Managerial

Economics

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Conception of Economics 2
WHAT IS ECONOMICS?

Unlimited wants and scarce resources

Science [methodology] or Art [Application]…?

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Introduction
The word Economics is derived from the Greek word “OKIOS NEMEIN” meaning
household management

Man is a bundle of desires. Goods and services satisfy these wants. But almost all
the goods are scares

To produce goods factors of production are needed and these are all scarce
WHAT IS ECONOMICS?
Father of Economics

Economics is
the study of
nature and
uses of national
wealth.

Adam Smith (1723-1790)

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THE STUDY OF ECONOMICS
Economics is the study of how individuals and societies choose to use the scarce

resources that nature and previous generations have provided.

It is the study of economic problems. Wants are motive for economic activity. Wants

leads to efforts and which lead to satisfaction

TYPES OF ECONOMIC ANALYSIS
A. Micro (individual consumers and firms)
Macro (Aggregates- Industry, not firm)

B. Positive (factual statements- “What is”) – The distribution of

income in India is unequal.
Normative (Value judgments- “What ought to be”) – The
distribution of income in India should be equal.

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TYPES OF ECONOMIC ANALYSIS
C. Time period

 Short run -A time period not long enough for

consumers and producers to adjust to a new
situation- K/L
 Long run- Planning horizon- A time period long
enough for consumers and producers to adjust to a
new situation- All inputs can be varied- K and L-
Whether to change product lines, build new plant
etc.
Conception of Managerial Economics 9
76% of senior executives say that it is important they have the

knowledge and skills to respond to trends like resource scarcity, the

low carbon economy and doing business in emerging markets

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What is Managerial Economics???

It is the integration of economic principles with business management

practices

It is essentially applied economics in the field of business

management.
 Managerial Economics- Meaning

“Application of economic theory and tools of analysis of

decision science to examine how an organization can
achieve its objectives most efficiently”
- Salvatore

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DEFINITIONS: MANAGERIAL ECONOMICS
Integration of Economic theory with business practice for purpose of
facilitating decision making and forward planning by management

- Spencer & Siegelman

It is concerned with the application of economic concepts and economics to

the problems of formulating rational decision making

-Mansfield
Users of Managerial Economics

Thank you sir

I learned many
economic
concepts from
you. It’s
helping me a
lot
Economist
Manager

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WHY DO MANAGERS NEED TO KNOW ECONOMICS?

Economic theories contribute in building analytical models, which help to

recognize the structure of managerial problems

Economic theories do enhance analytical capabilities of business analyst

They offer clarity to various concepts used in business analysis, which

enables the managers to avoid conceptual pitfalls
DECISION PROBLEMS FACED BY FIRMS

What should be the price of the product?

What should be the size of the plant to be installed?

How many workers should be employed?

What is the optimal level of inventories of finished products, raw

material, spare parts, etc.?

What should be the cost structure?

KINDS OF ECONOMIC QUESTIONS
1. What to Produce? (Micro)
2. How to Produce? (Micro)
3. How much to produce? (Micro)
4. For Whom to Produce? (Micro)
5. Are Resources Used optimally? (Micro)
6. Are Resources fully employed? (Macro)
7. Is the economy Growing? (Macro)
8. In what phase of business cycle is the economy? (Macro)

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CONCEPTUALIZATION OF ME
Economics –
Theory &
Methodology

Managerial
Economics –
Application of
economics to
solve business
problems
Business
Management
– Decision
Problems

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RELATIONSHIP BETWEEN ECONOMICS & MANAGEMENT

Business Management
Economics theory
Decision Problems

Managerial Economics-
Application of Economics
to
solving business problems

Optimal Solutions to
Business problems
MANAGERIAL ECONOMICS AND BUSINESS DECISIONS
SCOPE
DECISION MAKING PROCESS
5 Stage Model of Decision Making Process

Identify
Define the possible Implement
problem solutions the decision

Determine Select the best

the possible
objective solution

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Conventional Decision Rules
[Principles relevant to managerial decisions]

A. Concept of Scarcity

◦Human wants are unlimited, but human capacity to satisfy

such wants is limited.
Resources

Demand
for
Resources

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…Conventional Decision Rules
[Principles relevant to managerial decisions]

B. Concept of Opportunity Cost

◦ It is the benefit foregone from the alternative that is not selected.

◦ The economist has to make rational choice in all aspects of

business by sacrificing some of the alternatives, since resources
are scarce and wants are unlimited.

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…Conventional Decision Rules
[Principles relevant to managerial decisions]

C. Production Possibility Curve (PPC)

◦ PPC is a graph that shows the different combinations of the

quantities of two goods that can be produced (or consumed) in an
economy, subject to limited availability of resources.

Individual
Society
…Conventional Decision Rules
[Principles relevant to managerial decisions]

D. Concept of Margin

◦ The Marginality deals with a unit increase in cost or revenue or

utility.

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ROLE OF ECONOMICS
What is the role of Economics in Business?
Costs, prices, output, compensation, strategic
behaviour and SO ON……….

The Big Picture- Whose job is this?

Economic theory forms the basis for different
management areas such as accounts, finance,
marketing, systems and operations.
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…Role of Economics
A manager has to deal with problems pertaining to
the individual firm as well as domestic and global
environment.

Microeconomics: Deals with individual unit

Macroeconomics: Deals with aggregates

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…Role of Economics
MICROECONOMICS
Theory of demand and supply- consumer behavior, demand theory,
demand forecasting and factors affecting individual and market
supply- Helps in choice of commodities for production.

Theory of Production: Production function and laws of returns to

scale etc- gives an idea about I/O relations, input requirement size
of firm, technology choice of output- Helps producer to plan
production, cost and budget.
…Role of Economics
Market Analysis: helps understand degrees of
competition, pricing-output decisions, price
discrimination, monopoly power, advertising

Profit Analysis: Provides logical analysis of break-even

point, emergence of profits, profit-maximizing
output, dealing with risk and uncertainty

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…Role of Economics
Macro economics variables and policies impact business

@ Behaviour of macro economic indicators: GDP, GNP, GDCF(Gross

Domestic Capital Formation), HDI (Human Development Index)
etc.
@ Business Cycles – Inflation- Employment
@ Fiscal Policy: Taxes and Govt. Expenditure
@ Monetary Policy: Savings and Investment
@ Foreign Trade: Imports and exports, Exchange rate, trade policies
and capital flows
Role of Economics in Business
Economics is a tool, means to an end:
To help efficient allocation and achieve business
objectives

To optimizing resources - Maximise goals, minimize

costs under constraint
Logic, tools and techniques of economics to analyse
business problems, evaluate business options and
opportunities with a view to arriving at an appropriate
business decision.
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ROLE OF MANAGERIAL ECONOMIST
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Role of Managerial Economist
Role Of Managerial Economist: To decide
What to produce?
Where?
How ?
How much?
Allocation of resources
For whom to produce?
Which price to sell?
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 …Role of Managerial Economist
Plan and control business operations-
Cost minimization
Profit maximization ??
Managing competition
Economic intelligence
Market research

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 …Role of Managerial Economist
Uncertainty & Risk management

 Forecast change in environment and policies- domestic and

international
 To manage change in global scenario
 Everything comes at a price- quality is not free

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Growing Challenges to the Managerial
Economist
A) Globalization
What is Globalization ?

People-goods-services- communication- Finance- Ideas

…Growing Challenges to the Managerial
Economist
Global corporations
- Research & production facilities across countries
- Global markets
- Global Finance
- Employment Diversity
- Global work culture

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…Growing Challenges to the Managerial
Economist

 Increased competition

 Increased Opportunity

 Tastes converging internationally?

 Customizing to local tastes

Growing Challenges to the Managerial
Economist
B) Computerization and Technology
 Easier model-building and simulation
 Quick and easier data analysis
 Rapid spread of information
 Internet changing both buyers and sellers
 Videoconferencing- saving cost and time
 Paperless administration
 Speed of dispatch, lower inventories, less waste
WRAP UP POINTS…..
1.Who sells the largest number of cameras in
India?
2. Who has the biggest revenue from music
business in India?
3. Who gained the most when business of
British Airways was affected due to the 2008
recession?

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Answers to the Lessons?
1: Samsung (whose main line of business is NOT
cameras but cell phones)
2: Airtel (which is not in music business)- by selling
caller tunes makes more money than HMV etc
3: videoconferencing and telepresence services of
HP and Cisco.

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What are the Lessons?

Nokia missed the Smartphone bus. Apple's I phone

and Google's Android are making life difficult for Nokia.

But Google is not a mobile company

Nokia is a global behemoth, with 35% of the world’s
handset market.

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What are the Lessons?

Products have vanished from the market in the past 20

years:
◦ Black & white TVs
◦ Fountain pens
◦ Type writers
◦ Alarm Clocks

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What are the Lessons?
Lessons by the Managerial economist:
Today's competitor is obvious. Tomorrow's is
not- Think beyond conventional framework;
think beyond the obvious
Need to identify competition (present)
Need to foresee competition (Future)
Need to beat competition (Strategies)

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