and economic viability of projects, finance
would study their financial viability. E.g. The Garland Project linking Himalayan rivers to the southern plateau
was considered feasible from the technical point of view, but it was thought to be financially not feasible as it
involved investment beyond India‟s capacity.
Definitions of Managerial Economics
Managerial economics is the study of how scarce resources are directed most efficiently to achieve managerial
goals. It is a valuable tool for analyzing business situations to take better decisions.
Prof. Evan J Douglas defines Managerial Economics as “Managerial Economics is concerned with the application
of economic principles and methodologies to the decision making process within the firm or organization under
the conditions of uncertainty”
According to Milton H Spencer and Louis Siegelman “Managerial Economics is the integration of economic
theory with business practices for the purpose of facilitating decision making and forward planning by
management”
According to Mc Nair and Miriam, „Managerial Economics consists of the use of economic modes of thoughts to
analyze business situations‟.

4. Economic Approach to MANAGERIAL ECONOMICS
The approach to index number theory that assumes that the observed price and quantity data are generated as
solutions to various economic optimization problems. The quantities are assumed to be functions of the prices and
not independent variables.
Also known as the “micro-economic approach”.
The definition of managerial economics cover a number of different approaches:
1. Analysis based on the theory of the firm
2. Analysis based upon management sciences
3. Analysis based upon industrial economics
Divisions of Economics
Economics can be divided into two broad categories: micro economics and macro economics. Macro economics is
the study of the economic system as a whole. It is related to issues such as determination of national income,
savings, investment, employment at aggregate levels, tax collection, government expenditure, foreign trade,
money supply etc. while Micro economics focuses on the behavior of the individuals, firms and their interaction in
markets. Managerial economics is an application of the principles of micro and macro economics in managerial
decision making.
The economic way of thinking about business decision making provides all managers with a powerful set of tools
and insights for furthering the goals of their organization. Successful managers take good decisions, and one of
their most useful tools is the methodology of managerial economics.
Nature Of Managerial Economics:
1. Managerial economics is concerned with the analysis of finding optimal solutions to decision making problems
of businesses/ firms (micro economic in nature).
2. Managerial economics is a practical subject therefore it is pragmatic.
3. Managerial economics describes, what is the observed economic phenomenon (positive economics) and
prescribes what ought to be (normative economics)
4. Managerial economics is based on strong economic concepts. (conceptual in nature)
5. Managerial economics analyses the problems of the firms in the perspective of the economy as a whole ( macro
in nature)
6. It helps to find optimal solution to the business problems (problem solving).

5. Managerial Economics And Other Disciplines
Managerial economics has its relationship with other disciplines for propounding its theories and concepts for
managerial decision making. Essentially it is a branch of economics. Managerial economics is closely related to
certain subjects like statistics, mathematics, accounting and operations research.
Managerial economics helps in estimating the product demand, planning of production schedule, deciding the
input combinations, estimation of cost of production, achieving economies of scale and increasing the returns to
scale. It also includes determining price of the product, analyzing market structure to determine the price of the
product for profit maximization, which helps them to control and plan capital in an effective manner. Successful
mangers make good decisions, and one of their most useful tools is the methodology of managerial economics.
Warren E Buffett, the renowned chairman and CEO of Berkshire Hathaway Inc., invested $100 and went on to
accumulate a personal net worth of $30 billion. Buffett credits his success to a basic understanding of managerial
economics. Buffett‟s success is a powerful testimony to the practical usefulness of managerial economics.
Managerial economics has a very important role to play by helping managements in successful decision making
and forward planning. To discharge his role successfully, a manager must recognize his responsibilities and
obligations. There is a growing realization that the managers contribute significantly to the profitable growth of
the firms.
We can conclude that managerial economics consists of applying economic principles and concepts towards
adjusting with various uncertainties faced by a business firm.
GENERAL FOUNDATION OF MANAGERIAL ECONOMICS
managerial economics is applied micro-economics. It is an application of that part of micro-economics, which is
directly related to decision making by a manager. Thus, “managerial economics analyses the process through
which a manager uses economic theories to address the complex problems of business world, and then take
„rational‟ decisions in such a way that the preconceived objectives of the concerned firm may be attained” (Barla,
2000).
Like an economy, the manager of a firm also faces five basic issues:
(1) Choice of product, i.e., the products a firm has to produce -A manager has to allocate the available resources,
so as to maximize the profit of the firm.
(2) Choice of inputs – After determining the profit maximising level of output, the manager has to identify the
input-mix which would produce the profit maximizinglevel of output at minimum cost.
(3) Distribution of the firms‟ revenue – The revenue received by the firm through sales has to be distributed in a
just and fair manner by the manager. Workers, owner of factory building, bankers, and all those who have
contributed their materials and services in the process of production, storage and transportation, have to be paid

6. remunerations, according to the terms and conditions already agreed upon. The residual after such payments
constitutes the firm‟s profit which has to be distributed among the owners of the firm after tax payment.
(4) Rationing -This constitutes an important function of a manager. He/she should utilize the scarce resources
optimally, which involves expenditure. As themanager has to often look after several plants simultaneously,
he/she must prioritize not only the allocation of resources but also the time.
(5) Maintenance and expansion – In addition, the manager has to plan strategies to ensure that the level of output
is maintained, the efficiency of the firmis retained over time, and also to plan the future expansion of the firm.
Expansio n of the firm imvolves making adequate provisions for mobilizing additionalcapital from the market
and/or borrowing money from banks. A dynamic manager always aspires to expand the firm‟s scale of operation,
so as to increasethe profits.
Managerial Economics and Economic Theory
1. Managerial Economics deals with applications of microeconomics. It is useful for making business decisions
concerning pricing, production, cost analysis, market structure, and strategy.
2. Honda and Toyota both expanded capacity to produce cars in the US. The decision is either to expand (S1) or not
expand (S2). Both firms believe that the capacity expansion was profitable.
3. Steps in decision making include: Establish and identify objectives, define the problem, find possible alternative
solutions, select the best solution, and implement that choice.
Distinction between Micro and Macro Economics:
Broadly speaking, microeconomic analysis is individualistic, whereas macroeconomic analysis is aggregative.
Microeconomics deals with the part (individual) units while macroeconomics deals with the whole (all units taken
together) of the economy.
1. Difference in nature: Microeconomics is the study of the behavior of the individual units. Macroeconomics is
the study of the behavior of the economy as a whole.

7. 2. Difference in methodology: Microeconomics is individualistic; whereas macroeconomics is aggregative in its
approach.
3. Difference in economic variables: Microeconomics is concerned with the behavior of micro variables or micro
quantities. Macroeconomics is concerned with the behavior of macro variables and macro quantities. In short,
microeconomics deals with the individual incomes and output, whereas macroeconomics deals with the national
income and national output.
4. Difference in field of interest: Microeconomics primarily deals with the problems of pricing and income
distribution. Macroeconomics pertains to the problems of the size of national income, economic growth and
general price level.
5. Difference in outlook and scope: The concept of „industry‟ in microeconomics is an aggregate concept but it
refers to all firms producing homogenous goods taken together. Macroeconomics uses aggregates which relate to
the entire economy or to a large sector of the economy. Aggregate demand covers all market demands.
6. Demarcation in areas of study: Theories of value and economic welfare are major areas in microeconomics.
Theories of Income and employment are core topics in macroeconomics.
Managerial Economics as a Positive or Normative Science: Positive Economics explains the economic
phenomenon as “What is, what was and what it will be.
Normative Economics prescribes what it ought to be”. Positive sciences simply describe, while normative sciences
simply prescribe. According to Prof. Robbins, economics is a positive science. Science is, after all, a search for
truth and therefore, economics should study the truth as it is and not as it ought to be. This is because when we say
that this ought to be like this, we presume that our point of view is correct. In a study of a problem at a given point
of time, not only economic considerations but also many other considerations such as ethical, political etc. must be
considered. A policy decision is taken after weighing the relative importance of all these factors. There are bound
to be differences in respect of policy prescription and it is better to keep away from areas which are controversial
and study the facts as they are.
According to economists like Marshall and Pigou, the ultimate object of the tudy of any science is to contribute to
human welfare. Thus economics should be a normative science. It should be able to suggest policy measure to the

8. politicians. It should be able to prescribe guidelines for the conduct of economic activities. Not only economists
should build up the economic theory but also at the same time they should provide policy measures.
4 We must strike a balance between these two extreme views. As Keynes put it, “The main function of economics
is not to provide a body of settled conclusions immediately applicable to policy. It provides a method or a
technique of thinking, which enables its possessor to draw correct conclusions.” Managerial economics is a
blending of pure or positive science with applied or normative science. It is positive when it is confined to
statements about causes and effects and to functional relations of economic variables. It is normative when it
involves norms and standards, mixing them with cause- effect analysis. One cannot disregard the normative
functions of managerial economics, though the discipline may be treated primarily as a positive science.
Normative approach in managerial economics has ethical considerations and involves value judgments based on
philosophical, cultural and religious positions of the community. The value judgments and normative aspect and
counseling in managerial economic studies can never be dispensed with altogether. We may thus conclude that
Managerial Economics is both a Positive and Normative Science. Briefly discuss the three fundamental concepts
of Managerial Economics. Managerial Economics is confined to the following three major fields: (1) Pricing (2)
Distribution (3) Welfare. Chart:
Pricing: Microeconomics assumes the total quantity of resources available in an economic society as given and
seeks to explain how these shall be allocated to the production of particular goods for the satisfaction of chosen
wants. In a free market economy, the allocation of resources is based on the relative prices and profitability of
different goods. To explain the allocation of resources, microeconomics seeks to explain the pricing phenomenon.
Price theory explains how the price of a particular commodity is determined in the commodity market. For in
depth analysis of price determination it contains: • Theory of demand of the analysis of consumer behavior. •
Theory of production and cost or the analysis of producer behavior. • Theory of product [pricing or price
determination under different market structures.
Distribution: The theory of distribution basically deals with factor pricing. It seeks to explain how rewards of the
individual factors of production such as land, labors, capital and enterprise are determined for their productive
contribution. In other words, it is concerned with rent, wages, and interest, profits, as the respective rewards of
land, labour, capital and enterprise respectively. Since demand and supply of each of these factors are different,
there are separate theories to these. Thus the field of distribution includes general theory of distribution and
theories of rent, wages, interest and profits.

9. Welfare: The theory of economic welfare explains how an individual consumer maximizes his satisfaction when
production efficiency is achieved by allocation of resources in such a way as to maximize output from a limited
set of input. Along with individual economic welfare, welfare economics is also concerned with social welfare,
which is based on overall economic efficiency of the system. When maximum individual wants are satisfied at the
best possible optimum level by a production pattern through efficient allocation of resources, overall economic
efficiency or „Pareto optimality‟ condition is reached. Such a situation can raise the standard of living of the
population and maximize social welfare.
Importance and Uses of microeconomics:
1. It explains price determination and the allocation of resources. 2. It has direct relevance in business decision-
making. 3. It serves as a guide for business‟ production planning. 4. It serves as a basis for prediction. 5. It teaches
the art of economizing. 6. It is useful in determination of economic policies of the Government. 7. It serves as the
basis for welfare economics. 8. It explains the phenomena of International Trade.
Limitations of microeconomics:
1. Most of the micro-economic theories are abstract. 2. Most of the microeconomic theories are static – based on
ceteris paribus, i.e. “other things being equal”. 3. Microeconomics unrealistically assumes „laissez-faire‟ policy
and pure capitalism. 4. Microeconomics studies only parts and not the whole of the economic system. It cannot
explain the functioning of the economy at large. 5. By assuming independence of wants and production in the
system, microeconomics has failed to consider their „dependent effect‟ on economic welfare. 6. Microeconomics
misleads when one tries to generalize from the individual behavior. 7. Microeconomics in dealing with
macroeconomic system unrealistically assumes full employment.
Role played by Managerial Economists in assisting the Manager in decision making and forward planning:
Managerial Economists act as operations researchers and systems analysts in the management services department
of large business firms usually in the private sector. Their job lies in designing the course of operations to
maintain and improve the „systems‟ of the firm in terms of productivity, market share, load factor percentage and
so on and prepare reports for helping the decision makers to cope with current as well as anticipated future
problems. In modern business, managers constantly face the major problem of choice among alternative ways of
producing goods and allied business decisions. Managerial economists assist them in making a rational choice.
A Managerial economist is an economic adviser to a firm or businessman. A firm or entrepreneur, in the course of
its/his business operations, has to take a number of decisions which are vital to the survival and growth of the

10. business. Such decisions may pertain to the nature of the product to be produced, the quantity, quality, cost, price
and its distribution, planning and diversification of business, renewal of worn out equipments and machinery,
modernization, etc. The Managerial economist helps the businessman or the manager in arriving at correct
decisions. In short, the business economist while helping in the decision making process, measures a number of
micro and macro variables by applying intelligently certain quantitative and qualitative techniques to the practical
aspects and problems encountered by a business firm in its business activity. Forecasting is a fundamental activity
of the Managerial economist. Indeed a business economist is greatly helpful to the management by virtue of his
studies of economic analysis. He is an effective model builder. He deals with the business problems in a sharp
manner with a deep probing. A Managerial economist in a business firm may carry on a wide range of duties, such
as: • Demand estimation and forecasting. • Preparation of business forecasts; to provide forecasts of changes in
costs and business conditions based on market research and policy analysis. • Analysis of the market survey to
determine the nature and extent of competition. • Analysing the issues and problems of the concerned industry. •
Assisting the business planning process of the firm. • Discovering new and possible fields of business endeavour
and its cost-benefit analysis as well as feasibility studies. • Advising on pricing, investment and capital budgeting
policies. • Evaluation of capital budgets. • Building micro and macro economic models of particular aspects of the
firm‟s activities that are useful in solving specific business problems. Most models may be prediction oriented. •
Directing economic research activity. • Briefing the management on current domestic and global economic issues
and challenges. DEMAND
Internationalization
In economics, internationalization has been viewed as a process of increasing involvement of enterprises in
international markets,[1] although there is no agreed definition of internationalization[2] or international
entrepreneurship.[3] There are several internationalization theories which try to explain why there are international
activities.
Entrepreneurs
Those entrepreneurs who are interested in the field of internationalization of business need to possess the ability to
think globally and have an understanding of international cultures. By appreciating and understanding different
beliefs, values, behaviors and business strategies of a variety of companies within other countries, entrepreneurs will
be able to internationalize successfully. Entrepreneurs must also have an ongoing concern for innovation,
maintaining a high level of quality, and continue to strive to provide the best business strategies and either products
or services possible while adapting to different countries and cultures.