Difference between Managerial Economics and Economics?

1) Managerial Economics is micro in character and Pure Economics is both micro and macro in character
2) Managerial Economics study only practical application of the Economic principle to the problem of firm and Pure
Economics deals with the study of principles itself
3) Managerial Economics deals with the Economic problems of the firm while Pure Economics deals with
Economic problems of both firm and individuals
4) Managerial Economics deals with profit theory only Pure Economics deals with all distribution theories like rent,
wages, interests, and profits.
Opportunity Cost Definition
Definition: Opportunity cost is the next best alternative foregone.
The fundamental problem of economics is the issue of scarcity. Therefore we are concerned with the optimal use and
distribution of these scarce resources. Wherever there is scarcity we are forced to make choices. If we have 20 we
can spend it on an economic textbook or we can enjoy a meal in a restaurant.
If we spend that 20 on a textbook, the opportunity cost is the restaurant meal we cannot afford to pay.
Production Possibility Frontier and opportunity cost

Moving from Point A to B will lead to an increase in services (22-25). But, the opportunity cost is that
output of goods falls from 15 to 11.

Therefore, the opportunity cost of increasing consumption of services is the 4 goods foregone

At point C, the economy is inefficient. We can increase both goods and services without any opportunity cost.
Examples of Opportunity Cost
The Cost of War. If the government spends $870bn on a war, it is $870bn they cannot spend on education, health
care or cutting taxes / reducing budget deficit.
Spending on new road. If the government build a new road, then that money cant be used for alternative spending
plans, such as education and health care.

Time
If you have 12 hours at your disposal during the day, you could spend these hours in work or leisure. The
opportunity cost of spending all day watching TV, is that you are not able to do any study during the day.

This shows a trade off between working and hours spent in leisure. If you enjoy 2 hours more leisure, the
opportunity cost is 2 hours lost for studying.
Actual Opportunity Cost
Suppose you buy a new car for 10,000. After three years it has depreciated in value to 3,000. What is opportunity
cost of deciding to keeping the car?
The opportunity cost of keeping the car is the 3,000 you could have got for selling the car. The price you bought it
for is not relevant here
Importance of Opportunity Cost

Do you support the repeal of the estate tax that means you pay tax on inherited money?

Do you support the repeal of the estate tax if you have to pay higher rate of VAT?

Opportunity cost and comparative advantage.

The theory of comparative advantage states that countries should specialise in producing goods where they have a
lower opportunity cost.
Opportunity cost and a free good
If there is no opportunity cost in consuming a good, we can term it a free good. For example, if you breathe air, it
doesnt reduce the amount available to other people there is no opportunity cost.
Price ceiling & floor
Price ceiling is set below the equilibrium price (maximum price), basically lowering the price of certain goods in
order to make these goods affordable for consumers.
Price floor is set above the equilibrium price (minimum price), increasing the price of certain goods in order to

protect the interest of certain unproductive sectors(producers).

In short, price ceiling is the maximum price set by the government to protect the consumers while price floor is the
minimum price also set by the government but to protect the producers.