Definition
Economics helps in the optimum utilization of scarce resources to achieve the
desired results. Management helps businesses in planning and decision making for
the companies to achieve their goals and objectives and maximize their profits.
Hence, Managerial Economics is the integration of the economic theories with the
business practices to facilitate the decision making and forward/future planning by
the management.
Scope of Managerial Economics
1. Demand Analysis and Forecasting: ME helps in analysing the demand, what
are the factors that affect the demand, when the demand is elastic and when
is it inelastic.
2. Production Analysis: Analysis of how much needs to be produced in the short
and long run.
3. Cost Analysis: Analysis of how much cost will be incurred, how to do cost
minimization and profit maximization.
4. Inventory Management: How the inventory needs to be managed and how
businesses need to keep a track of the stock of the resources.
Nature of Managerial Economics
1. Art and Science: ME can be considered as art because it involves logical
thinking and creative skills to facilitate business decisions and solve business
problems. It can be considered as a science because it involves the use of
economic principles and techniques to help in decision making and profit
maximization.
2. Microeconomics: As managerial economics deals with the activities of a single
business instead of the economy. Hence it is considered to fall under
microeconomics
3. Uses Macroeconomics: As a company functions in an external environment, it
serves the economy. Hence businesses need to analyse different
macroeconomic factors such as market conditions economic reforms
government policies and their impact on businesses
4. Multi- Disciplinary: ME is considered multi-disciplinary because it uses many
tools and principles belonging to various disciplines like accounting, finance
marketing, statistics, production function, mathematics, HR.
Importance of Managerial Economics
1. Provide Guidance in decision making
2. Helps in identifying business problems
3. Provides skill and tools to solve business problems
4. Helps in optimum use of resources
5. Helps in understanding the external factors
Principles of Managerial Economics
1. Opportunity cost Principle: the opportunity cost concept is useful in decision
involving a choice between different alternative courses of action. Resources
are scarce, we cannot produce all the commodities. To produce one
commodity, we must forego the production of another commodity.
2. Incremental Principle: This is when the decision taken decreases cost more
than the revenue. Also, it increases the revenue more than the cost. It
increases revenue more than it decreases other things and it decreases cost
more than it increases other things.
3. Principle of Time Perspective: Maintaining the balance in prioritizing the short
term and long-term decisions
4. Discounting Principle: This principle states that a certain amount of money
today has more value than the same amount of money later.
5. Equi-Marginal Principle: According to this principle, a input should be added in
such a way that the value added by the last unit is same in all the cases.
Firm is a commercial enterprise that buys/sells products or services to consumers
with an idea of making a profit.
Objectives of a firm:
1. Maximization of Profit
2. Maximization of Sales Revenue
3. Maximization of the firm’s Growth Rate
4. Maximization of manager’s utility function
5. Long Run Survival of the Firm
6. Entry Prevention and Risk Evidence
Utility
Definition: Utility is the measure of satisfaction an individual gets from the
consumption of a particular commodity. It’s a measurement of usefulness that a
consumer obtains from any good.
