Introduction

 Should an electronic goods manufacturer cut the price

of its best selling television set in response to a rival
company’s launching of a new model?

 Should a commercial bank go for internet banking?

 Should a publisher offer more trade discount in

response to a new competitor’s entry into the market
of educational books?
 Should a pharmaceutical firm undertake a promising
but costly R&D programme?
 What tender should a construction company submit to
get a road construction contract from municipal
corporation in a city?
 In all the above situations the common element is
DECISION MAKING
 Prime function of any organisation is Decision making
and forward planning.
 Decision Making and Forward
Planning
 Decision making is the process of selecting one
course of action from two or more alternative
courses of actions

 Forward planning means establishing plans for the

future
 Decision making is a continuous process through
uncertain future.

 In fulfilling the function of decision making in an

uncertain frame work economics theory can be used
with considerable advantage.

 The way economic analysis can be used towards

solving business problems constitute the subject
matter of MANAGERIAL ECONOMICS
Definitions of Managerial Economics
1. According to Mc Nair and Meriam managerial
economics consists of use of economic mode of
thought in analysing business situations.

2. Spencer and Siegelman have defined managerial

economics as the integration of economic theory
with business practice for the purpose of facilitating
decision making and forward planning of the
management
Definitions of Managerial Economics
3. Managerial economics is the discipline which deals
with the application of economic theory to business
practice.

4. Managerial economics lies on the borderline

between economics and business management and
serves as a bridge between the two disciplines
Chief Characteristics of Managerial Economics
1. It is microeconomic in nature. The unit of study is
firm

2. It largely uses body of economic principles and

concepts. Therefore it is called theory of the firm or
economics of the firm

3. Managerial economics is pragmatic in nature (solves

problems in practical and sensible way rather than
having fixed ideas and theories)
Chief Characteristics of Managerial Economics
4. It belongs to normative science rather than positive . It
is prescriptive rather than descriptive.
It is concerned with what decisions ought to be
made. It involves value judgements and has two aspects
i) It tells what aims and objectives a firm should
pursue
ii) also, it tells how best to achieve these aims in
particular situations.
Therefore, managerial economics has been described
as Normative micro economics of the firm.
5. Macro economics is also useful as it provides intelligent
understanding of the environment
 Differences Between Managerial Economics
And Economics
Managerial Economics Economics
1. It involves application of economic 1. It deals with the body of
principles principles itself
2. It is micro economic in nature 2. It is both micro and macro
3. Though it is micro economic, it economic in nature
deals only with firms
3. It deals with individuals as
4. It adopts, modifies and reformulates
well as firms
economic models to suit to specific
conditions and serves problem 4. It hypothesizes economic
solving process relationships and build
5. It introduces feedback on various economic models
issues and thus embodying 5. It makes certain
complexities and attempting to solve assumptions
real life business problems using
tool subjects like mathematics,
statistics, accounting, operations
research, marketing research etc.,
Scope of Managerial Economics
 Scope refers to area of study
 Managerial economics provides management with a
strategic planning tool:
a. Provides clear perspective of business world
b. How should firm remain profitable in a changing
environment
Primary decision areas
 Choosing the product or service
 Choice of production methods and resource
combination
 Determination of best price and quantity combination
 Promotional strategies and activities
 Selection of location to produce and sell
Scope-Two broad areas of decision
making
Concepts and techniques of managerial economics are
applied on two broad areas of decision making:
 OPERATIONAL or INTERNAL ISSUES
 ENVIRONMENTAL or EXTERNAL ISSUES
Scope –Operational issues
Demand analysis and forecasting
Cost analysis
Production analysis
Pricing decisions, policies and practices
Profit management
Capital management
Demand analysis and forecasting
 Demand analysis refers to theory that is applied to

understand buying behaviour of consumers. This

theory helps identify various factors influencing the

demand for a firm’s product and thus provides

guidelines to manipulate demand

 Cost analysis
 One way to earn higher profits is by controlling the
costs involved in producing the product. Study of costs
is necessary for making efficient and effective
managerial decisions. The factors causing variations in
costs must be identified if a manager has to arrive at
cost estimates. An element of cost uncertainty exists
because all the factors determining costs are not
always known and controllable. If detailed cost
analysis is done, the firm can move upon to effective
profit management and pricing practices
 Production analysis
 When the business organization converts raw material
or resources to finished products, there are various
economic issues involved. Production analysis helps to
arrive at most profitable decision with regard to
efficient use of resources available to the firm and in
scheduling the output. Production function, a
relationship between inputs and output, involves the
best combination of inputs to yield maximum output
 Pricing decisions, policies and
practices
 A firm’s profitability and success greatly depend on the
pricing decisions and policies of the firm. The
patronization of the firm’s product by customers, the
competition faced by the product and the profits of
the firm, largely depend on the price of the product.
The relation between cost and demand forms the basis
for price fixation.
 Pricing also depend on the environment in which the
firm operates, competitions and customers
 Profit Management
 All business firms are motivated and committed to
produce profits. Profits are one of the tangible
yardsticks to measure the performance of the firm. It
also signifies the health of the firm. Profits are
influenced by various factors such as cost of
production, revenue and other factors both internal
and external to the firm. Profits are difficult to predict
because of the element uncertainty. This difficulty can
be reduced with some techniques like cost control,
break even analysis etc.,
 Capital management
 To realize the profits envisaged by the organization,
capital allocation is one of the fundamental decisions
which the firm takes. These decisions usually involve
huge sums and amount of resources.

 Once a decision is made to invest, it cannot be easily

reversed. The future success or failure greatly depends
on investment decisions made today.

 Some of the aspects of capital budgeting are cost of

capital, rate of return and selection of projects.
 Scope-Environmental issues
 The macroeconomic theory deals with issues related to
the general business environment in which
organisation operates. The environmental issues can
be associated with economic, political and social
environment of a country.
 Economic factors
 A. The pattern of national income, employment,
saving and investment of the country
 B. The functioning of financial sector of the country
 C. The structure and function of foreign trade in the
country
 D. The trends of labour supply and capital market
strength of the country
 E. The economic policies of the government
 Economic factors (contd..)
 F. The value system of society, customs and habits
 G. The political system of the country
 H. The functioning of private and public sectors
 I. The impact of globalization on the country