1. Meaning, Scope & Methods of Managerial Economics
Chapter 1
Meaning, Scope & Methods of Managerial Economics

2. Managerial Economics Objectives:
After studying the chapter, you should
understand:
1. The subject matter of Managerial Economics
2. The analytical approach used in Managerial Economics

3. What is Economics
Economics is usually defined as a social science concerned with analyzing and describing the production, distribution and consumption of wealth.
Robbin’s Definition : More recently. An English economist Lionel Robbins defines Economics as “ the science which describes human behavior as a relationship between (given ) ends and scarce means which have alternative uses”

4. Definition of Managerial Economics
Douglas - “Managerial economics is .. the application of economic principles and methodologies to the decision-making process within the firm or organization.”
Pappas & Hirschey - “Managerial economics applies economic theory and methods to business and administrative decision-making.”
Salvatore - “Managerial economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objectives most effectively.”

5. Meaning of Managerial Economics
Managerial Economics: Managerial economics is essentially applied economics in the field of business management. It is economics of business or managerial decisions. It pertains to all economic aspects of managerial decision making.
It is an evolutionary science, it is a journey with continuing understanding and application of economic Knowledge, theories, models, concepts and categories in dealing with emerging business or managerial situations and problems in a dynamic economy.

6. Types Of Business Decision
Price and Output Decision
Demand Estimation
Choice of a Technique of Production
Advertising Decision
Long-run Production Decision
Investment Decision

7. Nature of Managerial Decision
Decision Making Problem requires a choice among alternative courses of action so as to achieve the objective. Lets understand this with the help of a example: Consider Maruti Udyog Limited which manufacturers cars. Suppose it identifies 2 possible course of action also called as strategies to meet the growing demand of its product.

8. Nature of Managerial Decision
First Strategy is to plan for its internal expansion of productive capacity. Second Strategy is to take over the premier Auto Limited and use its capacity to increase output to meet growing demand of its product. Objective of the firm is to maximize profits to be earned from the expansion of output. Let S1 stand for strategy one and S2 stand for Strategy 2.

9. Nature of Managerial Decision
The objective function for the above decision making problem can be stated as maximise profits (S1, S2) To choose from the 2 alternative strategies, the following decision rule can be made: Choose strategy S1 if profits from S1 › profits from S2. Choose Strategy S2 if profits from S2 › profits from S1

10. Managerial Decision Making Process
The 5 steps in the decision making process
Establishing Objective
Defining the Problem
Identifying Possible Alternative Course of Action
Considering Legal and Social Constraints
Evaluating Alternative Course of Action and Choosing the Best
Considering Financial, Technological, Infrastructural and Input Constraints
Implementing and Monitoring the Decision

11. Managerial Economics: An Integration of Economics, Decision Science and Business Management
Traditional Economics & Tools and Techniques of Decision Sciences
Managerial Economics
Business Management In Theory and Practice: Decision, Problems

12. Managerial Economics: An Integration of Economics, Decision Science and Business Management
Managerial Economics bridges the gap between traditional economic theory and real business practices for the purpose of facilitating decision making and forward planning by management.
Economic Theory
Business Management
Managerial Economics

13. Characteristics of Managerial Economics
1. Micro Economics:- Managerial economics is micro economics in character as it is concerned with smaller units of the economy. It studies the problems and principles of an individual business firm or and individual industry.. It assist the management in forecasting and evaluating the trends in the market.

14. Characteristics of Managerial Economics
2. Normative Economics :- Managerial economics belongs to normative economics. It is concerned with what management should do under particular circumstances. It determines the goals of the enterprise and then develops the ways to achieve these goals. It deals with the future planning, policy-making, decision- making and making full utilization of the available resources of the enterprises.

15. Characteristics of Managerial Economics
3. Pragmatic :- Managerial economics is pragmatic. It tries to solve the managerial problems in their day-to-day functioning and avoids difficult issues of economic theory.
4. Uses Theory of firm :- Managerial economics uses economic concepts and principles which are know as the theory of firm or economics of the firm. Thus, its scope is narrower than that of Pure Economic Theory.

16. Characteristics of Managerial Economics
5. Takes help of Macro Economics :- Managerial economics takes help of macro economics also because it needs an understanding of the circumstances and environment the individual firm or industry has to work. Issues of macro economics whose knowledge is necessary for the successful management of a firm or an industry are : Business Cycles, Taxation Policies, Industrial Policy, Price and Distribution Policies, Wage Policies and Anti-Monopoly Policies etc.

17. Characteristics of Managerial Economics
6. Aims at helping the Management :-Managerial economics aims at helping the management in taking correct decisions and preparing plans and policies in the future.

18. Scope of Managerial Economics
The scope of managerial economics includes the following subjects :
Theory of Demand
Theory of Production
Theory of Exchange or Price Theory
Theory of Profit
Theory of Capital and Investment
Environmental Issues

19. Scope of Managerial Economics
Theory of Demand :According to Spencer and Siegelman “A business firm is an economic organization which transforms productivity sources into goods that are to be sold in the market “
Demand Analysis: helps the management in identifying factors that influence the demand for the products of a firm. For eg an estimation of future sales is essential before preparing production schedule and employing productive resources. Thus demand analysis and forecasting is essential for business planning.

20. Scope of Managerial Economics
ii) Demand Theory : is a study of behaviour of consumers. It answers questions such as why do the consumer buy a particular commodity ? How much they purchase a commodity ? What is the effect of income, habit and taste on the demand of a commodity ? What are the factors influencing the demand of a commodity ? Why and when do consumers stop to consume a commodity .

21. Scope of Managerial Economics
b) Theory of Production : Production and cost analysis is important for smooth functioning of production process and project planning.
Production theory helps in determining the size of firm and the level of production.
It explains how average and marginal costs change with the change in production
Under what conditions do costs increase or decrease?
How does total production increase when input of one of the factors of production is increased keeping other factors constant ?

22. Scope of Managerial Economics
How can one factor of production substitute another when all the factors are increased simultaneously ?
How can optimum production be obtained ?

23. Scope of Managerial Economics
c) Theory of Exchange or Price Theory :
It explains how the prices are determined under different markets ?
How and to what extent advertisement can be helpful in increasing sales of a firm in market.
Pricing is an important area of managerial economics. Pricing policy affects the demand for the product. It also includes pricing methods, pricing policies, differential pricing, product line pricing and price forecasting .

24. Scope of Managerial Economics
d) Theory of Profit: Profit maximization is the aim of every firm. Profits is the difference between total revenue and total cost. Because of the following factors profits are always uncertain :
Demand of the product
ii) Prices of the factors of production
iii) Nature and degree of competition in the market
iv) Price behaviour under changing conditions.
Hence Profit Planning and Profit Management are necessary for improving profit earning efficiency of the firm.

25. Scope of Managerial Economics
e) Theory of Capital and Investment :
This theory explains the following issues :
Selection of most suitable investment project
Most efficient allocation of capital
Assessing the efficiency of capital
Minimizing the possibility of under capitalization or Over- capitalization.

26. Scope of Managerial Economics
f) Environmental Issues : Certain issues of macro-economics also form a part managerial economics. These relate to social and political environment in which a business and industrial firm has to operate .This is governed by factors:
The type of economic system of the country
Business cycles, industrial policy of the country
Trade, fiscal and taxation policies
Price and labour policy
General trends in economy with regards to the production, employment, income, prices, savings and investment etc.

27. Scope of Managerial Economics
vi) General trends in the foreign trade of the country
vii) How develop is the banking sector
viii) Social structure and political system
As the management of a firm cannot have any control over these factors, it should adjust the plans, policies and programmes of the firm according to these factors to offset their adverse effect on the firm.

28. Significance of Managerial Economics
Spencer and Siegelman have described the importance of Managerial economics and industrial enterprise as follows:
Reconciling Traditional Theoretical Concepts to the Actual Business Behaviour and Conditions : Managerial economics reconciles the tools, Techniques, models and theories of traditional economics with actual business practices and with the environment in which a firm has to operate.

29. Significance of Managerial Economics
2.Estimating Economic Relationships: Managerial economics estimates economic relationship between different business factors such as income, elasticity of demand and cost volume of profit analysis etc.
3. Predicting Relevant economic Quantities :
Its helps the management in predicting various economic quantities such as cost, profit, demand, capital, production, price etc.

30. Significance of Managerial Economics
4. Understanding Internal and External Forces
5. Basis of Business policies: Managerial economics is the foundation of business policies. Business policies are prepared on the basis of studies and findings of managerial economics which warns the management against all the turning points in national as well as international economy .

31. Managerial Economics : Normative or Positive
Normative Economics : Basically prescribes what it out to be. Positive Economics : explains the economic phenomenon as : What is, what was and what will be. “Managerial Economics is a blending of pure or positive science with applied or normative science.”

32. Relationship with other Disciplines
Economics has to aspects : Positive and Normative Economics Normative Economics : Basically prescribes what it out to be. Positive Economics : explains the economic phenomenon as : What is, what was and what will be. “Managerial Economics is a blending of pure or positive science with applied or normative science.”

33. Economic and Managerial Economic Theory
The relationship between the two theory is like that of engineering science to Physics or of Medicine to Biology. Both deal with problems of scarcity and resource allocation.
The 3 contribution of Economic theory to Managerial economics are:
It helps Managerial Economic by building Analytical models which helps in analyzing the structure of Managerial problems
It contributes a set of Analytical Methods which helps to enhance the analytical abilities of a business analyst.
It helps to clarify Concepts used in business analysis which helps the managers to avoid conceptual pitfalls.

34. Management Theory and Accounting
Accounting refers to the recording of transactions of the firm in certain books. Profit Maximization is a major objective of any firm. In order to make correct managerial decisions, it requires proper knowledge of cost and revenue information. So it is necessary for a managerial economist to be able to interpret and use accounting data.

35. Managerial Economics and Mathematics
Mathematical concepts and tools are widely used in economic logic to solve problem related to how firm should minimize costs, how to maximize profits, or how to optimize sales. Mathematical symbols are most convenient to handle and understand various concepts like incremental cost, elasticity of demand etc

36. Managerial Economics and Statistics
Managerial Economics needs tools of Statistics in more than one way:
Business man can correctly forecast the demand of the product.
Impact on variations such as taste, fashion, and changes in income on demand
It provides a sure base for decision making

37. Managerial Economics and Operational Research
Operational Research is concerned with the complex problems arising out of the management of men, machines, materials and money.

38. Role and Responsibilities of a Managerial Economist
Demand Estimation and Forecasting
Preparation of business/sales forecast
Analysis of the market survey
Analyzing the issues and problems of the concerned industry.
Assisting the business planning process of the firm
Discovering new and possible fields of business
Advising on pricing, investment and capital budgeting policies
Evaluation of capital budgets
Building micro and macro economic models
Directing economic research activity
Briefing the management on current domestic and global economic issues and emerging challenges.

39. Usefulness of Managerial Economics
Managerial Economics enables the use of economics logic and principles to aid management decision making
It focuses on the most profitable use scarce resources rather than the achievement of equilibrium prices and quantities as pure theory of economics does.
3. It has introduced dynamism in the world of decision making and business environment.
4. It has given rise to emergence of a new approach in decision making Known as Corporate strategy
5. Managerial economics sharpens the business aceum

40. Question Bank
Q1. Define Managerial economics . How does it differs from traditional economics . Q2. Discussion the Importance of Managerial Economics with special reference to decision- making . Q3. Explain the role and responsibilities of a Managerial economist. Q4. What is the scope of Managerial Economics.