Introduction

MBA-I (2013-15)
What is managerial Economics?
Mangerial economics is the application of
economic tools and techniques to business and
administrative decision making
The main objectives of Managerial economics
are:
To learn the usefulness of economics
in describing managerial behavior.
to improve managerial decisions.
to understand vital role of business in society.

Usefulness of managerial economics
(i)Evaluating the alternative choices
By linking the economic concepts to quantitavve
methods, the managers can evaluate various alternatives
and take the most appropriate decision. Since both the
human and material resources are scarce and limited one
has to take the decision for the use of the best
combinations.
Any problem in respect of production,pricing, labour,
rawmaterials, investmenant, organisational strategy etc
can be solved most efficiently for achiving the optimal
solution to the management decisions. All these can be
solved with the help of economic concepts and
quantitative methods.
Steps for such evaluation:
Identify ways to efficiently achieve goals.
Specify pricing and production strategies.
Spell out production and marketing rules to maximize profits.
Hence managerial economics has a singificant role in the managers
decision making process.
(ii) Making the Best Decision
In order to take appropriate decision, the managers are
required to understand the economic environment in which
they operate.
Managerial economics helps meet management objectives
efficiently by applying the economic theory and methodology to
decision making.
Managerial economics describes the logic of pricing practices for
maximising profits.
Mostly we will deal with the business applications.


For the successful business, the managers need to
adopt a set of principles which is popularly
known as busness ethics. They are are follows:
Above all else, keep your word. Say what you
mean and mean what you say.
Do the right thing. A handshake with an
honorable person is worth more than a ton of
legal documents from a corrupt individual.
Accept responsibility for your mistakes and fix
them. Be quick to share the credit for success.
Leave something on the table. Profit with your
customer not off your customer.
Stick by your principles. Pricniples are not for sale
at any price.

Role of Business in society:
The aim of business is not only to
maximise profit but also it aims at
fulfilling some social responsibility. These
are:
satisfying consumer wants.
contributing to social welfare
Serving the customers.
Providing employment opportunities.
Obeying laws and regulations of the
government.

On the one hand the main objectives of the business to
maximise profit and on the other hand it has to move
with the society in fulfilling the overall social welfare.
The firm has to operate in the context of economic
model to achieve this objective.
The business needs to be induced to move towards the
directions that society desires. For this it is necessary to
know the consumers demand, producers supply, market
environment, product quality, level of competition in the
market, pricing strategy, organisational strategy etc. Also
it has to deal with the political pressure or regulations of
the govt etc.
Hence the firm has to keep close relationship with the
society in respect to above issues to achive the social
objectives without foregoing the main goal of business.
How the firm serves the customers and
society?
Firm has to establish the realtionship with
suppliers, investors, workers, and
management jointly to serve the customers
and the society. This will be mainatained by
estimating the expected value maximisation in
terms of optimisation of profits keeping in
view the uncertainty and time value of money.
How is it done? It can be done by estimating the
present value of firms expected net cash flow
(future profits).

If is the profit, the present value of future
expected profits will be:
n
/(1+i)
t
t=1
t=time , i =discount rate, n= no. of years(time)
Profit is the total revenue minus the total cost: TR-TC.
Constraints of theory of firms:
Resource constraint: Human and material
Other constarints: legal, and such others

Limitations of the theory of firms:
Always it is not possible to optimise the
business profit. Hence it is untenable to
assume optimisation of profit under the
theory of firms.
Manytimes the cost of finding the best
solution is higher than its benefits. Hence the
mangers in this case seek for satisfactory
rather optimal results.
Measuring the profit of the firm/business
Business Versus Economic Profit
i. Business (accounting) profit reflects explicit
costs and revenues.
ii. Economic profit.
Reflects the implicit cost which Considers cash
and non-cash items.
Do profits vary among fims? There are wide variations in
profits of the firms.
Why do they vary?
It is on account of unexpected growth in revenue
and cost savings.
Profits vary among firms because of differences in
competions among different firms.


Throughout the managerial economics the
following main topics will be covered:
Demand and supply
Production and Cost concepts
Theory of the firm,its objectives,
constraints etc.
Marketing structure and its behaviour
Game theory and its application in
Business

Ecnomic Optimisation process
What is optimal decision? It is the best
decision of the mangers which is
consistent with the mangerial objectives
Maximizing the Value of the Firm by
fuilfilling the need of the customers most
efficiently
Managers need to be more cusomers
focused rather than involving with self
interest



Revenue Concepts
Price and quantity relation

P




Total Revenue = Price Quantity
Marginal Revenue:Change in total revenue associated with
a one-unit change in output.
Maximization of total Revenue : MR = 0.




Q
AR
MR
Cost Concepts
Total Cost= Fixed Cost + Variable Cost.
Marginal Cost is the change in total cost
associated with a one-unit change in
output.
Average Cost = Total Cost/Quantity
Average Cost is Minimum when: MC =
AC. It reflects efficient production of a
given output level.
Concepts of Profit
Total Profit : Total Revenue - Total Cost
Marginal Profit: change in total profit due to a one-
unit change in output: MR MC. It is the gain from
producing one more unit of output (Q).
Profit Maximization: MR MC = 0 or MR = MC
Incremental profits: It is the gain tied to a given
managerial decision, possibly involving multiple units
of Q.
The incremental revenue of a new productis
measured as the difference between the firms total
revenue before and after the new product is
introduced. So also the incremental cost. Accordingly
one can estimate the incremental profit.
Decision making process
Establishing objective
Defining the problem
Identifying possible
alternative solutions
Evaluating alternative
courses of action
Legal and social
constraints
Of the alternative
courses of action,
choosing the best
Considering financial,
technological , infrastructure
and output constraints
Implementing and monitoring
the decision