This PPT focuses on the introduction to Managerial Economics. The nature and scope of managerial economics along with its relationship with other subjects. This PPT will provide insights about the roles and responsibilities of managerial economists and objectives of the firm.

1. INTRODUCTION OF
MANEGERIAL ECONOMICS
Dr. Smriti Mathur
Assistant Professor
Babu Banarasi Das University, Lucknow
PhD (Commerce), UGC NET (Commerce)
M.Com (Applied Economics)

2. What Managerial Economics is all about?
Nature and Scope of Managerial Economics
Role and Responsibilties of a Managerial
Economist
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Objectives of the Firm
Relationship with other subjects

3. Managers A manager is a person who directs resources to achieve a stated goal.
This definition includes all individuals who
(1) direct the efforts of others, including those who delegate tasks
within an organization such as a firm, a family, or a club;
(2) purchase inputs to be used in the production of goods and services
such as the output of a firm, food for the needy, or shelter for the
homeless; or
(3) are in charge of making other decisions, such as product price or
quality.

4. Introduction:
Factors
contributing to
the emergence
of Managerial
Economics
Growing complexity of
the business
environment and
decision making
Increasing application of Economic Logic,
concepts, theories and tools of economic
analysis in the process of Business Decision
making
Rapid increase in demand for
professionally trained managerial
manpower with good knowledge of
Economics
In management studies, the terms ‘Business Economics’ and ‘Managerial Economics’ are often synonyms. Both the
terms, however, involve ‘economics’ as a basic discipline useful for certain functional areas of business management.
Managerial Economics has emerged as a separate branch of Economics. The emergence of managerial economics can
be attributed to following factors-

5. Introduction to Managerial Economics
• Managerial Econoimics as a subject gained popularity in th USA after the publication of the book “Managerial
Economics” by Joel Dean in 1951.
• Main problems faced by a business firms are:
 The choice of a product to be produced or services to be rendered
 Decision about price and output of the product so as to maximise profits or attain desired goals.
 What methods or techniques of production are to be used in the production process.
 How much advertisement expenditure is to be incurred for promoting the sales of their products.
 Long term decisions pertaining to production
 Long term decisions related to investment or Capital Expenditure.
• The science of economics is concerned with the allocation of scarce resources to alternative uses so as to
achieve maximum possible satisfaction of the people. The management science is concerned with the
allocation of scarce resources at the disposable of the firm.
• Managerial economics is an application of microeconomics and its supportive quantitative methods (drawn
from mathematics and statistics) in the decision-making process for managers who are in pursuit of
recognizing and utilizing the optimal treatments and solutions to managerial problems and issues in order to
reach a certain level of efficiency in achieving the firm’s objectives.

6. Definitions of Managerial Economics
Definitions
According to Spencer .nd Siegelman
“The integration of economic theory with business practice for the purpose of facilitating decision-
making and forward planning by management”.
According to Mansfield
"Managerial economics provides a link between economic theory and decision sciences in the
analysis of managerial decision making”
According to TJ. Webster
"Managerial economics is the synthesis of microeconomic theory and quantitative methods
to find optimal solutions to managerial decision-making problems”
According to Prof. Evan J Douglas
‘Managerial economics’ is concerned with the application of economic principles
and methodologies to the decision making process within the firm or organisation
under the conditions of uncertainty”

7. Descriptive and Prescriptive Role of Managerial Economics
• The descriptive approach is concerned with positive economics. It is concerned with what was, is, and will be in actuality,
with a certain degree of objectivity and regardless of any subjective positions. It considers the given conditions and
circumstances, investigates any causes and effects, formulates theories and designs models, and predicts what might
happen and what would change, and in what direction, all in a reasonable of neutrali.
• On the other hand, the prescriptive approach adopts a normative stand. It is based on subjective views and value
judgment. It is all about “what ought to be” from a certain perspective. Outcomes, therefore, are deemed to be presented
as good or bad.
• Economics is basically considered a descriptive and positive science.
• Positive economic analyses of many contentious issues can appear to be harsh just because they are deliberately separated
from any value judgment and sentimental consideration. Examples of these issues are rent control, minimum wage,
welfare system, housing subsidies, comprehensive healthcare, and many more. Just like economics, managerial economics
is essentially a positive science where managers are not suppose make their decisions on the basis of their sentiments.
They are supposed to observe data and trends and use a scientific approach to predict consequences of their actions.
• The other dimension of their positive approach is that all decisions and actions can be tested empirically either by research
or by plain experience. However, managerial economics does have its own prescriptive side too, especially when it comes
to the issues in which managers and decision makers in general find themselves at a position in which they have to use
their own value judgment and personal positions when only gut feelings can be the determinant.

8. Figure shows how managerial economics acquires its essential identity through the contributions of three components:
(1) Quantitative economics,
(2) the scientific procedure of decision making, and
(3) the related functional fields.
Source: Allahbeeb, Moffitt, Managerial Economics: A Mathematical Approach, 2013, pg. no. 4.

9. Quantitative Economics
The quantitative approach would provide many technical tools such as numerical analysis, statistical estimation,
mathematical optimization, econometrical models, forecasting procedures, game-theoretic scenarios and
simulations, information system schemes, and linear programming. Economic theory, especially microeconomics,
provides the foundation for marginal analysis, theory of consumer choice, theory of the firm, industrial
organization and behavior, and theory of public choice and policy.
Micro Economics
Demand theory, analysis of cost
and production, theory of
determination of price and
output under different market
structures
Mathematics Techniques
Optimization techniques such
as differential callas, linear
programming etc.
Macro Economics
Consumption theory,
investment demand, the
general price level and Business
Cycles
Statictics
Measures of Central tendancy,
Measures of Dispersion,
Correlation, Regression, trend
projections, least square.

10. Managerial Decision Making
Decision making is crucial for running a business enterprise which faces a large number of problems requiring
decisions. Problems which requires decisions to be made by managers includes which product to be produced,
what price to be charged, what quantity of the product to be produced, how much investment expenditure to be
incurred etc. Following chart portays the decision making process -
Source: Ahuja H. L., Managerial Economics, 9e, pg. no. - 9.

11. Relationship of Managerial Economics with other subjects
Economics
Managerial Economics is economics
applied to decision making. It is a special
branch of economics, bridging the gap
between pure economic theory and
managerial practice.
Theory of Decision Making
The theory of decision making is
relatively a new subject that has
a significance for managerial
economics. In the process of
management such as planning,
organising, leading and
controlling, decision making is
always essential. Decision
making is an integral part of
today’s business management.
Mathematics
Mathematics has helped in the development of economic theories
and now mathematical economics has become a very important
branch of economics. Mathematical approach to economic theories
makes them more precise and logical.
Operations Research
The basic purpose of the approach is to
develop a scientific model of the system which
may be utilised for policy making.
Accounting
Managerial economics is closely related to
accounting. It is recording the financial
operation of a business firm. A business is
started with the main aim of earning profit.
Capital is invested / employed for purchasing
properties such as building, furniture, etc
and for meeting the current expenses of the
business.
Statistics
Statistics is a very useful science for business execu-
tives because a business runs on estimates and
probabilities. Statistics supplies many tools to
managerial economics. Suppose forecasting has to be
done. For this purpose, trend projections are used.
Similarly, multiple regression technique is used. In
managerial economics, measures of central tendency
like the mean, median, mode, and measures of
dispersion, correlation, regression, least square,
estimators are widely used.

12. Nature of
Managerial
Economics
Micro
Economics
Uses
Macro
Economics
Multidi
sci-
plinary
Prescript
ive /
Normati
ve
Managem
ent
Oriented
Pragmati
c
Art and
Science
Nature of Managerial Economics
 Art and Science: Managerial economics requires a lot of logical thinking and
creative skills for decision making or problem-solving. It is also considered to be
a stream of science by some economist claiming that it involves the application
of different economic principles, techniques and methods, to solve business
problems.
 Micro Economics: In managerial economics, managers generally deal with the
problems related to a particular organisation instead of the whole economy.
Therefore it is considered to be a part of microeconomics.
 Uses Macro Economics: A business functions in an external environment, i.e. it
serves the market, which is a part of the economy as a whole.
 Multi-disciplinary: It uses many tools and principles belonging to various
disciplines such as accounting, finance, statistics, mathematics, production,
operation research, human resource, marketing, etc.
 Prescriptive / Normative Discipline: It aims at goal achievement and deals with
practical situations or problems by implementing corrective measures.
 Management Oriented: It acts as a tool in the hands of managers to deal with
business-related problems and uncertainties appropriately. It also provides for
goal establishment, policy formulation and effective decision making.
 Pragmatic: It is a practical and logical approach towards the day to day business
problems.

13. Scope of Managerial Economics
Demand Analysis and Forecasting
A major part of managerial decision making depends on accurate estimates of
demand. A forecast of future sales serves as a guide to management for
preparing production schedules and employing resources. It will help
management to maintain or strengthen its market position and profit base.
Production and cost analysis
A firm’s profitability depends much on its cost of production. A wise
manager would prepare cost estimates of a range of output, identify
the factors causing are cause variations in cost estimates and choose
the cost-minimising output level, taking also into consideration the
degree of uncertainty in production and cost calculations.
Strategic Planning
Strategic planning provides a long-term goals and objectives and selects the
strategies to achieve the same. . The perspective of strategic planning is
global. strategic planning has given rise to be new area of study called
corporate economics
Pricing and Competitive Strategy
Pricing decisions have been always within the preview of managerial
economics. Price theory helps to explain how prices are determined under
different types of market conditions. Competitions analysis includes the
anticipation of the response of competitions the firm’s pricing, advertising and
marketingstrategies.
Resource Allocation
Managerial Economics is the traditional economic theory that is concerned
with the problem of optimum allocation of scarce resources. Marginal
analysis is applied to the problem of determining the level of output, which
maximizes profit. In this respect linear programming techniques has been
used to solve optimization problems
Capital or Investment decisions
Capital is the foundation of business. Lack of capital may result in small size of
operations. Availability of capital from various sources like equity capital, institutional
finance etc. may help to undertake large-scale operations. Hence efficient allocation
and management of capital is one of the most important tasks of the managers.
Operational
Issues
The scope of managerial economics refers to its area of study. It is comprised of economics concepts, theories
and tools of analysis that can be applied in the process of business decision making to analyse business
problems, to evaluate business options, to assess the business prospects, with the purpose of finding
appropriate solution to business problems and formulating business policies for future. The scope of managerial
economics covers two areas of decision making 1. Operational or Internal issues 2. Environmental or External
issues.
Operational issues refer to those, which are within the business organization and they are under the control of
the management. Following are the operational issues of Managerial Economics:

14. Environmental or External Factors refer to general economic, social and political
atmosphere within which the firm operates.
Economic Environment
The type of economic system in the country.
a. The general trends in production, employment, income, prices,
saving and investment. b. Trends in the working of financial
institutions like banks, financial corporations, insurance
companies c. Magnitude and trends in foreign trade; d. Trends in
labour and capital markets; e. Government’s economic policies
viz. industrial policy monetary policy, fiscal policy, price
policy etc.
Political Environment
The Political environment refers to the nature of state
activity, chiefly states’ attitude towards private
business, political stability etc.
Social Environment
The social environment refers to social structure as
well as social organization like trade unions,
consumer’s co-operative etc.
Scope of Managerial Economics

15. Role of Managerial Economicsts
• Analysis of Business Operations:
The managerial economist can help in the management in making decisions
regarding the internal operations of a firm. Managerial economists play an
important role in managing management in the following areas -
 Determining the budget of profit and sales volume in the coming years.
 For the Future Purpose, the quantity of production quantity should be
determined by the goods schedules and stock policy.
 In the next years, what changes should be made in the price policy and
wage policy?
 What is the firm’s credit policy in the future, and what are the changes in
it?
 In the upcoming years, the business should be expanded and contracted,
if yes, how much?
 How many installed capacity should be used in the future. and how much
of the instruments should be applied, that the tools can be used?
 What steps should be taken to cut costs?
 How much cash will be available in the quarter of the coming year, half-
yearly. and suggest how to reduce the deficiency and how to use
excessive, etc.

16. Role of Managerial Economicsts
• Analysis of External factors:
The prime duty of a managerial economist is to make extensive study of the
business environment and external factors affecting the firm's interest. The
managerial economist can continue his studies by advising continuous study
and comprehensive analysis of these factors and tell the highest
management in making policies necessary adjustments.
 In what markets, what are the demands and how the market of the firm’s
products is likely to be?
 What are the trends of the national economy and the international
economy? And what are the chances of change soon?
 What is the state of the business cycle and what will be its appearance
and speed soon?
 What is the probability of the supply of raw materials and the price? And
what are the possibilities they have soon?
 Determination of future demand and price related possibilities of the
built route.
 What is the cost and availability of creditworthiness in the future?
 What are the prospects of changes in future economic policies and
controls?
 How is the competition event or the possibility of growth in business in
the future?
 What are the prospects of the availability and cost of fuel or power?
 What will be the prospects and speed of change in the future of national
income and what will be the change in the production and demand of the
firm?
• Other functions of Managerial Economists:
 Surveying different markets.
 Predicting the industry’s total demand for business.
 Analyzing pricing in different industries, finding a suitable solution to the
problem.
 Analysis of valuables and actions in competitive firms.
 Evaluation and analysis of capital projects in productive work.
 Determination of production schedules and goods tables in the industry.
 Making various appropriation decisions available financial instruments.
 Analysis of agriculture, industry, transportation or other development
work.
 Analyze the development of the economy.
 Comparative analysis of projects.
 Forecasting external conditions affecting a professional firm.

17. Responsibilities of Managerial Economicsts
A Managerial economist plays a very significant role in decision-making and forward planning. But,to serve his role
successfully, he must thoroughly recognize his responsibilities, some of which arefollowing:-
To increase the profitability of the Firm: An economist has a responsibility to earn profit forthe firm by taking right
decision about investment, production, sale and market research.
To make Accurate and Successful Forecast: It is a responsibility of an economist to makesuccessful research and use past
data to find out the expected sales in future and the trend insales.
To maintain relations with Experts: The important responsibility of a managerial economist isto provide solution to
complex business problems, for this purpose he must establish and maintain the relations with such experts of different
fields who can provide their service to the firm as andwhen required.
To aware availability of Resources: A managerial economist should be aware of locations andsituations of the specific
markets, by which he should be able to provide the resources of firm’soperation quickly at reasonable price.
To Simplifying the decision making process: The management has to take many decisions in itsday-today functioning. It is
the main responsibility of a managerial economist to make the decisionmaking process as simple as possible so that quick
and correct decision could be taken promptly.
Responsibility to minimize risk: Minimizing risk is another responsibility to the economist. Itcan be done by minimizing
future uncertainty by knowing about all the prospective facts present inthe market. To minimize risk successful forecasting
and right decisions are needed

18. Objectives of Managerial Economics
A. Profit Maximisation
• Economic Profit = Total Revenue – Total Economic Cost (Firms try to
maximise this profit in their decision making). Thus, π =TR-TC
• The simple profit maximising model of the firm provides very useful
guidelines for the decision making by the firm with regard to efficient
resource management. Thus, any business decision by a firm will
increase its profits if the following conditions prevail:
It brings about increase in TR more than increase in costs
It causes increase in revenue, costs remain unchanged
It reduces cost more than it reduces revenue
It reduces cost, revenue remaining the same.
• But, this model has two important limitations:
It does not incorporate time dimension in decision making process of
the firm
It does not analyse the firm’s behaviour under conditions of risk and
uncertainty.

19. B. Value Maximising Model of the Firm
• This model is also known as shareholders wealth maximisation
model .
• Modern theory of the firm assumes that primary objective of
the firm or their managers is to maximise value of wealth or
shareholders wealth.
• Value of the firm is measured by calculating present value of
cash flows of profits of the firm over a no. of years in the
future.
• Constrained Optimisation: In making efficient and optimum
decisions regarding pricing level of output, production method,
costs, manager of the firm work under several constraints. So,
decision making by a firm to maximising profits or value of the
firm is called as Constrained Optimisation.
 Legal Constraint: relate to laws such as minimum wage act,
company act etc. The society imposes these constraints on the
firm to modify behaviour so as to make them consistent with
overall social objectives.
 Input Constraints: relate to limited availability of essential
physical inputs.
 Financial Constraints: relate to financial resources it is able to
raise.

20. Other
Objectives
of Firms
Sales Revenue Maximization
Maximization of Firm's Growth Rate
Maximization of Managerial Utility Function
Baumol has proposed maximization of sales revenue as an
alternative to profit maximization objective. According to him,
sales maximization leads to enhancement of prestige,
reputation, perks of managers, strengthen competitive spirit of
the firm etc.
Marris proposed maximization of firm’s balanced growth rate as
an objective of the firm. Manager seeks to maximize the size of
the firm. Maximization of size of the firm depends on the
maximization of its growth rate.
Williamson focused on maximization of marginal utility function.
According to him, instead of maximizing profit, the managers of
modern corporations seek to maximize their own utility
function subject to a minimum level of profit.

21.  What managerial economics is all about? Managerial Economics has both descriptive and
prescriptive roles. Explain.
 Explain how managerial economics acquires its essential identity?
 Explain the various steps in management decision making process.
 What is the nature and scope of managerial economics?
 Discuss the roles of managerial economists in modern business management.
 Specify the important responsibilities of a managerial economists.
 Explain briefly profit maximizing model of the firm.
 Explain value maximization theory of the firm.