Managerial Economics Unit I: Introduction: Naba Deka

Managerial Economics
Unit I: Introduction
Naba Deka
Lecture 1
What is Economics?
The word Economy derived from the Greek word “okios” which
means household.
the branch of knowledge concerned with the production and
consumption of goods & services, and transfer of wealth
Human wants are unlimited
Resources available to satisfy these wants are scarce / limited
 People wants to maximize their gains
 Economic agents / society have some economic problems
because of scarcity of resources
They need to choose scarce resources among alternatives
(scarce resources) based on choice and valuation of alternatives
Nature & Scope of Managerial Economics
Managerial economics is a science applied to decision making.
It bridges the gap between ‘economic theory’ and ‘managerial
or business practice’. It concentrates more on the method of
reasoning. In short, managerial economics is “Economics
applied in decision making”.
Managerial economics refers to those aspects of economic
theory and application which are directly relevant to the
practice of management and the decision making process
within the enterprise. Its scope does not extend to
macro-economic theory and the economics of public policy
which will also be of interest to the manager. While considering
the scope of managerial economics we have to understand
whether it is positive economics or normative economics.
Economics has two main branches—micro-economics and
macro-economics.
Micro-economics:
‘Micro’ means small. It studies the behaviour of the individual units
and small groups of such units. It is a study of particular firms,
particular households, individual prices, wages, incomes, individual
industries and particular commodities. Thus micro-economics gives a
microscopic view of the economy.
The micro-economic analysis may be undertaken at three
levels:
(i) The equalization of individual consumers and produces;
(ii) The equalization of the single market;
(iii) The simultaneous equilibrium of all markets. The problems of
scarcity and optimal or ideal allocation of resources are the central
problem in micro-economics.
Macro-economics:
‘Macro’ means large. It deals with the behaviour of the large aggregates in the economy. The
large aggregates are total saving, total consumption, total income, total employment, general
price level, wage level, cost structure, etc. Thus, macro-economics is aggregative economics.
It examines the interrelations among the various aggregates, and causes of fluctuations in
them. Problems of determination of total income, total employment and general price level
are the central problems in macro-economics.
Macro-economies is also related to managerial economics. The environment, in which a
business operates, fluctuations in national income, changes in fiscal and monetary measures
and variations in the level of business activity have relevance to business decisions. The
understanding of the overall operation of the economic system is very useful to the
managerial economist in the formulation of his policies.
Positive versus Normative Economics:
A positive science is concerned with ‘what is’. Robbins regards economics as a pure science of what is, which is not
concerned with moral or ethical questions. The economist has no right to pass judgment. Positive economics is
objective and fact based, while normative economics is subjective and value based. Positive economic statements do
not have to be correct, but they must be able to be tested and proved or disproved. Normative economic statements
are opinion based, so they cannot be proved or disproved.
The manufacture and sale of cigarettes and wine may be injurious to health and therefore morally unjustifiable, but
the economist has no right to pass judgment on these since both satisfy human wants and involve economic activity.
Normative economics is concerned with describing what should be the things. It is, therefore, also called
prescriptive economics. What price for a product should be fixed, what wage should be paid, how income should be
distributed and so on, fall within the purview of normative economics?
For example, the statement, "government should provide basic healthcare to all citizens" is a normative economic
statement. The statement, "government-provided healthcare increases public expenditures" is a positive economic
statement, because it can be proved or disproved

It should be noted that normative economics involves value judgments. Almost all the leading managerial
economists are of the opinion that managerial economics is fundamentally normative and prescriptive in nature.
Deductive vs Inductive approaches
Deduction means reasoning or inference from the general to the
particular or from the universal to the individual. The deductive method
derives new conclusions from fundamental assumptions or from truth
established by other methods. It involves the process of reasoning from
certain laws or principles, which are assumed to be true, to the analysis
of facts. Then inferences are drawn which are verified against observed
facts
Induction “is the process of reasoning from a part to the whole, from
particulars to generals or from the individual to the universal.” Bacon
described it as “an ascending process” in which facts are collected,
arranged and then general conclusions are drawn.
Please read about the topics from book
Managerial economics: Science of directing scarce resources to manage more
effectively & efficiently (Being effective is about doing the right things, while being
efficient is about doing things right.)
Resources – financial, human, physical
Management of customers, suppliers, competitors, internal organization
Organizations – business, nonprofit,
household & Individuals
Thus, economics is the study of how economic agents or societies choose to use
scarce productive resources that have alternative uses to satisfy wants (needs)
which are unlimited and of varying degree of importance
“the integration of economic theory with business practice for the
purpose of facilitating decision making and forward planning by
management.”
Managerial Decision
Problems
Economic theory Decision Sciences

Microeconomics, ,Mathematical Economics,
Macroeconomic Econometrics
MANAGERIAL ECONOMICS
Application of economic theory
and decision science tools to
solve managerial decision
problem
OPTIMAL SOLUTIONS TO MANAGERIAL

DECISION PROBLEMS
Coca Cola and Pepsi Co -World’s two major soft drink manufacture .
Manufacture only Concentrate, ships to network of bottlers . 1999,
Pepsi bottling group following Coca Cola bottling Company.
November 1999: Coca Cola announced increase it the price of
concentrate by 7%.
What Managerial economics will do???
Find answers to
If coke rises its price by 7% should Pepsi follow?
How would the price increase affect consumer demand?
How should advertising expenditure be related to pricing?
Was it correct for Pepsi to follow coca cola in separating bottling
business from manufacturing concentrate?

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Managerial Economics

Economic theory Decision Sciences

OPTIMAL SOLUTIONS TO MANAGERIAL

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