Managerial Economics -Module -1

1. MANAGERIAL ECONOMICS
MODULE -1

2. Introduction
To keep the pace with the change in the nature of business
organizations and how business is conducted.
To supplement the real life cases
To explore the techniques of business
To make students understand the various dimensions of
business problems and possible solutions.

3. NatureofManagerialEconomics
Coordination
An activity or ongoing process
A purposive process
An art of getting things done by other
people
Decisions like: what, how for whom to
produce?

4. ScopeofManagerialEconomics
Resource allocation
Inventory and queuing problem
Pricing problem
Investment problems
Demand analysis
Cost analysis
Pricing theory and policies

5. Profit analysis with special reference to
break- even point
Capital budgeting for investment decisions
The business firm and objectives
Competition
Linked with microeconomic theory, macro
economic theory , operation research, theory
of decision making, statistics, management
theory & accounting

6. ManagerialEconomistsinDecisionmaking
Defining the problem
Determining the objective
Exploring the alternatives
Predicting the consequences
Making choice
Performing sensitivity analysis

7. Decision Making process
Micro & Macro Analysis
Partial and General Equilibrium Analysis
Static, Comparative Static and Dynamic Analysis
--allowing no change at a point of time (static)
-- allowing once for all change at a point of time
(comparative static)
--allowing successive changes over a period of
time (dynamic)
Positive and Normative analysis

8. MODULE -2
FUNDAMENTAL PRINCIPLES OF
MANAGERIAL ECONOMICS
Opportunity Cost (Opportunity Lost)
The next best alternative
Costs of sacrificed alternatives
Manager takes a decision by
choosing one course of action,
sacrificing the other alternatives
Holding Rs 1000 in hand……

9. Production possibility curve & increasing marginal
opportunity cost

10. of a project. According to this theory, a project is sound if it
incremental principle, several guidelines should be maintained:
remains related to the other activities of the firm. Because of this,
either negatively or positively. It can increase the profits for the firm
considered.
represent an expenditure done by the firm in the past. These
denote all those expenditures that are done for the preliminary work
Incremental Principle
The incremental principle is used to measure the profit potential
increases total profit more than total cost.
--To have a proper estimation of profit potential by application of the
--Incidental Effects: Any kind of project taken by a company
the particular project influences all the other activities carried out,
or it may cause losses. These incidental effects must be
Sunk Costs: These costs should not be considered. Sunk costs
expenditures are not related with any particular project. These costs
related to the project, unrecoverable in any case.

11. extending from the relevant past* and foreseeable future taken
business decisions with long run implications.
Time Perspective
All business decision are taken with a certain time perspective.
The time perspective refers to the duration of time period
in view while taking a business decision.
period of past experience and trends which are relevant for
All business decisions do not have the same time perspective.
Eg: Manufacturing of Crackers
Eg: Management Institute.

12. production, in order to get the maximum total output, resources should be
productivity of each resource is the same in each unit of production.
"efficient allocation of resources." In the example, we have a tiny economy,
productivities on the two plots are equal, this tiny economy has an "efficient
the principles governing the efficient allocation of resources are the same.
two things equal "at the margin" -- in this case, to make the marginal
applications in economics. In more complicated cases, we will have to
resources between two fields that produce the same output. When the
services, it will be more complicated. But a version of the Equimarginal
Discounting & Equimarginal
Principles
When the same product or service is being produced in two or more units of
allocated among the units of production in such a way that the marginal
This example may also be a little clearer example of what we mean by
consisting of one farmer and two plots of land. When the marginal
allocation of resources." Of course, real economies are more complex, but
This rule has a name: it is the Equimarginal Principle. The idea is to make
productivity of labor equal on the two fields. As we will see, it has many
generalize the rule carefully. In this example, for instance, we are allocating
different areas of production are producing different kinds of goods and
Principle will still apply.

13. Discounting principle
A present gain is valued more than a future gain.
Thus, in investment decision making, discounting of future value with the
present one is very essential.
The following formula is useful in this regard:
V = A
(1 + i)
Where , V = present value, A = annuity or returns expected during a year, i
= current rate of interest.
To illustrate the formula, suppose A = 110 and i = 10% or 1/10, we can
ascertain the present value Rs. 110 one year after as:
V = 110 = 110 = 100
1 + 0.1 1.1
In business decision making process, thus, the discounting principle may be
stated as: “If a decision affects costs and revenues at future dates, it is
necessary to discount those costs and revenues to present values before a
valid comparison o alternatives is possible”