Managerial Economics
By :Gaurav Gupta
Wants of each household are unlimited
but the means (wealth) to satisfy them r limited
or Scare.
Each household like to utilise his wealth in such
a way as to satisfy most of his wants.
Scarcity and choice
Scarcity means that the supply of resources
is less than the demand for resources.
Choice is the outcome of scarcity.
Choice refers to the process of selection from
available limited alternatives.
Maximising behaviour or optimizing behaviour
Thus economics is a social science. Its basic
function is to study how people- individual
,household, firms and nations-maximise their
gains (satisfaction) from their limited
resources and opportunity.
Thus it is study of choice making behaviour
of the people.
Optimizing behaviour means selecting the
one out of available option.
Economics
Micro Macro
Microeconomics studies the Macroeconomics studies
economic activity at the the economic activity as a
individual level. whole.
Ex:Demand for salt by an Ex:Aggreate demand for all
individual household goods and services in a
economy
How nations allocate their
resources so that economic
welfare of society can be
maximise.
Problems of Economy
Unlimited wants
Limited or scare means
Central problem of economy
Problem of allocation of resources
What to produce how much to produce
How to produce
Whom to produce
How to achieve full utilisation of resources
How to achieve growth of resource.
Managerial Economics
It should be thought of applied micro economics.
It is an application of microeconomics to take
managerial decision.
Defines as the study of economics theories, logic
and tools of economic analysis that are used in the
process business decision making.
Objective of a Firm
Primaryobjective to make profit.
Maximisation of sales revenue
Maximisation of firm growth rate
Maximisation of managers utility function
Making a satisfactory rate of profit
Opportunity cost
Canbe defined as the income forgone which
a businessman could make from second best
use of his resources.
Accounting profit Vs Economic profit
A/c profit does not take into account the opportunity
cost but economic profit does.
A/c profit = TR- (W+R+I+M)
Economic profit= Tr-(Explicit Cost +Implicit Cost)
W=Wages, R=Rent,I= Intrest,M=Cost of material
Marginal concept
Widely used in economics
Refers to the change (Increasing or
decreasing) in total quantity or value due to
one unit change in determinant.
Ex MC= TCn-TCn-1(Page 43 dnd)
Ex TR=TRn-TRn-1
Business decision
The decision rule: Firm faced problem how
much to produce so that profit is maximum.
A simple rule that a business activity must
be carried out so long as it MR>MC
So for profit maximisation economist use
marginal principal and set necessary
condition for profit maximisation o/p.
Thus the profit is maximum when MR=MC
Limitations
Itcan be applied only where the
management has the TC and TR data for
each and every unit or where the
management is fully aware of the cost of
producing one additional unit end price
expected to be received from the sale of that
unit.
Profit maximisation as a business
objective
P= TR-TC (Two condition must satisfy)
1-Mr = Mc (First order condition)
2-Decreasing MR and Rising MC(second order condition)
MR:is the revenue obtained from the production and sales of
one additional unit of output.and Marginal cost is the cost
arising due to production of one additional unit.
Let TR= f(q) and TC = f(q) then
P= F(q)tr- F(q)tc
First order condition
Dp/dq=DTR/dq-DTC/dq=0
DTR/dq = DTC/dq
Thus MR=MC
Second order condition
D2P/Dq2=D2TR/dq2-D2TC/Dq2
Second order condition require that
D2TR/Dq2-D2TC/Dq2<0
D2Tr/Dq2<D2Tc/Dq2
Do numerical ex From Dnd(Text) page 28
