This document provides an introduction to managerial economics. It defines managerial economics and discusses its scope and relationship to other disciplines. Basic economic concepts for decision making like opportunity cost, incremental principle, and discounting principle are covered. The roles and responsibilities of managerial economists in business are described, including assisting with planning, analysis, and advising management. The document also discusses economic objectives of firms, scarcity of resources, efficiency, and the role of government in economic development through fiscal and monetary policy.

1. UNIT-1
30211MG103
Economic Analysis for Business

2. INTRODUCTION
 Introduction: definition of Managerial
Economics: Scope of Managerial
Economics and other disciplines-
decision making - Basic economic
concepts in decision making-
Objectives of a firm– the role and
responsibility of managerial economist
in the business.

3.  The knowledge of economics is useful
for everyone-individuals, households,
business units, institutions as well as
government.

4.  Economic analysis aims to determine
how effectively the economy or
something within it is operating. For
example, an economic analysis of a
company focuses mainly on how much
profit it is making. Economists say that
economic analysis is a systematic
approach to find out what the optimum
use of scarce resources is.

5.  Adam Smith (1776) “ An Inquiry into Nature
and Causes of Wealth of Nations”.
Explanation:
 Alfred Marshall’s Neoclassical (1890) “ a study
of man in ordinary business of life”
 Lionel Robbins (1932) Modern definition “
Economics as a science dealing with human
behaviour, as a relationship between multiple
ends and scarce means that have alternative
uses.

6.  Samuelson’s Modern Growth-Oriented :
“ Economics is the study of how people
and society end up choosing, with or
without the use of money, to employ
scarce productive resources that could
have alternative uses to produce
various commodities over time and
distributing them for consumption, now
or in the future, among various persons
or group in society. It analyses the cost
and benefits of improving patterns of
resource allocation”.

7.  Gross Domestic Product (GDP) is used to provide a
snapshot of a country’s monetary market value of
all final goods and services that the country has
made during a specific period. GDP helps to
provide a country’s economy using expenditures,
production, and incomes.
 So, what are the largest economies in the world?
According to the International Monetary Fund,
these are the highest-ranking countries in the world
in nominal GDP for 2020:

8. 12 Brazil
13.Australia
14.Spain
15.Indonesia
16.Mexico
17.Netherlands
18.Switzerland
19.Saudi Arabia
20.Turkey
 Rank
 Country
1. United States
2. China
3. Japan
4. Germany
5. United Kingdom
6. India
7. France
8. Italy
9. Canada
10. South Korea
11. Russia

9. Scope of Economics
 Economics is a Science
For quite a long time there was controversy among economists as to whether it
is a science or an art. The members of the English classical school, such as
Adam Smith, T. R. Mathus and David Ricardo, held the view that it was a pure
science whose task was just to explain the cause of economic phenomena such
as unemployment, inflation, slow growth or even trade deficit.
 Socio Economics
Socioeconomics (also known as social economics) is the social science that
studies how economic activity affects and is shaped by social processes
 Economic Activity
 Micro Economics
Microeconomics examines individual economic activity, industries, and their
interaction
 Macro Economics
Macroeconomics focuses on the performance of economies – changes in
economic output, inflation, interest and foreign exchange rates, and the balance
of payments. Poverty reduction, social equity, and sustainable growth are only
possible with sound monetary and fiscal policies.
 Public Economics
 Development Economics

10. Scope of Economics (continue)
 Health Economics-production and consumption of
health and healthcare
 Environmental Economics-environmental policies and
analyze the effects and merits of existing or proposed
policies.
 Urban and Rural Economics
 Welfare Economics
 Economic planning
 Monetary Economics-economics that studies the
different competing theories of money
 Agricultural Economics
 Gender Economics-Gender equality can
promote economic growth.

12. Flow in an Economy

13. Scarcity of Resources and Efficiency
 Scarcity of resources is the most fundamental economic
problem.
 What is scarcity in economy?
Scarcity is one of the key concepts of economics. It
means that the demand for a good or service is greater
than the availability of the good or service.
 Natural resource such as air, water and sunlight are
abundant? These resources creates a problem? Or No
problem!!
 Supply of natural resources such as land and natural gas,
and minerals, such as iron, copper, and Uranium is
limited within a country ? or Unlimited?
 Scarcity of resources is the root of all problems behind
the satisfaction of human want.

14. Efficiency
 The term efficiency is concerned with
the optimal Production, consumption
and distribution of the scarce resources

15. Efficiency
 The ‘efficiency’ Concerned with the
optimal production, consumption and
distribution of the scarce resources.
 Productive Efficiency
 Technical Efficiency
 Pareto Efficiency/ Economic Efficiency
 Allocative Efficiency (M.C)
 Distributive Efficiency (Who needs)

16.  Productive efficiency: It occurs when
maximum number of goods and
services are produced within a given
amount of inputs of resources.
 Technical Efficiency: is the
effectiveness with which a given set of
inputs is used to produce an output. A
firm is said to be technically efficient if it
produces maximum output from
minimum quantity of inputs such as
labour, capital and technology.

17. Pareto Efficiency/ Economic Efficiency :
Pareto efficiency is a situation where
resources are distributed in the most
efficient way. It is defined as a situation
where it is not possible to make one party
better off without making another party
worse off.
Allocative Efficiency: shows how well
economic resources are allocated to
satisfy economic wants.
Distributive Efficiency: is concerned with
allocating goods and services according to
who needs those most.

18. Decision Making
Business decision making is
essentially a process of selecting the
best out of alternative opportunities open
to the firm. The steps below put
managers analytical ability to test and
determine the appropriateness and
validity of decisions in the modern
business world.

19. Economic Problems
1. What to Produce and in What
Quantities? 2. How to Produce these
Goods?
3. For whom is the Goods Produced?
4. How Efficiently are the Resources
being Utilized?
5. Is the Economy Growing?.

20. Steps in Decision making
process
1. Establish objectives
2. Specify the decision problem
3. Identify the alternatives
4. Evaluate alternatives
5. Select the best alternatives
6. Implement the decision
7. Monitor the performance

21. Basic Economic Tools in Managerial
Economics for Decision Making
 Opportunity cost
 Incremental principle
 Principle of the time perspective
 Discounting principle
 Equi-marginal principle

22. Opportunity Cost Principle
 By the opportunity cost of a decision is meant
the sacrifice of alternatives required by that
decision. For e.g.
 The opportunity cost of the funds employed in
one’s own business is the interest that could be
earned on those funds if they have been
employed in other ventures.
E.g: The opportunity cost of holding Rs. 1000 as cash in hand for
one year is the 10% rate of interest, which would have been
earned had the money been kept as fixed deposit in bank.

23. 2. Incremental Principle
 It is related to the marginal cost and
marginal revenues, for economic
theory.
 Incremental concept involves
estimating the impact of decision
alternatives on costs and revenue,
emphasizing the changes in total cost
and total revenue resulting from
changes in prices, products,
procedures, investments or whatever
may be at stake in the decisions.

24. 3. Principle of Time Perspective
 “a decision should take into account
both the short run and long run
effects on revenues and costs and
maintain the right balance between
long run and short run perspective”

25. 4. Discounting Principle
 One of the fundamental ideas in
Economics is that a rupee tomorrow is
worth less than a rupee today.
Suppose a person is offered a choice to make between a
gift of Rs.100/- today or Rs.100/- next year. Naturally he will
chose Rs.100/- today. This is true for two reasons-

26. 5. Equi – Marginal Principle
 This principle deals with the allocation of
an available resource among the
alternative activities. According to this
principle, an input should be so allocated
that the value added by the last unit is the
same in all cases. This generalization is
called the equi-marginal principle.

27. Economic objectives of firms
 Profit maximisation
 Sales maximisation
 Increased market share/market
dominance
 Social/environmental concerns
 Profit satisfying
 Co-operatives

28. Cont...

29. Roles and responsibility of
managerial economist in the
business.
1. He studies the economic patterns at macro-
level and analysis it’s significance to the
specific firm he is working in.
2. He has to consistently examine the
probabilities of transforming an ever-
changing economic environment into
profitable business avenues.
3. He assists the business planning process of
a firm.
4. He also carries cost-benefit analysis.

30. 5. He assists the management in the
decisions pertaining to internal
functioning of a firm such as changes
in price, investment plans, type of
goods /services to be produced,
inputs to be used, techniques of
production to be employed,
expansion/ contraction of firm,
allocation of capital, location of new
plants, quantity of output to be
produced, replacement of plant
equipment, sales forecasting,
inventory forecasting, etc.

31. 6. In addition, a managerial economist
has to analyze changes in macro-
economic indicators such as national
income, population, business cycles,
and their possible effect on the firm’s
functioning.
7. He is also involved in advising the
management on public relations,
foreign exchange, and trade. He
guides the firm on the likely impact of
changes in monetary and fiscal policy
on the firm’s functioning.

32. 8. He also makes an economic analysis of
the firms in competition. He has to
collect economic data and examine all
crucial information about the
environment in which the firm operates.
9. The most significant function of a
managerial economist is to conduct a
detailed research on industrial market.
10. In order to perform all these roles, a
managerial economist has to conduct an
elaborate statistical analysis.

33. 11. He must be vigilant and must have
ability to cope up with the pressures.
12. He also provides management with
economic information such as tax
rates, competitor’s price and product,
etc. They give their valuable advice to
government authorities as well.
13. At times, a managerial economist
has to prepare speeches for top
management.

34. Role of Government in economic
development
Direct Role:
a) Agricultural Growth
b) Industrial Growth
c) Development of Socio-Economic Infrastructures
d) Efficient Utilisation of Resources
e) Maintain Law and Order
f) Social Distributive Justice
g) Progressive Taxation
h) Economic Subsidy
i) Control of Monopoly

35. Cont...
Indirect Role
a) Fiscal Policy: All the government policies
related with public revenue and
expenditures, i.e., taxes and subsidies, are
related with fiscal policies. With the proper
implementation of these policies the state
tries to raise economic development of the
country.
It helps to perform following functions:
(i) To control inflation,
(ii) To increase capital formation,
(iii) To maintain equalities of income and wealth;
(iv) To stabilize market

36. Monetary Policy:
The government along with the Central Bank
with the help of this policy controls the money
market. In India, Reserve Bank of India (RBI)
along with all the commercial banks tries to
control and regulate the money supply.
During the time of inflation, i.e., excessive rise in
price level, the government with the help of RBI
checks the money supply and credit creation.
 Price Measures
 International Trade Policy

37. Policy rates
 Repo Rate : (5.40% on 25/9/19)
Repo rate is the rate at which the central bank of a
country (Reserve Bank of India in case of India)
lends money to commercial banks in the event of
any shortfall of funds.(Repo rate refers to the rate
at which commercial banks borrow money by
selling their securities to the Central bank of
our country)
Reverse Repo Rate : (5.15% on 25/9/19)
Reverse repo rate is the rate at which the
central bank of a country (Reserve Bank of
India in case of India) borrows money from

38. Cont..
Marginal Standing Facility Rate : (5.65%
on 25th Sep 2019)
Marginal standing facility (MSF) is a window
for banks to borrow from the Reserve Bank
of India in an emergency situation when
inter-bank liquidity dries up completely.
Bank Rate : 5.65%
Bank rate is the interest rate at which
a nation’s central bank lends money to
domestic bank, often in the form of
sort-term role.

39. Reserve Ratios
Cash Reserve Ratio (4% as on 25th Sep 2019:
CRR is the amount of funds that banks have to
maintain with the RBI at all times.
Statutory Liquidity Ratio 18.75:
It is the government term for the reserve requirement
that the commercial banks in India are required to
maintain in the form of cash, gold reserves, RBI
approved securities before providing credit to the
customers.