UNIT – 1: INTRODUCTION TO BUSINESS ECONOMICS

TOPIC – 1: INTRODUCTION TO ECONOMICS

ECONOMICS
The word economics has been derived from the word “Oikon + Nomos” which means “laws of
household”. Hence it can be inferred that economics describes about the laws or principles or
standard procedures to manage the household within the scarce resources available. Economics is
the study of how people choose to use resources. Resources include the time and talent people
have available, the land, buildings, equipment, and other tools on hand, and the knowledge of how
to combine them to create useful products and services.

DEFINITION OF ECONOMICS
In general "Economics is the study of how individuals and groups make decisions with limited
resources as to best satisfy their wants, needs, and desires".

Definition 1: According to Alfred Marshall - Principles of Economics

“Economics is the study of mankind in the ordinary business of life”.
So economics is
 Study of mankind: Study of human behaviour, attitude or psychology
 May be behaviour of an individual or group behaviour
 Business: In narrow sense: day to day economic activities
 In broad sense: business is the actual business done by the organization.
Business organizations have to make three types of the decisions. They are
 Production decisions
 Exchange decisions
 Consumption decisions
 Production decisions involve:
 What to produce?
 How much to produce?
 How to produce?
 Exchange decisions involve:
o At what price organization should sell the products to thecustomers?
o To whom it must sell?
 Consumption decisions involve:
o What are resources required to be consumed?
o How much quantity of each resource is required to beconsumed?
Thus, from the above explanation it can be concluded that
 Economics is the study of behavior of the individual in his day to day economic affairs.
 Economics is the study of behavior of organization (group of individuals) at the time of making
economic decisions like production, exchange & consumption decisions.

Definition 2: Lionel Robbins - An Essay on the Nature and Significance of EconomicScience.

“Economics is a social science concerned with allocation of scarce resources among the competing
ends”.
 Science : Because economics involves systematic study.
 Social Science : Because economics involves systematic study of Social elements (human
beings & their behavior).
 Scarce means : All the resources available are scarce. Ex: money is scarce, land is scarce
etc.
 Competing ends: These resources can be put for several uses. Suppose a farmeris having
10 acres of land if he allots 10 acre, for cultivation of Rice, he cannot allot it for some other
purposes. So the purposes are competing with each other.
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Thus, from the above explanation it can be concluded that “Economics is the study of human behavior
in allocation of scarce resources among the competing ends”.

CLASSIFICATION OF ECONOMICS
On the basis of Scope of the study, economics is classified into two categories. They are:
 Micro Economics: ‘Micro’ means small. It studies the behaviour of the individual units and
small groups of 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.
 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.

On the basis of whether the economic concept is used in any field or not, economics is classified
into two categories. They are:

 Pure Economics: It is the economics that focuses on developing the models by examining the
relationships between various economic variables. Pure Economics focuses only on extending
the boundaries of the knowledge about a particular aspect in the field of economics. The
concepts or models are developed with no necessarily immediate application to any of the
particular aspect and these modelsare developed on the basis lot of assumptions.
 Applied Economics: It is the branch economics that focuses on applying the economic
concepts and models for solving a particular problem in any of the chosen field. Applied
Economics doesn’t focus on developing the economic models rather focus on application of the
developed models for solving the economic problems.

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 TOPIC – 2: BUSINESS ECONOMICS

MANAGERIAL ECONOMICS (OR) BUSINESS ECONOMICS

Managerial economics is a discipline which deals with the application of economic theory to
business management. It deals with the use of economic concepts and principles of business
decision making. Formerly it was known as “Business Economics” but the term has now been
discarded in favor of Managerial Economics. Managerial Economics may be defined as the study of
economic theories, logic and methodology which are generally applied to seek solution to the
practical problems of business. Managerial Economics is thus constituted of that part of economic
knowledge or economic theories which is used as a tool of analyzing business problems for rational
business decisions. Managerial Economics is often called as Business Economics or Economic for
Firms.
DEFINITIONS
 Definition 1; According to Spenser & Siegelmen
“Managerial Economics is the integration of economic theory with business practice forthe
purpose of facilitating decision making & forward planning”.

 Definition 2: According to Mc Nair & Meriam

“Managerial Economics is the use of economic models of thought to analyze the business
situation”.

 Definition 3: According to Brigham & Pappas

“Managerial Economics is the application of economic theory & Methodology to business
Administration Practice”.

We may, therefore define Managerial Economics as the discipline which deals with the
application of economic theory to business management.

DIFFERENCES BETWEEN ECONOMICS & MANAGERIAL ECONOMICS

Economics Managerial Economics

Body of Principles Application of those principles to solve thebusiness
problems.
Deals with firm & Industry. Deals with firm only.
It builds economic models. It modifies economic models to suit aParticular situation.
It is micro & macro in nature. It is micro only.

NATURE OR CHARACTERISTICS OF BUSINESS ECONOMICS

 It is economics only
 It is applied economics
 It is applied economics in the field of business management.
 It is micro-economic in character.
 It is prescriptive than descriptive
 It is normative science but not positive science
 It is pragmatic in nature.

SCOPE OF MANAGERIAL ECONOMICS

The scope of managerial economics is not yet clearly laid out because it is a developing science.
Even then the following fields may be said to generally fall under Managerial Economics:
1. Demand Analysis and Forecasting
2. Cost and Production Analysis

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 3. Pricing Decisions, Policies and Practices
4. Profit Management
5. Capital Management
These divisions of business economics constitute its subject matter. Recently, managerial
economists have started making increased use of Operation Research methods like Linear
programming, inventory models, Games theory, queuing up theory etc., have also come to be
regarded as part of Managerial Economics.

 Demand Analysis and Forecasting: A business firm is an economic organization which is

engaged in transforming productive resources into goods that are to be sold in the market. A
major part of managerial decision making depends on accurate estimates of demand. A
forecast of future sales serves as a guide to management for preparing production schedules
and employing resources. It will help management to maintain or strengthen its market position
and profit base. Demand analysis also identifies a number of other factors influencing the
demand for a product. Demand analysis and forecasting occupies a strategic place in
Managerial Economics.
 Cost and production analysis: A firm’s profitability depends much on its cost of production. A
wise manager would prepare cost estimates of a range of output, identify the factors causing
are cause variations in cost estimates and choose the cost-minimizing output level, taking also
into consideration the degree of uncertainty in production and cost calculations. Production
processes are under the charge of engineers but the businessmanager is supposed to carry out
the production function analysis in order to avoid wastages of materials and time. Sound pricing
practices depend much on cost control. The main topics discussed under cost and production
analysis are: Cost concepts, cost- output relationships, Economics and Diseconomies of scale
and cost control.
 Pricing decisions, policies and practices: Pricing is a very important area of Managerial
Economics. In fact, price is the genesis of the revenue of a firm ad as such the success of a
business firm largely depends on the correctness of the price decisions taken by it. The
important aspects dealt with this area are: Price determination in various market forms, pricing
methods, differential pricing, product-line pricing and price forecasting.
 Profit management: Business firms are generally organized for earning profit and in the long
period, it is profit which provides the chief measure of success of a firm. Economics tells us that
profits are the reward for uncertainty bearing and risk taking. A successful business manager is
one who can form more or less correct estimates of costs and revenues likely to accrue to the
firm at different levels of output. The more successful a manager is in reducing uncertainty, the
higher are the profits earned by him. In fact, profit-planning and profit measurement constitute
the most challenging area of Managerial Economics.
 Capital management: The problems relating to firm’s capital investments are perhaps the most
complex and troublesome. Capital management implies planning and control of capital
expenditure because it involves a large sum and moreover the problems in disposing the capital
assets off are so complex that they require considerable time and labour. The main topics dealt
with under capital management are cost of capital, rate of return and selection of projects.

The various aspects outlined above represent the major uncertainties which a business firm has to
reckon with, viz., demand uncertainty, cost uncertainty, price uncertainty, profit uncertainty, and
capital uncertainty. We can, therefore, conclude that the subject- matter of Managerial Economics
consists of applying economic principles and concepts towards adjusting with various uncertainties
faced by a business firm.

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 TOPIC – 3: FUNDAMENTAL CONCEPTS OF MANAGERIAL ECONOMICS

Every house will have the basement on which it has been built. Similarly every discipline will have
the fundamental concepts on which it has been built. Managerial economics is not an exemption
from that. It too has few fundamental concepts on which it is growing in multiple folds. The
fundamental concepts of Managerial Economics are mentioned below.
1. Opportunity Cost Concept
2. Time Value of Money Concept
3. Discounting and Compounding Principle (DCP)
4. Concept of Marginalism
5. Concept of Incremental Reasoning
6. Concept of Time Perspective
7. Equi - Marginal Principle
8. Risk and Uncertainty Concept
9. Concept of Scarcity

1. OPPORTUNITY COST CONCEPT: Suppose that an individual is having Rs.1,00,000/-. Suppose

that he has identified various alternatives for investing these Rs.1,00,000/- and he wants to get
maximum return on the investment. Let these investment opportunities are A, B, C and D. Each of
these opportunities require the outlay of Rs.1,00,000/- and their return on investment are 10% ,
15% , 12% and 8% . By thinking in a rational manner he has selected opportunity B as it is yielding
more Return on Investment (ROI).
Here, by selecting the opportunity B
 He has lost an opportunity to earn 10% ROI on A
 He has lost an opportunity to earn 12% ROI on C.
 He has lost an opportunity to earn 8 % ROI on D.
This is called Opportunity Loss Concept or Opportunity Cost Concept.

After selecting alternative B, there will not be any problem if B yields 14% or 13% or 12%. If it is
yielding less than these returns, then selecting B is the wrong decision because C can yield him 12%
ROI. So the minimum acceptable ROI is 12% rather than earning 15% from B.

Definitions of Opportunity Cost

 Opportunity Cost is the cost of selecting an alternative instead of selecting another alternative.
 Opportunity Cost is the cost of sacrificing an alternative.
 Opportunity Cost represents the benefits or revenues foregone by pursuing one course of action
rather than the other.

Decision Criterion: According to Opportunity Cost Concept, “Selecting an alternative is valid and
sound if and only if the returns from that alternative must be more than the cost of sacrificing the next
best alternative”.

Characteristics of Opportunity Cost Concept

 Whenever an economic resource is having more than one use then it will have opportunity cost.
 Always one need not required knowing the exact opportunity cost of a resource for the given
alternative but still he has to determine approximate opportunity cost if he wants to use it for
decision making. Ex. A professor who is drawing the salary of Rs. 20,000/-. If he has started his
own consultancy then his earnings must be more than his earlier earnings. If he earns Rs. 23,000/-
then it is acceptable to him and his opportunity cost is 20,000. Here we are able to state Rs.
20000/- as the opportunity cost of the professor because we know his earlier earnings. But if that
information is not available to us it is difficult to determine the exact opportunity cost.

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2. TIME VALUE OF MONEY CONCEPT
According to this concept value of the money changes as the time passes. Suppose that if a
person is having Rs. 100 /- at present. The value of these Rs 100 /- now may not be Rs. 100 /-
after one year. The value of the money after one year will be more than Rs. 100 /-. The reason is
that even if that person deposits these Rs. 100 /- in the bank as fixed deposit and the bank is
agreed to pay 10 % interest, then the value of these Rs 100 /- after one year will be Rs. 110/-. So
the value of Rs 100 /- now will be more than Rs. 100/- after one year.

Similarly if a person realizes Rs 100 /- after one year then its present value will not be Rs. 100 /-
now but its value is lesser than Rs 100/- . Thus there exist difference between present value of
money and future value of money

How to know future and present values?

 Simple Interest Method:
Change in the present value i.e. Interest = P T R / 100
Where P = Principal Amount
T = Time Period
R = Rate of Interest
 Compound Interest Method:
o Future Value (FV) = Present Value (1 + r)n
o Present Value (PV) = Future Value / (1 + r)n

Where r = interest rate

n = no. of years
Example – 1: If present value = Rs. 100, r = 10%, Then find future value after year -1, 2, 3 and 4?

Example – 2: If future value after year - 3 = Rs. 100, then find its present value assuming that r =
10%?

3. DISCOUNTING & COMPOUNDING PRINCIPLE: Discounting and Compounding Principle states

that when a decision involves cash receipts and payments over a period of time, then all the money
transactions must be valued at a common period to be meaningful for decision making.

Example: If a business involves cash outflow of Rs 1, 00, 000 /- and Cash Inflows realized after
year–1, 2 and 3 are Rs. 50,000, Rs. 40,000 and Rs. 30,000 respectively and the discount rate =
12%. Whether the business is to be undertaken or not?

So when there are money receipts or payments over a period of time, then it is desirable to
discount the future values at certain rate and convert them into their present values.Then,
appropriate decision has to be taken on the basis of present value of cash inflows and present
value of cash outflows.

4. CONCEPT OF MARGINALISM

Marginal cost = increase in the total cost on account of increase in the production by one unit.
Suppose that Present Production = 100 units
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 Total Cost = Rs. 1000/-
Now the production is increased to 101 units
Then the total cost = Rs. 1012/-
Increase in the production = 101 units – 100 units = 1 unit
Increase in the Total Cost = Rs. 1012 – Rs.1000 = Rs.12/-
Then Marginal cost = Rs. 12/-
As the production of the firm increases then its total cost, average cost and marginal cost will
undergo into change. A hypothetical situation is considered and the changes in the total cost,
average cost and marginal cost as the result of change in the production is given in the
following table.

Output Total Cost Average Cost Marginal Cost

0 20 --- ---
1 28 28 8
2 37 18.50 9
3 47 15.7 10 Current production
4 58 14.50 11
5 68

Current situation
Suppose that Current production of the firm = 3 units
Selling Price Per Unit (SPPU) = Rs 25/-
Total Revenue (TR) = Rs 25 * 3 units = Rs 75/-
Total Cost to produce 3 units (TC) = Rs 47/-
Then, current Total Profit TP = TR – TC = Rs 75 - Rs 47 = Rs 28/-

New situation
Now, a customer has come to the firm and requested to produce and sell one more unit to him
at the price of Rs 14/- . Then whether the firm should sell the fourth unit at Rs 14/- or not?

 Decision making on the basis of Average Cost (AC) Concept

If the firm produces 4th unit, then Total Cost (TC) = Rs 58/-
Units produced = 4
Average Cost (AC) = Rs58/4units= 14.50
It means that if the firm produces 4th unit, then the average cost per unit ACPU = Rs 14.50/-.
But the customer is willing to pay Rs 14/- only. Hence the firm should not sell the 4th unit at
Rs 14/-.

 Decision making on the basis of Marginal Cost Concept

Marginal Cost to produce 4th unit = Rs. 58 – Rs 47 = Rs 11/-.

It means to produce 4th unit, the firm is incurring an additional cost of Rs. 11/- whereas the
customer is ready to pay Rs 14/- that will increase the profit of the firm by Rs 3/-.So the firm
should sell 4th unit at Rs 14/-.

Limitations of Concept of Marginalism

 In the above example MC < AC. It means fixed resources are not fully utilized. Once they are
optimally utilized then we observe MC > AC. Then the firm cannot sell its products on the basis
of marginal cost concept.
 If the firm sells first 3 products @ Rs. 25/- per unit and it sells 4th unit @ Rs14/- then first 3
customer may think that the firm has deceived them by charging higher price and may decide
not to buy the firm’s products in the future. If the customers are not buying the products again
then the long run survival of the firm is a million dollars question.

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 Hence one can state the Concept of Marginalism as
“A firm can sell its goods by considering the marginal cost concept provided that
 there exists excess of unused capacity
 long run impact on the firm’s operations is insignificant”.

5. INCREMENTAL REASONING CONCEPT

Incremental Cost = Increase in the TC on account of increase in the production by more than one unit.

Example: Suppose that at present a firm is producing and selling 1,000 units of a particular product.

Assume that, Selling Price Per Unit (SPPU) = Rs. 100 /-

Average Cost Per Unit (ACPU) = Rs. 80 /-
Then, Current Total Revenue = (1000 units) (Rs.100 per unit) = Rs. 1, 00,000 /-
Current Total Cost = (1000 units) (Rs.80 per unit) = Rs. 80,000 /-
Current Total Profit = Current Total Revenue – Current Total Cost
= Rs. 1,00,000 – Rs. 80,000 = Rs. 20,000 /-
If the firm wants to increase its current profit, then it can do it by either expansion or contraction.

1. Expansion: Here the firm expands its current output to increase its current total profit. If the firm
expands its production then it results in increase in production, total revenue and total cost.
Example: Suppose that the firm has increased its production from 1,000 units to 1,100 units. Then
the increase in the output is 100 units.
Then,
Total Revenue after Expansion = 1100 units * Rs.100 = Rs. 1,10,000/-.
Total Cost after Expansion = (1100 units) (Rs. 75) = Rs. 82,500/-.
Total Profit after Expansion = Rs. 1,10,000 - Rs. 82,500 = Rs. 27,500 / -

So, when the firm increases its level of output with an objective of increasing its current Total
Profit, then the following aspects will be observed.
 Increase in output causes increase in TR as well as increase in TC
 If increase in TR > increase in TC, it leads to increase in TP
 If increase in TR < increase in TC, it leads to decrease in TP.

2. Contraction: Here the firm contracts (reduces) its current output to increase its current total profit.
If the firm contracts its production then the number of units that it is producing will decrease.

Example:- Suppose that the firm has decreased its production from 1,000 units to 900 units. Then,
the decrease in the output is 100 units. Suppose that the firm will not increase the price in order to
capture the excess of demand caused by shortage of supply of the commodity. Then,
Total Revenue after Contraction = (900 units) (Rs. 100/- per unit) = Rs. 90,000/-.
Total Cost after Contraction = (900 units) (Rs. 75/- Per Unit) = Rs. 67,500/-.
Total Profit after Contraction = Rs. 90,000 - Rs. 67,500 = Rs. 22,500 /-

Thus, when the firm decreases its level of output with an objective of increasing its current Total Profit,
then the following aspects will be observed.
 Decrease in output causes decrease in TR as well as decrease in TC
 If decrease in TR < decrease in TC, it leads to increase in TP.
 If decrease in TR > decrease in TC, it leads to decrease in TP.

6. CONCEPT OF TIME PERSPECTIVE

According to this concept, “The decision maker must give due consideration to both the short and
long run consequences of his decision”.

 Example – 1: In the example given to the Concept of Marginalism, The decision maker can sell 4th
unit @ Rs 14/- if the impact of such decision on the business is insignificant. But if it loses its
customers in the future because of such a decision it should not sell @ Rs. 14/-.Here the firm In
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 the short run earning the profit of Rs.3/-. In the long run it is losing the customers. So the decision
maker must consider both the short and long run consequences of his decision before making any
decision.

 Example – 2: Price Penetration Policy: Here the company offers the products to the customers at
a lesser price than the cost to penetrate the sales of the product. We know

Price = Fixed cost per unit + variable cost per unit+ desired level of returnPrice
= Rs 6 + Rs 4 + 20% of margin on total cost = Rs 6 + Rs 4 + Rs 2. = Rs 12/-.

The firm has forecasted that the demand for its product @ Rs 11,000 /- will be 50,000 units. But the
firm wants to sell 1,00,000 units. If it has to sell 1,00,000 units then it has to reduce its price to
Rs.10,000 /-. In that case Profit = Selling Price Per Unit – Average Cost Per Unit = Rs 10,000 – Rs
10,000 = Rs 0. Then, the firm will not be able to earn any profit at present but once 1,00,000
customers are habituated to use firm’s product and if they spread positive word of mouth about its
product, then positive word of mouth will increase the demand for the product. Suppose that positive
word of mouth has increased the demand 10,00,000 units after 3 years. At that time, if the firm
increases the price of its product by Rs 500 /-. Then the firm may realize much more profit than what it
has foregone. Hence in the price penetration strategy firm is foregoing the profits in the short run but
realizing huge profits in the long run.

Thus the Concept of Time Perspective can be stated as, “The decision maker must consider the
impact of his decision on short run and long run revenues, costs and profits to maintain the right
balance between short and long run”.

7. EQUI – MARGINAL PRINCIPLE

“If a person has a thing which can be put for several uses, then he will distribute it among the uses in
such a way that it has the same marginal utility in all”

Explanation: if a person has a resource that can be put for 3 alternatives X, Y and Z. Then he
distribute that resource among X, Y and Z in such a way that
Marginal Utility of X = Marginal Utility of Y = Marginal Utility of Z
MU (X) = MU (Y) = MU (Z)

8. RISK AND UNCERTAINTY PRINCIPLE

Decision making involves selection of an alternative course of action from the various alternatives
available.
Decision making depends on types of the environment in which decision is made.
There are three types of environments related to decision making. They are
 Certain Environment (Possible events are known with certainty)
 Risk Environment (Possible events are known along with their probabilities)
 Uncertain Environment (Possible events are known but probabilities are unknown)

A). Certain Environment

Demand for the product in the next week may be 0,1,2,3,4 (State of events)
Your alternatives are buying and selling 0,1,2,3,4 (alternatives)
You come to know that next week the demand is 3 units, then you will buy 3 units

B). Risk Environment

Demand 0 1 2 3 4
Last 100 Weeks Data 10 times 30 times 20 times 30 times 10 times
Probability 0.10 0.30 0.20 0.30 0.10

Here probabilities are given, hence it represents risk environment. How do we decide?
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  Expected Monetary Value
 Expected Opportunity Loss
 Expected Value of Perfect Information

If profit of Rs. 10 is realized on selling each unit, then

Demand 0 1 2 3 4
Profit (Rs ) 0 10 20 30 40
Probability 0.10 0.30 0.20 0.30 0.10
Expected Monetary Value 0 3 4 9 4
Highest

Hence, we decide to buy three units as it has highest EMV

C). Under uncertain environment

Here the economist knows possible events but their probabilities are not known to him.
Demand 0 1 2 3 4
Probability Unknown Unknown Unknown Unknown Unknown

The decision criteria will be based on the attitude of the economist which may be (i) Optimism, (ii)
Pessimism, (iii) Realism, (iv) Rationalism etc.
 An optimist selects 4 units
 A pessimist selects 0 units
 A Realist decides coefficient of optimism (denoted by α), then selects best alternative
based on EMV
 A Rationalist assigns equal probability to all the events and selects the alternative which
has highest EMV

9. CONCEPT OF SCARCITY: Robbins in his book “Nature and Significance of Economic Science”
has given an analytical definition of Economics. According to him “Economics is the science which
studies human behavior as a relationship between ends and scarce means which have alternative
uses”.

The three fundamental propositions of this definition are;

 ‘Ends’ refer to wants. Wants are unlimited. Multiplicity of wants call for ceaseless efforts for
their satisfaction. As human wants are unlimited, one is required to choose between the urgent
and less urgent wants. So economics is the ‘science of choice’.
 ‘Means’ to satisfy the unlimited wants are limited. There would not have been an economic
problem if the means are unlimited.
 The ‘Scarce’ means are capable of alternative uses. If more of a scarce factor is used for one
use, less it is available for other use. Alternative uses vary in importance.
 So we have to choose to which use the good can put to. Thus the choice comes up again.
Choice making is the real economic problem.
 Choice making is the real economic activity. Neither the multiplicity of wants nor the scarcity of
the resources with alternative uses is the real economic problem. The real economic activity
lies in the utilization of scarce means having alternative uses for satisfaction of multiple ends.
So choice making is essential.

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 TOPIC – 4: RELATIONSHIP OF BUSINESS ECONOMICS WITH OTHER DISCIPLINES

1. Managerial Economics and Economics:

 Managerial Economics is economics applied to decision making. It is a special branch of
economics, bridging the gap between pure economic theory and manage-rial practice.
 Economics has two main branches—micro-economics and macro-economics.
 Micro-economics: The roots of managerial economics spring from micro-economic theory.
o In price theory,
o demand concepts, elasticity of demand,
o marginal cost marginal revenue,
o the short and long runs and theories of market structure are sources of the elements of
micro-economics which managerial economics draws upon.
o It makes use of well known models in price theory such as the model for monopoly price,
the kinked demand theory and the model of price discrimination.
 Macro-economics: It deals with the behavior 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.
o The environment, in which a business operates,
o fluctuations in national income,
o changes in fiscal and monetary measures and
o variations in the level of business activity have relevance to business decisions. The
understanding of the overall opera-tion of the economic system is very useful to the
managerial economist in the formulation of his poli-cies.
o Macro-economics contributes to business forecasting. The most widely used model in
modern forecasting is the gross national product model.

2. Managerial Economics and Accounting:

 Financial Accounting is used to determine the profit and loss, and financial position of the firm.
 Cost Accounting is used to determine the cost of producing a product
 Management accounting focuses on presenting accounting information to top level management to
make better decisions e.g. make or buy decisions, key factor decisions, budgeting, variance analysis,
standard costing, break-even point analysis etc.

3. Managerial Economics and Theory of Decision Making:

 In the process of management such as planning, organizing, leading and controlling, decision
making is always essential.
 A manager faces a number of problems connected with his/her business such as production,
inventory, cost, marketing, pricing, investment and personnel.
 Economist are interested in the efficient use of scarce resources hence they are naturally
interested in business decision problems and they apply economics in management of
business problems. Hence managerial economics is economics applied in decision making.
 There are three types of decision making environments
o Decision Making under Certain environment
o Decision Making under Risk environment
o Decision Making under Uncertain environment

4. Managerial Economics and Operations Research:

Techniques and concepts such as

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  Linear Programming,
 Dynamic Programming,
 Input-output Analysis,
 Inventory Theory,
 Information Theory,
 Queuing Theory,
 Game Theory,
 Decision Theory etc.

5. Managerial Economics and Statistics

 Empirical testing of theory.
 Correlation Analysis: It provides the individual firm with measures of appropriate functional
relationship involved in decision making.
 Regression Analysis
 Time series and Trend Analysis
 Measures of central tendency like the mean, median, mode, and measures of dispersion,
correlation, regression, least square, estimators are widely used.

6. Managerial Economics and Mathematics:

 Mathematics is another important subject closely related to managerial economics. For the
derivation and exposition of economic analysis, we require a set of mathematical tools.
 Mathematics has helped in the development of economic theories and now mathematical
economics has become a very important branch of economics.
 Mathematical approach to economic theories makes them more precise and logical.
 The important branches of mathematics generally used by a managerial economist are
geometry, algebra and calculus.
 The mathematical concepts used by the managerial economists are the logarithms and
exponential, vectors and determinants, input-out tables.

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