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Managerial Economics (Al Jamia Arts and Science College, Poopalam)INTRODUCTION ends and scares means which have
ECONOMICS alternative uses”.
The term “economics” has been derived from D. Modern Definition: The credit for
a Greek Word “Oikonomia” which means revolutionizing the study of economics
„household‟. Economics is a social science. It surely goes to Lord J.M Keynes. He defined
is called „social‟ because it studies mankind economics as the “study of the
of society. It deals with aspects of human administration of scares resources and the
behavior. It is called science since it studies determinants of income and employment”.
social problems from a scientific point of Prof. Samuelson recently given a definition
view. based on growth aspects which is known as
Definition of Economics Growth definition. “Economics is the study of
A. Wealth Definition, how people and society end up choosing,
with or without the use of money to employ
B. Welfare Definition,
scarce productive resources that could have
C. Scarcity Definition and alternative uses to produce various
D. Growth Definition commodities and distribute them for
A. Wealth Definition : Really the science of consumption, now or in the future, among
economics was born in 1776, when Adam various persons or groups in society.
Smith published his famous book “An Economics analyses the costs and the
Enquiry into the Nature and Cause of Wealth benefits of improving patterns of resources
of Nation”. He defined economics as the use”.
study of the nature and cause of national Meaning and Definition of Managerial
wealth. According to him, economics is the Economics.
study of wealth- How wealth is produced Managerial economics is first introduced by
and distributed. He is called as “father of Joel Dean. He is considered as the father of
economics” and his definition is popularly managerial economics. Managerial
called “Wealth definition”. economics is concerned with those aspects
B. Welfare Definition : It was Alfred of economics and its tools of analysis which
Marshall who rescued the economics from are used in the process decision making of
the above criticisms. By his classic work business enterprise.
“Principles of Economics”, published in 1890, Spencer and Siegleman defined managerial
he shifted the emphasis from wealth to Economics as “the integration of economic
human welfare. According to him wealth is theory with business practice for the
simply a means to an end in all activities, the purpose of facilitating decision making and
end being human welfare. He adds, that forward planning of management”
economics “is on the one side a study of the
Characteristics of managerial economics
wealth; and the other and more important
side, a part of the study of man”. Marshall 1).micro economics : M.E is micro economic
gave primary importance to man and in character. It does not study the problems
secondary importance to wealth of the entire economy.
C. Scarcity Definition : After Alfred 2) Normative science : M.E is a normative
Marshall, Lionel Robbins formulated his own science. It is concerned with what
conception of economics in his book “The management should do under particular
Nature and Significance of Economic circumstances.
Science” in 1932. According to him, 3) Pragmatic : M.E tries to solve managerial
“Economics is the science which studies problems in their day to day functioning of
human behavior as a relationship between business enterprise.
, Managerial Economics (Al Jamia Arts and Science College, Poopalam)
4) Prescriptive : M.E prescribes solutions to income, his taste etc. which are the
various business problems. determinants of demand. A study of the
5) Uses macroeconomics : it take help of determinants of demand is necessary for
macro economics also. forecasting future demand of the product.
6) Uses theory of firm: M.E is a special 2. Cost analysis: - Estimation of cost is an
branch of economics to bridge gap between essential part of managerial problems. The
economic theory and managerial practice. factors causing variation of cost must be
7) Management oriented found out and allowed for it management to
arrive at cost estimates. This will helps for
8) Art and science
more effective planning and sound pricing
Objectives of managerial economics: practices.
1. analyze the economic problems faced by 3. Pricing Decisions: - The firms aim to
the business. profit which depends upon the correctness
2. To integrate economic theory with of pricing decisions. The pricing is an
business practice. important area of managerial economics.
3. To apply economic concepts and Theories regarding price fixation helps the
principles to solve business problems. firm to solve the price fixation problems.
4. To allocate the scares resources in the 4. Profit management: - Business firms
optimal manner. working for profit and it is an important
5. To make all-round development of a firm. measure of success. But firms working under
6. To minimize risk and uncertainty conditions of uncertainty. Profit planning
7. To helps in demand and sales forecasting. become necessary under the conditions of
uncertainty.
8. To help in profit maximization.
5. Capital budgeting: - The business
9. To help to achieve the other objectives of
managers have to take very important
the firm like industry leadership, expansion decisions relating to the firm’s capital
implementation of policies etc...
investment. The manager has to calculate
Importance of managerial economics: correctly the profitability of investment and
1. techniques for managerial decision to properly allocate the capital. Success of
making. the firm depends upon the proper analysis of
2. It gives answers to the basic problems of capital project and selecting the best one.
business management. 6. Production and supply analysis: -
3. It supplies data for analysis and Production analysis is narrower in scope
forecasting. than cost analysis. Production analysis is
4. It provides tools for demand forecasting proceeds in physical terms while cost
and profit planning. analysis proceeds in monitory term.
5. It guides the managerial economist. Important aspects of supply analysis are;
supply schedule, curves and functions, law of
6. It helps in formulating business policies.
supply, elasticity of supply and factors
7. It assists the management to know influencing supply…
internal and external factors influence the
7. Study of market: after pricing of product,
business.
the manager has to introduce the product in
Scope of Managerial / Business the market. The manager should offer the
Economics products only in those market where he will
1. Demand analysis and Forecasting: - The gt maximum sales.
demands for the firms product would change 8. Inventory management : a firm should
in response to change in price, consumer’s
, Managerial Economics (Al Jamia Arts and Science College, Poopalam)
always keep an ideal quantity of stock. A firm Opportunity cost plays an important role in
always prefer to have an optimum quantity managerial economics. This concept helps in
of stock. Therefore, managerial economics selecting best possible alternative from
will use some methods as ABC analysis, among various alternatives available to solve
inventory models etc. a particular problem.
9. Linear programming and theory of 2.Principle of incremental cost and
games : linear programming and games revenue : incremental costs are additional
theory have come to be regarded as part of costs incurred due to a change in the level or
M.E recently. nature of activity. Incremental revenue
10. Business Cycle : business cycle affect means the change in total revenue resulting
business decisions. Business cycle refers to from a decision. Incremental principle can be
regular fluctuations in economic activities in used in the theories of consumption,
the country. production, pricing and distribution.
Functions of managerial economist 3. Principle of time perspective : time
1. Sales forecasting. plays an important role in economic theory.
A decision should be taken only after
2. Market research.
studying the short run and long run effects
3. Production scheduling on cost and revenue.
4. Economic analysis of competing industry. 4. Principle of discounting : time value of
5. Investment appraisal. money should be considered while taking
6. Security management analysis. related decision.
7. Advise on foreign exchange management. 5. Equi- marginal principle : according to
8. Advice on trade. this principle, an input should be allocated in
9. Environmental forecasting. such a manner that the value added by the
10. Economic analysis of agriculture Sales last unit of input is same in all uses. This
forecasting principle provides a base for maximum
exploitation of all the inputs of firm so as to
The responsibilities of managerial
maximize the profitability.
economists
6. Optimization : the objective may be
1. To bring reasonable profit to the company.
maximization of profit or minimization of
2. To make accurate forecast. time or minimization of cost.
3. To establish and maintain contact with Economics Vs Managerial economics.
individual and data sources.
Economics Managerial
4. To keep the management informed of all Economics
the possible economic trends.
Dealing both micro Dealing only micro
5. To prepare speeches for business and macro aspects aspects
executives.
Both positive and Only a normative
6. To participate in public debates normative science. science.
7. To earn full status in the business team. Deals with Deals with practical
Fundamental concepts of managerial theoretical aspects aspects
economics(techniques)
Study both the firm Study the problems
1.Principles of opportunity cost: and individual. of firm only
Opportunity cost refers to the cost of
Wide scope Narrow scope
foregoing or giving up an opportunity. It is
the cost of the next best alternative.
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