managerial economics Introduction.pptx

Managerial economics is a combination of two major disciplines
namely management and economics. To fully comprehend what
managerial economics is, it is first imperative to define what
economics disciplines are.
What is “Economics”?
 What is ‘ Micro and Macro economics?
 What is Managerial Economics?
 Nature, scope and significance of Managerial Economics
 How it is useful to a Manager?
What Role a managerial Economist plays in the Management
Team

Definition of Economics
 The separate treatment of Economics has accounted more than 200
years right from the book “The Nature and Causes of Wealth of
Nations” by Adam Smith who is regarded as the father of
Economics.
 The definition of economics has encountered so many
controversies.
 The reason behind is the economy in general is dynamic and subject
to frequent changes, likewise is the subject matter of Economics.
 Economics is a science that deals with allocation of scarce
resources among alternative means to satisfy Unlimited human
wants. Thus, this implies a science of choice.
 Therefore, the discipline of Economics is made so as to minimize
the very wide gap between scarce resources & unlimited human
wants.
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Factors of production
• Resources, also called factors of production, are all the things used
in producing goods and services. They fall into four categories:
 Land
 Labor
 Capital
 Entrepreneurship
 Land- refers to everything on earth that is in its natural state, or
earth's natural resources-free gifts of nature. The reward for the
service of land is rent.
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Factors of prod…cont
 Labor- refers to the services of human beings in
production of goods & services-physical and mental
effort of human beings. The reward for labor is wage.
 Capital- refers to all the manufactured inputs & skills
that are used to produce other goods and services. The
reward for capital is interest.
 Entrepreneurship- refers to the skills of people who
organize, manage factors of production and take the risk
of making losses. The reward for entrepreneurship is
profit.
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Central Problems of an Economy
 What is an economic problem?
 How is it to be solved?
 Scarce resources lie at the root of all economic problems.
 If we are incapable of satisfying all of our wants, we are required to make a
choice [Prioritizing]
 Scarcity refers to a physical condition where the quantity desired of a
particular resource exceeds the quantity available.
 The three basic economic questions are:
i. What to produce?
 It is a question in regard to which products are desirable to a society and at what
quantities should they be produced.
ii. How to produce?
 Asks with what combination of resources that the desired goods/services are to
be produced. This requires goods to be produced at the most efficient way- both
from the technical and economic sides.
iii. For whom to produce?
 Who should get how much from the total amount of goods and services
produced in a nation.
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Branches of Economics
Major branches of economics: Microeconomics &
Macroeconomics
a) Microeconomics
* The study of how individuals and firms make their
choices & decisions; what, how, and for whom to
produce; what price to charge.
Study of decision-making at the micro (“microscopic”) level.
Study of the theories of:
 Consumer behavior  welfare economics
 Production and cost  commodity & factor pricing
b) Macroeconomics
* The study of the working and performance of the
economy as a whole (national aggregate level).
National income, consumption, savings, investment, total
employment, general price level, country’s balance of payment.
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The Nature, Goals and Constraints of the Firm
 What is a Firm?
 A firm is a decision making production unit which
transforms resources into goods and services which are
ultimately bought by consumers, the government and
other firms.
 Why Firms Exist?
 Economists classify the economy into two sectors namely
households (they purchase goods and services and sell
their inputs) and business firms (they purchase inputs and
sell goods and services)
 In the most traditional era, households were self sufficient
but this kind of production is inefficient because the
society loses comparative advantage and households do
not benefit from trade. Over time, households began to
specialize in one type of production and to trade their

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 People have also discovered it is more efficient to bring
together resources in one place and co-operate in the
production of goods and services hence the benefits of
specialization and division of labour (specialization in
different parts within a single industry in making a single
commodity e.g. a car, pin)
 Firms of different types and sizes emerge in an economy
because they have been able to organize production more
efficiently than other former institutions could (i.e.
household self sufficiency.

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Objectives of the Firms
1) The traditional economic theory has assumed that the
typical firm has a single objective, to maximize profits.
2) The modern theories of the firm, however, do
acknowledge that firms may have other objectives such as
i) Sales revenue maximization (market power)
ii) Or maximization of managerial utility (skill power).
iii) Shareholder wealth maximisation.
iv) Welfare maximization.
 Other authors broadly classify the goals of a firm are
broadly classified into economic and non-economic goals.

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 Economic Goals: Maximizing or Satisfying?
 Profit
 Market Share
 Revenue Growth
 Return on Investment
 Technology
 Customer Satisfaction
 Shareholder Value
 Non-economic Goals
 A good place for our employees to work
 Provide high quality products/services to the customers
 Act as a good citizen in the society

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The Circular Flow of Economic Activity
The four sectors namely households, business firms,
government and the rest of the world can also be
considered to see the flow of economic activities.
 The circular flow of activity is a chain in which production
creates income, income generates spending and spending in
turn induces production.
 The major four sectors of the economy are engaged in three
economic activities of production, consumption and exchange
of goods and services.
 These sectors are as follows:
Households: Households fulfill their needs and wants through
purchase of goods and services from the firms. They are
owners and suppliers of factors of production and in turn they
receive income in the form of rent, wages and interest.
Firms: Firms employ the input factors to produce various
goods and services and make payments to the households.

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Government: The government purchases goods and
services from firms and also factors of production from
households by making payments.
Foreign sector: Households, firms and government
purchase goods and services (import) from abroad and
make payments. On the other hand all these sectors sell
goods and services to various countries (export) and in
turn receive payments from abroad
The above said four agents take economic decisions to
produce goods and services and to exchange them and to
consume them for satisfying the wants of the economy as
a whole. Understanding the opportunities and constraints
in the exchange is essential to take better decision in
business.

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The economy comprises of the interaction of households,
firms, government and other nations.
 Households own resources and supply factor services like
land, raw material, labour and capital to the firms which
helps them to produce goods and services.
 In turn, firms pay rent for land, wages for their labour and
interest against the capital invested by the households.
The earnings of the household are used to purchase goods
and services from the firms to fulfill their needs and wants,
the remaining is saved and it goes to the capital market
and is converted as investments in various businesses.
The household and business firms have to pay taxes to the
government for enjoying the services provided.

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On the other hand firms and households purchase goods
and services (import) from various countries of the world.
Firms tend to sell their products to the foreign customers
(export) who earn income for the firm and foreign
exchange for the country.
Therefore, it is clear that households supply input factors,
which flow to firms. Goods and services produced by firms
flow to households.
Payment flows in the opposite direction (refer chart 1
above).

What is Managerial Economics?
Manager
A person who directs resources to achieve a stated goal.
.
Managerial Economics
The study of how to direct scarce resources in the way that most efficiently
achieves a managerial goal.
Managerial Economics is economics applied in decision making. It is a
special branch of economics bridging the gap between abstract theory
and managerial practice.
Integration of economic theory with business practice for the purpose of
facilitating decision-making and forward planning .
“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”

Nature of Managerial Economics
• Managerial economics is concerned with the analysis of finding
optimal solutions to decision making problems of businesses/
firms (micro economic in nature).
• Managerial economics is a practical subject therefore it is
pragmatic.
• Managerial economics describes, what is the observed economic
phenomenon (positive economics) and prescribes what ought to
be (normative economics).
• Managerial economics is based on strong economic
concepts(conceptual in nature).
• Managerial economics analyses the problems of the firms in the
perspective of the economy as a whole ( macro in nature).
• It helps to find optimal solution to the business problems
(problem solving).

SCOPE OF MANAGERIAL ECOMONICS
• Business Environment has reference to the broad characteristics
of the economic system in which the business firm operates. It
includes the overall economic policies, social factors and
political atmosphere of the nation.
• Managerial economics, however, concerned with only the
economic environment, and in particular with those economic
factors which form the business climate. Such factors may not be
described under the major categories as the micro and the
macroeconomics.
• The scope of managerial economics to managerial issues is more
limited to microeconomics. the subject matter of managerial
economics revolves round the theory of the firm.

Functions of a Managerial Economists:
The main function of a manager is decision making and managerial
Economics helps in taking rational decisions.
The need for decision making arises only when there are more
alternatives courses of action.
Steps in decision making :
Defining the problem
Identifying alternative courses of action
Collection of data and analyzing the data
Evaluation of alternatives
Selecting the best alternative
Implementing the decision
Follow up of the action

 Specific functions to be performed by a managerial
Economist :
1. Production scheduling
2. Sales forecasting
3. Market research
4. Economic analysis of competing companies
5. Pricing problems of industry
6. Investment appraisal
7. Security analysis
8. Advice on foreign exchange management
9. Advice on trade
10.Environmental forecasting

managerial economics Introduction.pptx

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