Unit 1-Introduction to

Managerial Economics
MBA-I Semester
Course No:102
Introduction
—  Managerial Economics – Amalgamation of
economic theory with business practices so as to ease
decision making & future planning by management.
—  Nature of Managerial Economics –
Ø  ME is a science – Science is systematic body of
knowledge based on methodical observation. ME is also
science of making decisions with regard to scarce
resources with alternative applications. In science
conclusion is arrived on after continuous
experimentation , In ME also policies are made after
testing & training.
Ø  ME requires Art – ME is all about art of utilizing
his/her capabilities to achieve organizational objectives.
Ø  ME for administration of organization –
ME helps in decision making , decisions based on
economic rationale & are valid in existing economic
environment.
Ø  ME has components of both Macro/Micro
economics .
Ø  ME is dynamic in nature -- As it deals with
human beings.
SCOPE
—  SCOPE of ME -- Deals with allocating the
scarce resources in a manner that minimizes the cost.
Firm’s faces 3 fundamental questions :-
Ø  What to produce ?
Ø  How to produce ?
Ø  For whom to produce?
ME helps in solving these questions
Objectives of the Firm
1.  Profit maximization –
Ø  So that higher dividends for shareholders.
Ø  For better R&D.
Ø  Increased market share & market dominance.

Ø  Higher salaries for employees.

2. Sales maximization –
Ø  Increased market share increases monopoly power and
may enable the firm to put up prices and make more
profit in the long run.
Ø  Increasing market share may force rivals out of
business.-e.g Reliance Jio
3. Growth maximization –
Ø  With this objective, the firm may be willing to make
lower levels of profit in order to increase in size and
gain more market share. More market share increases
their monopoly power and ability to be a price setter.

4. Long run profit maximization –

Ø  In some cases, firms may sacrifice profits in the short
term to increase profits in the long run. For example, by
investing heavily in new capacity, firms may make a loss
in the short run but enable higher profits in the future.
5. Social/environmental concerns –
Ø  A firm may incur extra expense to choose products
which don’t harm the environment or products not
tested on animals. Alternatively, firms may be concerned
about local community / charitable concerns.

6. Co-operatives –
Ø  Co-operatives may have completely different objectives
to a typical PLC (Product Life Cycle). A co-operative is
run to maximize the welfare of all stakeholders –
especially workers. Any profit the co-operative makes
will be shared amongst all members.
Theories of the Firm
—  Thetheory of the firm consists of a
number of economic theories that
explain and predict the nature of the
firm, company, or corporation,
including its existence, behavior,
structure, and relationship to the
market.
 The theory of the firm aims to answer
these questions:
—  Existence- Why do firms emerge? Why are not all
transactions in the economy mediated over the market?
—  Boundaries. Why is the boundary between firms and the
market located exactly there with relation to size and output
variety? Which transactions are performed internally and
which are negotiated on the market?
—  Organization. Why are firms structured in such a specific
way, for example as to hierarchy or decentralization? What is
the interplay of formal and informal relationships?
—  Heterogeneity of firm actions/performances. What drives
different actions and performances of firms?
—  Evidence. What tests are there for respective theories of
the firm?[