Managerial economics nature and scope

1. • Now a days we are using economy, economy.
• Each and every economy means reduction on
the cost (cost reduction economy).
• So where ever we want to purchase, we will
always think about reduction of cost this is
consumer point of view.
• Similarly in the organization point of view
economics means reduction of cost of
production and gaining maximum profits.

2. • Fighter consumer or organization always thinks
about profit in the business transaction.
• Profit=revenue- cost
• In order to gain profit we have to reduce eighter
cost or increase revenue.
• Revenue = no. units sold X selling price unit
• Cost = fixed cost + variable cost.
• So profit ‘P’ =( no. of units sold X selling price per
unit) __ (fixed cost + variable cost).

3. • In present competitive environment
increasing the revenue is difficult the only way
to gain maximum profit is reduction of cost.
• In the cost we cannot reduce fixed cost.
• It is possible to reduce only variable cost.
• All these kind of cost reduction techniques will
Explained through managerial economics.
• M.E consists of both micro & macro
economics.

4. • Micro economics deals with within the
organization economics activities.
• Macro economics deals with economic
activities outside the organization.

5. Managerial economics
• Economics: economics is a study of human
activity both at individual and national level.
• The economists of early age treated
economics merely as the science of wealth.
• The reason for this is clear.
• Every one of us is involved in efforts aimed at
earning money and spending this money to
satisfy our wants such as food, clothing shelt

6. Introduction The word Economics is derived from the
Greek words “OKIOS NEMEIN” meaning household
management .
Man is bundle of desires. Goods and services satisfy
these wants.
But almost all the goods are scarce.
To produce goods land, labour, capital and organization
are needed. Economic problem arises because of
scarcity.
Economics is a study of economic problems. Wants are
motive force for economic activity.
Wants leads to efforts. Efforts secures satisfaction.

7. Economic definition
• McGowan and Moyer:
• Managerial economics is the application of economic
theory and methodology to decision-making problems
faced by both public and private institutions.
• Mc Nair and Merriam:
• managerial economics consists of the use of economic
modes of thought to analyze business situation. and
• Spencer the and siege man:
• managerial economics is “ the integration of economic
theory with business practices for the purpose of
facilitating decisionmaking and forward planning by
management.

8. • Haynes, mote and Paul:
• Managerial economics refers to those aspects
of economics and its tools of analysis most
relevant to the firm’s decision making process.

9. Characteristics of managerial
economics
• 1. Close to micro economics:
• It studies the problems and principles of an
individual business firm or an individual
industry.
• It aids the management in forecasting and
evaluating the trends of the market.

10. • Normative economics: (setting a standard or
norm)
• It is concerned with varies corrective measure
that a management undertakes under various
circumstances.
• It deals with goal determination, decision
making and optimal utilization of available
resource, come under the banner of
managerial economics.

11. • Pragmatic: (realistic)
• Managerial economics is pragmatic.
• In pure microeconomic theory, analysis is
performed, based on certain exceptions,
which are far from reality.
• However, in managerial economic,
managerial issues are resolved daily and
difficult issues of economic theory are kept a
bay.

12. • Uses theory of firm:
• Managerial economics employs economic
concepts and principles, which are known as
the theory of firm or “economics of the firm”.
Thus , its scope is narrower than that of pure
economic theory.

13. • 5. Takes the help of macro economics:
• M.E. incorporates certain aspects of macro
economic theory. these are essential t o
comprehending circumstances and environments
that envelop the working conditions of an
individual firm or an industry.
• Knowledge of macro economic issues such as
business cycles, taxation policies, industrial policy
of the government, price and distribution
policies, wage policies, and anti monopoly
policies and so on, is integral to the successful
functioning of a business enterprise.

14. • Aims at helping the management:
• M.E. aims at supporting the management in
taking corrective decisions and charting plans and
policies for future.
• 7. A scientific art:
• science is a system of rules and principles
engendered for attaining given ends. Scientific
methods have been created as the optimal path
to achieving one’s goals.
• M.E. has been is also called a scientific art
because it helps the management in the best and
efficient utilization of scarce economic resources.

15. • It considers production cost, demand, price,
profit, risk etc.
• It assists the management in singling out the
most feasible alternative.
• ME. Facilitates good and result oriented
decisions under conditions of uncertainty.

16. • Prescriptive rather than descriptive:
• M.E. Is a normative and applied discipline.
• It suggests the application of economic
principles with regard to policy formulation,
decision making and future planning.
• It not only describes the goals of an
organization but also prescribes the means of
achieving these goals.

17. Scope of managerial economics
• The main focus in M.E. is to find an optimal
solution to Managerial problem.
• The problem may relate to production,
reduction or control of costs, determination of
price of given product or service, make or buy
decisions, inventory decisions, capital
management or profit planning and
management, investment decisions or human
resource management.

18. • While all these are problems the managerial
economist makes use of the concepts, tools
and techniques of economics and other
related disciplines to find an optimal solution
to a given managerial problems.

19. Managerial decision
areas
Concepts and
techniques of
managerial
economics
•Production
•Reduction or control of
cost
•Determination of price
Optimal solutions
of a given product or
service.
•Make or buy decision.
•Inventory decisions
•Capital management
•Profit planning and
management.
•Investment decisions

20. Linked with other disciplines
• M.E. is closely linked with many other
disciplines such as economics, accountancy,
mathematics, statistics, operations research,
psychology and organization behavior.
• Economics:
• M.E. is the offshoot of economics and hence
the concepts of managerial economics is the
application of these in the real life.

21. • In the process of addressing various managerial
problems, several empirically estimated functions
such as demand function, cost function, revenue
function and so on are extensively used.
• Economics and Managerial economics both are
concerned with the problems of scarcity and
resource allocation.
• If the economist is concerned with study of
markets, the managerial economist is interested
in studying the impact of such markets on the
performance of a given firm.

22. • Operations research:
• Decision making is the main focus in
operations research and managerial
economics.
• If managerial economics focuses on problems
of decision making.
• Operation research focuses on solving the
managerial problems.

23. • In other words operations research is the tool
for finding the solutions for many a
managerial problems.
• Model building is one area of common
exercise.
• It is used to establish economic and logical
relationships among the given variables.
• It refers to both minimization of costs and
maximization of revenues.

24. • Mathematics:
• M.E. is concerned with estimating and
predicting the relevant economic factors for
decision making and forward planning.
• In this process he extensively makes use of the
tools and techniques of mathematics such as
algebra, calculus, exponentials, vectors inputoutput tables and such other .

25. • Statistics:
• statistics deals with different techniques useful
to analyze the cause and effect relationships in a
given variable or phenomenon.
• It also empowers the manager to deal with the
situations of risk and uncertain through its
techniques such as probability .
• The business environment for the managerial
economist is full of risk and uncertainty and he
extensively makes use of the statistical
techniques such as averages, measures of
dispersion,correlation,regression,time
series,interpolation,probability, and so on.

26. • Accountancy:
• the accountant provides accounting information
relating to costs, revenues, receivables, payables,
profits/losses ethane this forms the basis for the
managerial economist to act upon.
• This forms authentic source of data about the
performance of the firm.
• The main objective of accounting function is to
record, classify and interpret the given
accounting data.
• The managerial economist profusely depends
upon accounting data for decision making and
forward planning.

27. • Psychology:
• consumer psychology is the basis on which managerial
economist act upon.
• How the customer reacts to a given change in price or
supply and its consequential effect on demand/profits
is the main focus of study in managerial economics.
• We assume that the behavior of the consumer is
always rational, which is reality is not so , psychology
contributes towards understanding the behavior
implications, attitudes and motivations of each of the
microeconomic variables such as consumer,
supplier/seller. investor, worker or an employer.

28. • Organizational behavior:
• O.B enables the managerial economist to
study and develop behavioral models of the
firm integrating the manager’s behavior with
that of the owner.
• This further analyses the economic rationality
of the firm in a focused way.