1. UNIT -1
BASICS OF MANAGERIAL ECNOMICS
LESSON 3- Nature and Scope of Managerial Economics
Scope of Managerial Economics:
1. Demand analysis and forecasting:
Unless and until knowing the demand for
a product how can we think of producing that product. Therefore demand analysis
is something which is necessary for the production function to happen. Demand analysis
helps in analyzing the various types of demand which enables the manager to arrive at
reasonable estimates of demand for product of his company. Managers not only assess
the current demand but he has to take into account the future demand also.
2. Production function:
Conversion of inputs into outputs is known as production
function. With limited resources we have to make the alternative uses of this
limited resource. Factor of production called as inputs is combined in a particular way to
get the maximum output. When the price of input rises the firm is forced to work
out a combination of inputs to ensure the least cost combination.
3. Cost analysis:
Cost analysis is helpful in understanding the cost of a
particular product. It takes into account all the costs incurred while producing
a particular product. Under cost analysis we will take into account determinants of
costs, method of estimating costs, the relationship between cost and output, the
forecast of the cost, profit, these terms are very vital to any firm or business.
4. Inventory Management:
What do you mean by the term inventory? Well the
actual meaning of the term inventory is stock. It refers to stock of raw materials
which a firm keeps. Now here the question arises how much of the inventory is ideal

2. stock. Both the high inventory and low inventory is not good for the firm. Managerial
economics will use such methods as ABC Analysis, simple simulation
exercises, and some mathematical models, to minimize inventory cost. It also helps
in inventory controlling.
5. Advertising:
Advertising is a promotional activity. In advertising while the copy,
illustrations, etc., are the responsibility of those who get it ready for the press, the
problem of cost, the methods of determining the total advertisement costs and
budget, the measuring of the economic effects of advertising --- - are the problems of
the manager.
There’s a vast difference between producing a product and marketing it.
It is through advertising only that the message about the product should reach
the consumer before he thinks to buy it.
Advertising forms the integral part of decision making and forward planning.
6. Pricing system:
Here pricing refers to the pricing of a product. As you all know
that pricing system as a concept was developed by economics and it is widely used in
managerial economics. Pricing is also one of the central functions of an enterprise. While
pricing commodity the cost of production has to be taken into account, but a complete
knowledge of the price system is quite essential to determine the price. It is also
important to understand how product has to be priced under different kinds
of competition, for different markets.
Pricing = cost plus pricing and the policies of the enterprise
Now it is clear that the price system touches the several aspects of managerial economics
and helps managers to take valid and profitable decisions.
7. Resource allocation:
Resources are allocated according to the needs only to
achieve the level of optimization.
As we all know that we have scarce resources, and unlimited needs. We have to make the
alternate use of the available resources. For the allocation of the resources various
advanced tools such as linear programming are used to arrive at the best course of action.
NATURE OF MANAGERIAL ECONOMICS
• Managerial economics aims at providing help in decision making by firms. It is
heavily dependent on microeconomic theory. The various concepts of micro
economics used frequently in managerial economics
Elasticity of demand
Marginal cost

3. Marginal revenue
Market structures and their significance in pricing policies.
• Macro economy is used to identify the level of demand at some future point in time,
based on the relationship between the level of national income and the
demand for a particular product. It is the level of national income only that the
level of various products depends.
In managerial economics macro economics
indicates the relationship between (a) the magnitude of investment and the level
of national income, (b) the level of national income and the level of employment, (c) the
level of consumption and the level of national income.
• In managerial economics emphasis is laid on those prepositions which are likely
to be useful to management.
UNIT -1
BASICS OF MANAGERIAL ECONOMICS
Relationship between managerial economic, economic,
and other subjects
After studying this lesson you will be able to distinguish managerial economics with its
related subjects. Managerial economic is not something which is related to
economics only, but there are other areas also to which managerial economic is related.
Other related subjects of managerial economics are:
• Economics
• Mathematics
• Statistics
• Accounting
• Operation Research
• Computers
• Management
Before knowing the relationship between managerial economics and other
related fields it is customary to divide economics into “positive” and

4. “normative” economics. Economists make a distinction between positive and
normative that closely parallels popper’s line of demarcation.
Positive economics:
It deals with description and explanation of economic behavior,
Economics and Managerial economics. Managerial economics draws on
positive economics by utilizing the relevant theories as a basis for prescribing choices.
A positive statement is a statement about what is and which contains no indication of
approval or disapproval. It’s not like that positive statement is always right,
positive statement can be wrong. Positive statement is a statement about what exists.
Normative economics:
It is concerned with prescription or what ought to be done.
In normative economics, it is inevitable that value judgment are made as to what should
and what should not be done. Managerial economics is a part of normative economics as
its focus is more on prescribing choice and action and less on explaining what has
happened. It expresses a judgment about whether a situation is desirable or undesirable.
The primary task of Managerial economics is to fit relevant data to this framework of
logical analysis so as to reach valid conclusion as a basis for action.

5. Another branch of economics which is normative like managerial is public policies
analysis which is concerned with the problems of managing the government of a country.
Economic and managerial economic:
Economics contributes a great deal towards the
performance of managerial duties and responsibilities. Just as the biology contributes to
the medical profession and physics to engineering, economics contributes to
the managerial profession.
All other qualifications being same, managers with working knowledge
of economics can perform their function more efficiently than those without it.
What is the basic function of the managers of the business?
As you all know that the basic function of the manager of the firm is to achieve
the organizational objectives to the maximum possible extent with the limited
resources placed at their disposal.
Economics contributes a lot to the managerial economics.
Mathematics and managerial economics:
Mathematics in ME has an important role
to play. Businessmen deal primarily with concepts that are essentially quantitative in
nature e.g. demand, price, cost, wages etc.
The use of mathematical logic I the analysis of economic variable provides not
only clarity of concepts but also a logical and systematical framework.
Statistics and managerial economics:
Statistical tools are a great aid in business decision
making. Statistical techniques are used in collecting processing and analyzing business
data, testing and validity of economics laws with the real economic phenomenon before
they are applied to business analysis.
The statistical tools for e.g. theory of probability, forecasting techniques, and regression
analysis help the decision makers in predicting the future course of economic events and
probable outcome of their business decision.
Statistics is important to managerial economics in several ways. ME calls for marshalling
of quantitative data and reaching useful measures of appropriate relationship involves in
decision making.
Let me explain it through an example:
In order to base its price decision on demand
and cost consideration, a firm should have statistically derived or calculated demand and
cost function.
Operation research and managerial economics:

6. It’s an inter-disciplinary
solution finding techniques. It combines economics, mathematics, and statistics to build
models for solving specific business problems.
Linear programming and goal programming are two widely used OR in business decision
making.
It has influenced ME through its new concepts and model for dealing with risks. Though
economic theory has always recognized these factors to decision making in the
real world, the frame work for taking them into account in the context of actual problem
has been operationalised.
The significant relationship between ME and OR can be highlighted with reference to
certain important problems of ME which are solved with the help of OR techniques, like
allocation problem, competitive problem, waiting line problem, and inventory problem.
Management theory and managerial economics:
As the definition of management says
that it’s an art of getting things done through others. Bet now a day we can
define management as doing right things, at the right time, with the help of right people
so that organizational goals can be achieved. Management theory helps a lot in
making decisions.
ME has also been influenced by the developments in the management theory. The central
concept in the theory of firm in micro economic is the maximization of profits. ME
should take note of changes concepts of managerial principles, concepts, and
changing view of enterprises goals.
Accounting and managerial economics:
There exits a very close link between ME and
the concepts and practices of accounting. Accounting data and statement constitute the
language of business.
Gone are the days when accounting was treated as just bookkeeping. Now its far more
behind bookkeeping. Cost and revenue information and their classification are influenced
considerably by the accounting profession.
As a student of MBA you should be familiar with generation, interpretation, and use of
accounting data.
The focus of accounting within the enterprise is fast changing from the concept
of bookkeeping to that of managerial decision making.
Mathematic is closely related to ME. Certain mathematical tools such as logarithm and
exponential, vectors, determinants and matrix algebra and calculus etc.
Computers and managerial economics:
You all know that today’s age is known as
computer age. Everyone of us are totally dependent on computers. This computers have
effected eachone of us in every field. Managers also have to depend on computers for
decision making. Computer helps a lot in decision making. Through computers data are
presented in such a nice manner that its really very easy to take decisions.
There are so many sites which help us in giving knowledge of various things, and in a
way helps us in updating our knowledge.

7. Conclusions:
Managerial Economics is closely related to various subjects i.e. Economics,
mathematics, statistics, accountings. Computers etc. a trained managerial economist
integrates concepts and methods from all these subjects bringing them to bear on business
problem of a firm. In particular all these subjects are getting closed to Managerial
Economics and there appears to be trends towards their integration.