Introduction to Managerial

Economics
The Central Idea

Def:- Economics is the Study of allocation of scarce resources, among

alternative uses.
1. Resources are always scarce.
2. They are not only scarce, but also have alternative uses.
3. Optimum allocation is required
Allocation problems are faced by individuals, Organizations (Both
profit making and non- profit making) and Nations also.
Individuals / organizations (profit/non profit)/nations attain their
goals, by optimum use of limited resources.

Economics deals with:

1. How an individual consumer allocates his
scarce resources among alternative uses? To
attain Maximization of satisfaction
2. How an individual firm/Industry attains
equilibrium? To attain profit maximizing.
3. How a country reach equilibrium? To welfare
maximization.

What is Microeconomics and Macroeconomics ?

Ragnor Frisch : Micro means Small and Macro means
Large
Microeconomics deals with the study of individual behaviour.
It deals with the equilibrium of an individual consumer,
producer, firm or industry.
Macroeconomics on the other hand, deals with economy wide
aggregates.
Determination of National Income Output, Employment
Changes in Aggregate economic activity, known as Business
Cycles
Changes in general price level , known as inflation, deflation
Policy measures to correct disequilibrium in the economy,
Monetary policy and Fiscal policy

What is Managerial Economics?

Managerial Economics is economics applied in decision making. It is a
special branch of economics bridging the gap between abstract theory
and managerial practice Willian Warren Haynes, V.L. Mote, Samuel Paul
Integration of economic theory with business practice for the purpose of facilitating
decision-making and forward planning - Milton H. Spencer
Managerial economics is the study of the allocation of scarce resources available to a
firm or other unit of management among the activities of that unit
Willian Warren Haynes, V.L. Mote, Samuel Paul

OPPORTUNITY COST
DEFINED
The opportunity cost of doing something is what
you must give up in order to do it.
The cost of a pizza is what you must give up to consume
it, which in this case is easily computed in money.
The cost of a college education includes both money and
other foregone alternatives. For example, the cost of a
year at institute includes not only tuition and books, but
the income you could have earned working on a full time
job.
The cost of attending a cricket game includes the value
of the time you could have spent studying economics.

In case of many choices, opportunity cost of choice

is the loss of NEXT BEST ATLERNATIVE which is not
chosen.

Scarcity and Choice for the

Economy as a whole
Production possibilities
Increasing opportunity costs
Production Possibilities Curve (PPC)

Production Possibilities
Alternative combinations of
production of various goods that are
possible, given the economys
recourses. Production Possibilities
Movies

Computers

25,000

100

24,000

200

22,000

300

18,000

400

13,000

500

Production Possibilities
Curve/Frontier
Efficient

Computers (thousands)

25

A
Impossible
with given
economic
resources

Under utilization of available

resources (inefficient)

I
C
Movies (hundreds)

Shift
in PPC

Growt
h

Computers (thousands)

25
Earlier
Impossible
now
underutilization
Under utilization of available
resources (inefficient)

Movies (hundreds)

J
5

Three Fundamental questions

What to produce
How to produce
For whom to produce

Circular Flow of Economic Activity

Two Sector Economy

Five Sector Economy