INTRODUCTION

TO
ECONOMICS
MANAGERIAL ECONOMICS
Syllabus
• INTRODUCTION TO ECONOMICS – MANAGERIAL ECONOMICS
• 1.1 Managerial Economics and Decision Making
• 1.2 Fundamental concepts in Managerial economics that aid decision
making:
o Incremental Principle
o Opportunity Cost
o Discounting Principle
o Time Concept
o Equi-Marginal Principle
• 1.3 Illustrations on fundamental concepts in Managerial Economics
Managerial economics is an evolutionary science, it is a journey
with continuing understanding and application of economic
knowledge — theories, models, concepts and categories in
dealing with the emerging business/managerial situations and
problems in a dynamic economy.
"Managerial economics is the Integration of economic theory
with business practices for the purpose of facilitating decision
making and forward planning by management“

-Spencer and Siegelman

Managerial Economics and Decision Making
 Demand Analysis and Forecasting
 Cost Analysis
 Pricing Strategies
 Profit Management
 Capital Budgeting
 Production and Cost Functions
 Risk Analysis
 Market Structure Analysis
 Decision Support Systems (DSS)
Demand analysis and forecasting.
• Accurate estimates of demand help a firm in minimizing its
costs of production and storage.
• A firm must decide its total output before preparing its
production schedule and deciding on the resources to be
employed.
• Demand forecasts serves as a guide to the management for
maintaining its market share in competition with its rivals,
thereby securing its profit.
Cost and production analysis.
• A wise manager would prepare cost estimates of a range of
output, identify the factors causing variations in costs and
choose the cost-minimizing output level.
• Consider the degree of uncertainty in production and cost
calculations.
• Business manager works to carry out the production function
analysis in order to avoid wastages of materials and time.
Pricing decisions, policies and practices.
• A firm's income and profit depend mainly on the price decision
• The pricing policies and all such decisions are to be taken after
careful analysis of the nature of the market in which the firm
operates.
• The important topics covered in this field of study are:
• Market Structure Analysis
• Pricing Practices
• Price Forecasting
Profit management.
• A successful business manager is one who can form more or
less correct estimates of costs and revenues at different levels
of output.
• Manager is in reducing uncertainty, the higher are the profits
earned by him.
• Profit-planning and profit measurement constitutes the most
challenging area of business economics.
Capital management.
• Investments are made in the plant and machinery and
buildings which are very high. Therefore, capital management
requires top-level decisions.
• It means capital management i.e., planning and control of
capital expenditure.
• It deals with Cost of capital, Rate of Return and Selection of
projects.
Inventory management:
• A firm should always keep an ideal quantity of stock.
• Production will be interrupted due to non-availability of
materials.
• A firm always prefers to have an optimum quantity of stock.
• Managerial economics will use some methods such as ABC
analysis, inventory models with a view to minimizing the
inventory cost.
External Environmental Risk:
• There are certain issues of macroeconomics which also form a
part of managerial economics.
• These issues relate to general business, social and political
environment in which a business enterprise operates.
Business cycles:
• Business cycles affect business decisions.
• They refer to regular fluctuations in economic activities in the
country.
• The different phases of business cycle are Expansion,Peak,
recession, depression, recovery, prosperity, boom.
a) Choice of business and the nature of products, that is, what to
produce?,
b) Choice of size of the firm, that is, how much to produce?,
c) Choice of technology, that is, choosing the factor-combination
(technique of production)
d) Choice of price, that is, how to price the commodity?,
e) How to promote sales?,
f) How to face competition?,
g) How to decide on new investments?,
h) How to manage profit and capital?,
i) How to manage an inventory?, that is, stock of both finished
goods and raw materials.
• Micro economic character
• Managerial economics is normative economics
• Managerial economics is pragmatic
• Managerial economics make use of macro economics
• Managerial economies theory of the firm
Micro economic character
• This is so because it studies the problems of an individual business
unit.
• It does not study the problems of the entire economy.
Managerial economics is normative economics
• It is concerned with what management should do under particular
circumstances.
• It determines the goals of the enterprise.
• Then it develops the ways to achieve these goals.
Managerial economics is pragmatic
• It concentrates on making economic theory more application
oriented.
• It tries to solve the managerial problems in their day-today
functioning.
Managerial economics make use of macro economics
• Macro-economics provides an intelligent understanding of the
environment in which the business operates.
• Managerial economics takes the help of macro-economics to
understand the external conditions such as business cycle, national
income and economic policies of Government etc.
Managerial economies theory of the firm
• Managerial economics largely uses the body of economic concepts
and principles towards solving the business problems.
• Managerial economics is a special branch of economics to bridge the
gap between economic theory and managerial practice.
Basic Economics Concepts that aid Decision Making:

 Incremental concept /principle

 Discounting Principle
 Principle of Opportunity Cost
 Concept of Time Perspective
 Equi-marginal principle
Incremental concept
• The main objective of this principle is maximization of profits.
• Incremental principle focuses on the changes in total costs and total
revenues resulting from a decision.
• Helps managers decide whether to proceed with an action by
evaluating whether the incremental benefits outweigh the
incremental costs.
Incremental concept
• The main objective of this principle is maximization of profits.
• Impact of decision alternatives on cost and revenues.
• Incremental principle focuses on the changes in total costs and total
revenues resulting from a decision.
• Helps managers decide whether to proceed with an action by
evaluating whether the incremental benefits outweigh the
incremental costs.
Key components:
• Incremental cost: The change in total cost resulting from a
decision.
• Incremental revenue: The change in total revenue resulting
from a decision.
A decision is profitable if it:
• Increases revenues more than it increases costs.
• Reduces some costs more than it increases others.
• Increases some revenues more than it decreases others.
• Decreases costs more than it decreases revenue.
Incremental concept
The two fundamental concepts-
 Incremental revenue
 Incremental cost
This principle wants to stress that a decision is sound or valid where the
increased revenue should be more than the increased cost.
E.g. Let the cost be increased 5%, revenue increase should be more than
5%.
Or, the reduces costs should be more than its reduces revenue.
E.g. Let the cost cut be 5% , the revenue lose should be Less than 5%
Discounting Concept
• The process of determining the present value of a payment or a stream
of payments that is to be received in the future.
• Discounting is the method used to figure out how much these future
payments are worth today.
• It is most relevant in investment decisions.
• For Example,
The future value of a present receipt Rs.100 , after one year with a n
interest of 10% is RS.110
The present value of a receipt of Rs.110 after one year is Rs.100 at a
discount or interest of 10%
Discounting Concept
What is The Time Value of Money?
• A dollar received today is worth more than a dollar received tomorrow
• This is because a dollar received today can be invested to earn interest
• The amount of interest earned depends on the rate of return that can be
earned on the investment
• Time value of money quantifies the value of a dollar through time
PV =

FV = PV(1+i)n
where: i = discount rate,
n= time
Opportunity Cost
• Resources are scarce and limited.
• Opportunity cost is a fundamental concept in economics that
represents the value of the next best alternative that is foregone when
a decision is made.
• It highlights the trade-offs involved in any decision-making process,
emphasizing that choosing one option means giving up others.
• When we put resources for a particular output, we forego some other
output.
• The opportunity cost of any action is the best alternative forgone
Opportunity Cost
Formula:
• The opportunity cost can be expressed as:
Opportunity Cost =
Return on Best Foregone Op on−Return on Chosen Option
Opportunity Cost
Examples:
• Personal Finance: If you decide to spend money on a vacation, the
opportunity cost might be the investment returns you could have
earned by saving that money.
• Business Decisions: A company choosing to invest in new equipment
rather than expanding its workforce faces the opportunity cost of the
potential productivity gains from additional employees.
• Time Management: For a student, the opportunity cost of attending a
lecture might be the time that could have been spent working a part-
time job.
Time Concept
• The time perspective concept states that the decision maker must give
due consideration both to the short run and long run effects of his
decisions.
• In analysing cost, revenue and profit, economist usually make
assumptions on time span like “short-run” and “long-run”.
• short-run” A time period when at least one input, such as plant size,
cannot be changed
• long-run”. The time period in which all factors of production can be
different
Time Concept – Short Run Examples
• Inventory management is based on short-term perspectives.
• A bus company has to manage extra tyres;
• A bookseller keeps high stock only before and initial month of
school/college semester beginning.
• Guides-books are stored more in quantity when examination period,
is near. It involves short-term business planning to maintain business
routine with the given business size.
Time Concept – Long Run Examples
• It is related to the long-run business planning for progress.
• In this regard, external influencing factors are also considered.
• For instance, when an airline assumes that business is expanding and
it has increased flights due to increasing number of travellers in the
years to follow on account of rising income level and economic growth
rates, it has to order extra aircrafts for replacement and for additional
flights, it is a long-term perspective.
Equi- Marginal Concept
• The Equi marginal principle is also known as the law of
substitution or the law of maximum satisfaction
• It guides optimal resource allocation in microeconomics.
• It states that consumers achieve maximum satisfaction when
the marginal utility per unit of money spent on each good is the
same.
• In other words, consumers allocate their income in a way that
ensures the last unit of currency spent on each good yields equal
marginal utility.
Equi- Marginal Concept
• This principle relates to optimum utilization of scarce resources,
when they are put to different uses.
• According to this principle, an input should be allocated to various
uses in such a way that the value added by the last unit of the input is
same for all the uses.
• This will ensure optimum utilization of scarce resources. E.g. Principle
of equi-marginal utility
Equi- Marginal Concept
How can we apply it in our daily life?
A consumer has a given income of Rs. 24.
He wishes to spend his income on three different goods
Dosa- (a)- Rs.2 per unit
Vada- (b)- Rs. 3 per unit
and Tea-(c)-Rs.5 per glass
Consumer is rational and seeks to maximize his satisfaction.
The consumer has a definite scale of preference as revealed by the
marginal utility schedule given below
Equi- Marginal Concept
For example, a company should distribute its advertising budget across
different media in such a way that the last dollar spent on each medium
yields the same marginal benefit.
The concept of scarcity in economics
• Refers to limited availability of resources compared to unlimited wants
and needs.
• Forces individuals and societies to allocate resources efficiently.
• Affects the monetary value of goods and services.
• Can be caused by increased demand, decreased supply, or both.
• Central to economic decision-making and resource allocation.