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School of Business, Management and Economics

DEPARTMENT OF ECONOMICS

Managerial Economics

Prepared by Mr. Mwansa JJ

 INTRODUCTION
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 What is Managerial Economics
 Why Managerial Economics is Relevant for Manager
 Applicability of Managerial to different Organizations
 Methods of Managerial Economics
 Conclusion
Motivation
 One standard definition for economics is the study of the
production, distribution, and consumption of goods and
services.

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 A second definition is the study of choice related to the
allocation of scarce resources.
 The first definition indicates that economics includes any
business, nonprofit organization, or administrative unit.
 The second definition establishes that economics is at the core
of what managers of these organizations do.
 The purpose of managerial economics is to provide economic
terminology and reasoning for the improvement of managerial
decisions.
Motivation contin….
 Managerial economics is, perhaps, the youngest of all the
social sciences. Since it originates from Economics, it has the
basic features of economics, such as assuming that other
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things remaining the same (Ceteris paribus).
 The other features of managerial economics are explained as
below:
 (a) Close to microeconomics: Managerial economics is
concerned with finding the solutions for different managerial
problems of a particular firm. Thus, it is more close to
microeconomics.
 (b) Operates against the backdrop of macroeconomics:
The macroeconomics conditions of the economy are also seen
as limiting factors for the firm to operate. In other words, the
managerial economist has to be aware of the limits set by the
macroeconomics conditions such as government industrial
policy, inflation and so on.
WHAT IS MANAGERIAL ECONOMICS?
 Managerial economics is the application of economic theory
and quantitative methods (mathematics and statistics) to the
managerial decision-making process. Simply stated,
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managerial economics is applied microeconomics with special
emphasis on those topics of greatest interest and importance
to managers.
Managerial Economic decisions as they relate to
Profit Maximization.
The main focus in managerial economics is to find an optimal solution to a
given managerial problems. The problem may relate to production,

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reduction or control of costs, determination of price of a given product or
service, make or buy decisions, inventory decisions, capital management or
profit planning and investment decisions or human resource management.
While all these are the problems, the managerial economist make use of
the concepts, tools and techniques of economics and other related
disciplines to find an optimal solution to a given managerial problem.
The following aspects may be said to generally fall under Managerial Economics.
 Demand Analysis:
 A business firm is an economic organism which transforms productive
resources into goods that are to be sold in a market. The analysis of a
demand for a given product and service is the first task of managerial
economist. Before production schedules can be prepared and resources
employed, a forecast of future sales is essential. This forecast can also
serve as a guide to management for maintaining or strengthening the
market position and enlarging profits.
 Cost Analysis:
 A study of economic costs, combined with the data drawn from the
firm’s accounting records, can yield significant cost estimates that
are useful for managerial decisions.
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 The factors causing variations in costs must be recognized and
allowed for if management is to arrive at cost estimates which are
significant for planning purpose.
 The chief topics covered under cost analysis are cost concept and
classifications, cost output relationship, economies and diseconomies
of scale and cost control and cost
 Pricing Decisions:
 Pricing is very important area of managerial economics.
 In fact, price is the source of the revenue of a firm and as such the
success of a business firm largely depends on the correctness of the
price determination in various market forms, pricing, methods,
differential pricing, product line pricing and price forecasting.
Production And Supply Analysis:
 Production Analysis is narrower in scope that cost analysis production

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Analysis frequently proceed in physical term while cost analysis
proceeds in monetary terms. Production analysis mainly deals with
different production functions and their managerial use.
 Supply analysis deals with various aspects of supply of a commodity.
Certain important aspects of supply analysis are : supply schedule,
curves and function, law of supply and its limitations. Elasticity of
supply and factors influencing supply.
 Profit analysis:
 Profit making is the major goal of firms. There are several constraints
here an account of competition from other products, changing input
prices and changing business environment hence in spite of careful
planning, there is always certain risk involved. Managerial economics
deals with techniques of averting of minimizing risks. Profit theory
guides in the measurement and management of profit, in calculating the
 Capital Management:
 Among the various problems of a business, the most complex and
difficult for the business manager are likely to be those relating to the
firms capital investments.

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 Relatively large sums are involved and the problems are so complex
that their disposal not only requires considerate time and labor but is
a matter for top level decisions.
 Briefly capital management implies planning and control of capital
expenditure. The main topics dealt with are cost of capital, rate of
return and selection or projects.
 Strategic planning:
 Strategic planning provides management with a framework on which
long-term decisions can be made which has an impact on the
behavior of the firm. The firm sets certain long-term goals and
objectives and selects the strategies to achieve the same.
 Strategic planning is now a new addition to the scope of managerial
economics with the emergence of multinational corporations.
 Fundamental
principles of effective
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management 
The golden rule of economics is to spend according/
within your budget.
 Concept of delayed gratification
 Concept of Modesty
 Concept of Opportunity cost
 Concept of Time Value of Money
 All managers should have principles of effective
management to propel their organizations to growth.
 Conclusion
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 The various aspects outlined above represent the major uncertainties
which a business firm has to reckon with, viz-a viz, demand
uncertainty, cost uncertainty, price uncertainty, profit uncertainty and
capital uncertainty.
 We can therefore, conclude that the subject matter or managerial
economics consists of applying economic principles and concepts
towards adjusting with various uncertainties faced by a business firm.
 The First place to start is looking atthe theory of individual behaviour.
Take time to understand the theory before we can apply them to the
firm.
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The end
Thank you for your time