Managerial Economics

Unit 1 : Scope of Managerial Economics

Madhan Kumar
Economics
“ Economy is the institutional structure through which individuals and firms in a
society coordinate their desires.

It is the study of how human beings in a society go about achieving their wants
and desires.

Study of allocation of scarce resources to satisfy individual wants or desires

¾ Macroeconomics : The study of overall economy and its aggregates such as GDP,
Inflation, Unemployment, Exports, Imports, Taxation Policy...etc

¾ Microeconomics : Addresses questions about changes in Investment, government

spending, employment, prices, exchange rates...etc. It deals with individual actors in
the economy such as firms and Individuals

The focus of managerial economics is on how the firm reacts to changes in the
economic environment in which it operates and how it predicts these changes and
devises the best possible strategies to achieve the objectives that underlie its existence.
Scope of Managerial Economics:
Economics = Theory & Methodology Micro
economic in
nature
Business Management = Decision & Problems

Economics + Business Management = Managerial Economics

Application of Economics
in solving
business problems

Optimal solutions
Uncertainty
to business problems

Decision Making
Forward Planning
Some Definitions
Management - Creation & maintenance of an internal environment in an
enterprise where individuals, working together in groups, can perform
efficiently and effectively towards the attainment group goals “
– Koontz & O'Donnell

“ Managerial Economics (Business Economics) consists of the use of economic

modes of thought to analyse business situations “ – McNair & Meriam

“ The Integration of economic theory with business practice for the purpose of
facilitating decision making and forward planning by management “ – Spencer
& Siegelman

“ Managerial economics is concerned with the application of economic

principles & methodologies to the decision making process within the firm or
organisation under the conditions of uncertainty” – Prof Evan.J.Douglas
Fundamental Nature of Managerial Economics

Unlimited Choice Limited Resources

SCARCITY

What to produce How to produce For whom to produce

3 Solutions to the above problems:

• Market Mechanism
• Govt. Polices
• Both the above options
Scope of Managerial Economics
• It is the economics applied to problems of choice or alternatives and allocation of
scarce resources by the firms
• Helpful to arrive at rational managerial decisions

4 Groups of Problems in Decision making & Forward planning

‰ Resource Allocation
‰ Inventory & Queuing problem
‰ Pricing Problem
‰ Investment Problem

Subject - matter of managerial economics

9 Demand Analysis & Forecasting
9 Cost Analysis
9 Production & Supply Analysis
9 Pricing Decisions, Policies & Practices
9 Profit Management
9 Capital Management
Managerial Economics & Other Subjects

• Microeconomic Theory

• Macroeconomic Theory

• Operations Research

• Theory of Decision Making

• Statistics

• Mathematics

• Accounting
Economic Analysis

• Micro & Macro Analysis

• Partial & General Equilibrium Analysis

• Static, Comparative Static & Dynamic Analysis

• Positive & Normative Analysis

Uses of Managerial Economics

i. What products and services should be produced?

ii. What inputs and production techniques should be used?
iii. How much output should be produced?
iv. At what prices it should be sold?
v. What are the best sizes and locations of the plants?
vi. When should equipment be replaced?
vii. How should the available capital be allocated?