2.  Economics is the science of scarcity. It explains the
behavior of different economic units (households, firms,
government & the economy as a whole) & it involves the
study of production, distribution and consumption of wealth
in society.
 Wealth: all those objects that are scarce in supply & hence command a
price
 Household is a basic economic unit which provides inputs that are used
to produce goods & services in the economy.
 Inputs are land, labour ,capital ,entrepreneurship
 A firm is a unit of production . It brings together inputs to produce goods
& services.
 A market is a place where buyers & sellers interact

3.  The source of any economic problem is scarcity. Resources
natural as well as man-made, both are scarce and are not
enough to satisfy the ever-growing needs of human beings.
Scarcity of resources forces economic agents to choose
among alternatives to maximize returns.
 Scarcity is a relative concept. It can be defined as excess
demand i.e., demand more than the supply. For example,
unemployment is essentially the scarcity of jobs. Therefore,
an economic problem can be said to be a problem of choice
and valuation of alternatives.

4.  Economics is the study of how economic
agents or societies choose to use scarce
productive resources that have alternative
uses to satisfy wants which are unlimited and
of varying degrees of importance.
 Economizing : To achieve a given objective
with the fewest resources at the least cost
 Efficiency : to achieve the maximum possible
benefits from given resources

5.  Rationality implies acting objectively, keeping in view the
ends and means, the objectives and constraints. Economics
assumes rationality on the part of consumer, producer and
seller. In the Decision-making context, rational behavior
implies the following:
 All possible courses of action are known to you.
 You are able to separate all such courses of action into two
categories - feasible and unfeasible.
 Based on the available information, you are in a position to
assess the consequences of following a particular feasible
course of action out of a given set of alternatives

6.  You can rank the alternatives in terms of priorities.
 You choose that course of action, which occupies the highest
position in the order of priority.
 The rationality on the part of a firm is to maximize profits or
sales revenue. Rationality on the part of an investor is to
maximize his return on investment. The rationality on the
part of a consumer is to maximize satisfaction.
 For the firm, the constraints can be productive capacity or
the size of the market. For the investor, the constraint can be
the level of risk acceptable. For the consumer, the constraint
can be the size of his budget.
 Feasibility implies the evaluation of both objectives and
constraints together.

7.  It is all about how to make optimum deecision
to use scarce productive resources that have
alternative uses to satisfy wants which are
unlimited and of varying degrees of
importance

14.  "Managerial Economics... is the integration of economic
theory with business practice for the purpose of facilitating
decision making and forward planning by management." -
Spencer and Seigelman
 "Managerial Economics applies the principles and methods
of economics to analyze problems faced by management of
a business, or other types of organization and to help find
solutions that advance the best interest of such
organization". - Davis and Chang
 ME is economics applied to decision making. It bridges the
gap between economic theory and business practice.

15.  Managerial economics is a special discipline which deals with
application of economic theory to analyze decision
making problems faced by business firms.
 Provides a framework for evaluating whether resources
are being efficiently allocated. Also addresses the problem
of what commodity to produce, level of output, prices,
choice of production techniques etc.
 Gives proper insight to understand the economic
environment (includes state of the economy, phases of the
business cycle, competition among rivals, govt.policies) and
helps the manager to respond to various economic signals

16.  Managerial Economics is concerned with decision making of economic
nature in an uncertain framework. Decision making is done with the
help of estimated economic quantities and relationships.
 It is both conceptual and applied (uses conceptual framework to
analyze the problem & uses quantitative techniques to measure the
impact of different factors)
 It in pragmatic in nature i.e. it concentrates on solving day to day
problems under constraints.
 It is a firm's economics i.e. micro in nature as it deals with problems of
an individual firm and not of the entire industry or the economy.

17.  Managerial economics is goal oriented.
 Managerial economics is concerned with normative micro
economics .i.e. what ought to be
 Managerial economics takes the help of macro economics
also to understand the external conditions which are relevant
to the business. Managers cannot ignore the environment
within which they operate, they must understand and adjust
to the external factors like govt. intervention in the business,
inflation, business cycle fluctuation etc.

18.  Decision making is a process of selecting a course of action out of
alternative choices available to a firm to realize its objectives.
There exists a gap between theory and practice. The real economic
environment is highly complex and change in an economic variable
causes changes in a large no. of related variables. Also, economic
theories are rather simple because they are based on certain
assumptions like other things remaining the same. Managerial
economics tries to deal with complex business problems and tries to find
solutions by applying various economic tools and techniques. It identifies
the problem, collects relevant date, processes data, draws relevant
conclusions, evaluates the alternatives and finally takes decision.
Decision making is the most critical part of management
since it is related with selection of best course of action .

19.  Forward planning refers to formulating plans for the future
to implement the decision taken e.g. once a decision is made
about a particular product or goal to be achieved then plans
regarding production, pricing, technology, capital and raw
material are prepared to achieve the goal.
 The function of decision making and forward planning is very
complex since the present world is full of risks and
uncertainties. Before taking any decision management has
to consider past records, current information and future
predictions The major objective is to achieve ultimate
efficiency in the whole business process for profit
maximization.

20.  Price and Output decision
 Demand estimation
 Choice of technique
 Advertising decision
 Long run production and investment
decision

21.  Establishing Objective
maximize profits, sales or growth of the firm
 Defining the Problem
eg: cause of declining profits of a textile company could be wrong pricing policy or bad
labour management relations or use of outdated technology
 Identifying possible alternative courses of action
eg : a. updating & replacing the old machinery
b. building a new plant with latest machinery
 Evaluation of alternative courses of action
Due consideration to legal & social environment ,financial, technological, infrastructure &
input constraints
 Implementing & monitoring the final decision
to ensure that expected results are obtained ,else corrective action
DM is a continuous process – any change in operating environment would necessitate
corresponding changes in the course of action

22. The scope of managerial economics is narrower than traditional
economics. It includes the following:
 Demand Analysis: Managerial economics deals with demand and
supply, the factors affecting them, the laws related to them, elasticity
and exception of this law, forecasting.
 Production & Cost analysis: To earn profits certain amt of goods need to
be produced, thus certain costs have to be incurred. Since managerial
economics is a firm's economics it deals with problems and issues related
to cost & production like production function so that AC are minimum,
laws relating to operations in the short-run and in the long-run.
 Pricing practices and policies : Prices affect demand. Pricing depends
on market conditions, pricing methods & policies etc.

23.  Profit Management: A firm's activities are directed towards
profit generation in the form of major or minor objective,
hence managerial economics also deals with what is profit,
by what factors it is influenced, how to calculate it etc.
 Capital Management: Capital is the foundation of any
business. This deals with selection, viability, efficiency &
issues of under & over capitalization.
 Environmental Issues : The management of a firm does not
have any control over government policies, economic
trends , foreign trade , social factors ,social organizations
,political systems etc. Therefore it needs to adjust plans
,policies etc of the firm to these factors.

24.  In general Managerial Economics can be used by the goal oriented
managers in two ways :
 Principle of Management Economics provide a framework for
evaluating whether resources are being allocated efficiently with a
firm for e.g. it helps the manager if profit could be increased by
reallocating labour from one production line to another.
 Secondly these principles helps the manager to respond to various
economic signal for e.g. given an increase in the price of input, the
manager can decide to change the technology.

25. ▪ Sales forecasting
▪ Industrial Market Research
▪ Economic analysis of competing companies
▪ Production Programme
▪ Environment forecasting
▪ Investment appraisal

26. ▪ What should be a product mix?
▪ Which production technique to be adopted?
▪ Level of output
▪ Price of Product
▪ How to allocate an advertisement funds between
different mode

27.  The concept of opportunity cost has been derived
from alternative uses of scarce resources. The
costs involved in any decision consist of the sacrifice
of alternatives required by that decision.
 It means opportunity cost is the cost of foregone
opportunity i.e. the revenue expected to be earned
if put to an alternative use
 OC is nil if no sacrifice involved

28.  Micro Economics
 Macro economics

29.  Individual decision-making and smaller components
 of the economy of the economy
 Individual income
 Individual consumption
 Individual savings
 Individual investment
 Output of an individual firm
 Individual expenditure
 Price of any product/factor
 Demand/supply of any
 product or a factor
 Employment/unemployment
 in any industry
 Export or import of a given
 product/factor
 Output of an industry

30.  Decision-making at the national level and aggregate
 economic variables
 National income
 Aggregate consumption
 National savings
 Aggregate investment
 National output
 General price-level
 Inflation and deflation
 Aggregate employment
 or unemployment
 Aggregate exports
 and imports of a country