Lesson 1 - Introduction To Managerial Economics

INTRODUCTION TO
MANAGERIAL
ECONOMICS
FORE School of Management, New Delhi

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.
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
Why should managers master
economics?
Decision Problems faced by firms are being solved

through specific models and analytical tools of
economics:
 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 materials, spare parts, etc.?
 What should be the cost structure?
MICROECONOMICS APPLIED TO
INTERNAL (OPERATIONAL)
BUSINESS ISSUES
 Demand Analysis
 Production and Supply analysis
 Cost analysis
 Analysis of market structure and Pricing Theory
 Profit Analysis
 Capital and Investment Decisions
MACROECONOMICS
Applied to describe external business issues but is

necessary for sound internal economic decision
Economic system suitable for business
 Favorable Macroeconomic indicators for business
 Conducive atmosphere for foreign trade
 Impact of Government policies on business
 Economy and long-term businesses
 Economic growth & business expansion
ROLE OF A MANAGERIAL
ECONOMIST
 He is an economic advisor to a firm.
 He not only studies the economic trends at macro
level but also interpret their relevance to the particular
industry and business.
 General task of managers is to use readily available
information about the environment to make a decision
that furthers the goals of an organization
DECISIONS TO BE TAKEN BY
MANAGERIAL ECONOMIST
 Production scheduling
 Demand Estimation and Forecasting
 Analysis of market to determine nature and extent
of competition
 Pricing problems of industry
 Assist business planning process
 Advising on investment and capital budgeting
 Analyzing and forecasting environmental factors
Student of Managerial Economics:
Will I ever use this?
Professor:
Only if your career is successful.
BASIC ECONOMIC PRINCIPLES FOR
MANAGERIAL DECISION MAKING
WHY THE MIND OF AN ECONOMIST IS DIFFERENT FROM A
COMMON MAN?
 Production Possibility Frontier
 Opportunity Cost Principle
 Accounting and Economic Costs
 Nominal & Real Values
 Marginal & Equi - Marginal Principle
 Time Perspective Principle
 Discounting Principle
Production Possibility Frontier
Any point on the curve (for example,
50 guns and 250 roses) illustrates an
output combination that is produced
with all available resources and as
efficiently as possible.
A point inside the curve, for example

50 guns and 200 roses, represents an
output combination that is produced
with less than the available resources
(unemployment), or with all the
resources, but with inefficient use of
resources (underemployment).
OPPORTUNITY COST
Related to alternative uses of scarce resources.

Opportunity cost of availing an opportunity is
the expected income foregone from the second
best alternative.
Difference between actual earning and its
opportunity cost is called the economic gain.
ACCOUNTING AND ECONOMIC
PROFITS
Accounting Profit = Total revenue minus the explicit

or accounting costs of production.
Economic Profit = Total revenue minus the explicit

and implicit costs of production.
NOMINAL AND REAL VALUES
Nominal values, such as nominal prices, earnings, wages or

nominal interest rates, are referred to express the face value or
numeric value.
 A person is earning Rs. 1,000 per hour is a nominal wage per
hour.
Real values are expressed to mean the usage value or the value in
comparison (a relative value).
Thus, a person earning a nominal wage of Rs. 1,000 in 2012, the
same income (Rs. 1,000) today (in 2021) may mean a real wage of
Rs. 750 relative to today’s prices.
Similarly, applying the concept to interest rates, a 12% nominal
interest rate is only a 2% real interest rate if prices are rising by
10%.
Time Value of Money - Present Value/Discounting Principle
The time value of money refers to the fact that a dollar to be received in the
future is not worth a dollar today.
The technique for measuring the value today of dollars to be received or paid
at one point of time or various points of time in the future - The present
value
The basic equation for the present value (PV) of an amount S is
 1 
PV  S  n 
       (1)
 1  i  
What is the present value of $1,080 in 1 year if the interest rate is 8
percent per year?
 1 
PV  $1,080  1
 $1,000
 1  0.08 
What is the present value of $ 1,00,000 to be received at the end of 10

years if the interest rate is 10 percent?
 1 
PV  1,00,000  10 
 $38,550
 1  0.10 
Note that the present-value factor decrease as the number of periods increases
and as the interest rate increases. There is an inverse relationship between the
present value and the interest rate.
Consider an annuity of three $100 payments at the end of each of the next three years
at 10 percent interest.
 1 1 1 
PV  100    3 
 1.10  (1.10 ) 2
(1. 10) 
In general the formula can be obtained as follows:
 1 1 1 1 
PV   A A A     A n
------------(2)
 1  i 
2 3
(1  i) (1  i ) (1  i) 
 1 
n
Or PV  A  t 
t 1  1  i  
EXAMPLE
Consider a present value of an annuity of $3,522 per month for thirty

months with an interest rate of 1 percent per month. The annuity factor for
1 percent rate of interest for 30 months (periods) is given as 25.8077.
 30  1  t 
PV  3,522    
 t 1  1.01  
t
30
 1 
the factor    is the present value of an annuity of $1. its value given as 25.8077.
t 1  1.01 
Thus, PV = $3,522(25.8077) = $90,895.
From a total receipt of 30 instalments of each of $3,522 =

1,05,660.

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INTRODUCTION TO

FORE School of Management, New Delhi

 It is the integration of economic principles

 It is essentially applied economics in the

Integration of Economic theory with business

It is concerned with the application of economic

Decision Problems faced by firms are being solved

 What should be the price of the product?

Applied to describe external business issues but is

A point inside the curve, for example

Related to alternative uses of scarce resources.

Accounting Profit = Total revenue minus the explicit

Economic Profit = Total revenue minus the explicit

Nominal values, such as nominal prices, earnings, wages or

The basic equation for the present value (PV) of an amount S is

What is the present value of $ 1,00,000 to be received at the end of 10

In general the formula can be obtained as follows:

Consider a present value of an annuity of $3,522 per month for thirty

Thus, PV = $3,522(25.8077) = $90,895.

From a total receipt of 30 instalments of each of $3,522 =

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