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Introduction to managerial economics:

The economy is an institutional framework through which individuals in a society,
together with the firms and the industry in large coordinate to meet their desires
and ends. The study of an economy is known as economics which is also called a
social science, since it studies the economic behavior of people, the way and
means by which they achieve their ultimate objectives .
An economic institution is a physical or mental structure that significantly
influences the economic decisions.corporations, governments,firms are all the
economic institutions. There are various factors which affect the working of these
institutions namely:
a. Cultural.
b. economic factors.
c. political factors.
Political factors are how and to what degree government intervenes in the
economy. Specifically, political factors include areas such as tax policy,
labour law, environmental law, trade restrictions, tariffs, and political
stability. Political factors may also include goods and services which the
government wants to provide or be provided (merit goods) and those that
the government does not want to be provided (demerit goods or merit
bads). Furthermore, governments have great influence on the
healtheducation, and infrastructure of a nation.
Economic factors include economic growth, interest rates, exchange rates
and the inflation rate. These factors have major impacts on how
businesses operate and make decisions. For example, interest rates affect
a firm's cost of capital and therefore to what extent a business grows and
expands. Exchange rates affect the costs of exporting goods and the
supply and price of imported goods in an economy
Social factors include the cultural aspects and include health
consciousness, population growth rate, age distribution, career attitudes
and emphasis on safety. Trends in social factors affect the demand for a
company's products and how that company operates. For example, an
aging population may imply a smaller and less-willing workforce (thus
increasing the cost of labor). Furthermore, companies may change various
management strategies to adapt to these social trends (such as recruiting
older workers).
Technological factors include technological aspects such as R&D activity,
automation, technology incentives and the rate of technological change.
They can determine barriers to entry, minimum efficient production level
and influence outsourcing decisions. Furthermore, technological shifts can
affect costs, quality, and lead to innovation.
Environmental factors include ecological and environmental aspects such
as weather, climate, and climate change, which may especially affect
industries such as tourism, farming, and insurance. Furthermore, growing
awareness of the potential impacts of climate change is affecting how
companies operate and the products they offer, both creating new markets
and diminishing or destroying existing ones.
Legal factors include discrimination law, consumer law, antitrust law,
employment law, and health and safety law. These factors can affect how a
company operates, its costs, and the demand for its products.
Complexity of modern business world:
Main characteristics of market economies:

a.individuals pursue their own self-interest ,buying and sellingwhat
seems best for themselves and their families.
b.people respond to incentives.
c.prices are set in the open markets in which suppliers compete to
sell to potential buyers.
d.people earn their living by selling their services.
e.all these activities are governed by a legal framework largely
created and administered by the state.

Modern economies are based on specialization and division of labour,which
necessitate the exchange of goods and services. Exchange takes place in
markets and is facilitated by the use of money. Market work to coordinate millions
of individuals, decentralized decisions.
There are three key issues which are faced by all the economies:

a. What should be produced: how should the nation s scarce
resources be allocated between the various possible kinds of
b.efficient production: the resources which are available should be
utilized in such a way that there is no wastage and the resources
should be fully employed.
c.economic growth: every production process aims at achieving the
desired rate of economic growth.

Reasons for complex business world:
Scarcity of resources.
Unlimited desires and wants.
Production choices.

Globalization: market economies are constantly changing as a
result of the development of new products and the new
technologies. The two major causes of globalization are the
rapid reduction in transportation costs and the revolution in
information and technology. This has led to globalizing
markets thus making business complex.

Also the growing complexity of business can be attributed to the
growth of large scale industries, diversification of industries,
corporate firms ,growth of multinational corporations, mergers and
take overs.
Thus these circumstances have led to the increased the application
of economic concepts ,theories, and tools of economic analysis in
this area. Appropriate business decision-making requires a clear
understanding of maket conditions, market fundamentals and the
external business environment. This requires an intensive and
extensive analysis of market conditions in the product ,input and the
financial markets. Economic tools ,theories and logical analysis have
been developed to analyze and predict market behavior.

Managerial economics:
Economic theories and analytical tools which are widely used in
business buseness decision making have crystallized into a
separate branch of management studies ,called managerial

Definitions: According to McNair and Meriam, "Managerial
Economics consists of the use of economic modes of thought to analyse
business situation."
Spencer and Siegelman have defined Managerial Economics as "the integration
of economic theory with business practice for the purpose of facilitating decision
making and forward planning by management."
Managerial Economics as the discipline which deals with the
application of economic theory to business management. Managerial
Economics thus lies on the borderline between economics and
business management and serves as a bridge between economics
and business management.

Characteristics of managerial economics:
Managerial Economics is micro-economic in character.
Managerial Economics largely uses that body of economic concepts and
principles, which is known as 'Theory of the firm' or 'Economics of the firm'.
Managerial Economics is pragmatic. It is concerned with analytical tools that are
useful in practice or that promise to improve decision making in the future.
Managerial economics fills the gap between the abstract economic theories and
their application in the real business world situations.
Managerial economics uses the economic tools and analyses to
a. Identify their problems and achieve their goals.
b. collecting the relevant data from the market and analyze them systematically to
arrive at the conclusion.
c. draw the relevant conclusions and apply to the current scenario.
d. finally arrive at some suggestions for future course s actions.

Scope of managerial economics:

Managerial economics is the study of allocation of
resources available to a firm or a unit of management among the activities of that
unit. Managerial economics is concerned with the application of economic
and analysis to the problem of formulating rational managerial decisions.

There are four groups of problem in both decisions-making and forward planning.

Resource Allocation: Scare resources have to be used with utmost efficiency to
get optimal results. These include production programming and problem of
transportation etc. How does resource allocation take place within a firm?
Naturally, a manager decides how to allocate resources to their respective uses
within the firm.
Inventory and queuing problem: Inventory problems involve decisions about
holding of optimal levels of stocks of raw materials and finished goods over a
period. These decisions are taken by considering demand and supply conditions.
Queuing problems involve decisions about installation of additional machines or
hiring of extra labour in order to balance the business lost by not undertaking
these activities.
Pricing Problem: Fixing prices for the products of the firm is an important
decision-making process. Pricing problems involve decisions regarding various
methods of prices to be adopted.
Investment Problem: Forward planning involves investment problems. These are
problems of allocating scarce resources over time. For example, investing in new
plants, how much to invest, sources of funds, etc.

Study of managerial economics essentially involves the analysis of certain major
subjects like:
The business firm and its objectives
Demand analysis, estimation and forecasting
Production and Cost analysis
Pricing theory and policies
Profit analysis with special reference to break-even point
Capital budgeting for investment decisions
Demand analysis and forecasting help a manager in the earliest stage in
the product and in planning output levels. A study of demand elasticity goes a
way in helping the firm to fix prices for its products. The theory of cost also forms
an essential part of this subject. Estimation is necessary for making output
variations with fixed plants or for the purpose of new investments in the same
of production or in a different venture. The firm works for profits and optimal or
near maximum profits depend upon accurate price decisions. Theories regarding
price determination under various market conditions enable the firm to solve the
price fixation problems. Control of costs, proper pricing policies, break-even
analysis, alternative profit policies are some of the important techniques in profit
planning for the firm which has to work under conditions of uncertainty. Thus
managerial economics tries to find out which course is likely to be the best for
the firm under a given set of conditions.
Managerial economics comprises both the micro and macro economics. The
areas of business issues to which the economic theories can be directly
applied are divided into two catagories:
a. Operational or internal issues.#
b,external or the environmental factors affecting the business world.
Microeconomics applied to operational issues:
There are various internal issues which affect the working of the business
1.choice of business and the nature of product,what to produce.
2.choice of size of the firm,how to much to produce.
3.choice of technology ie choosing the factor combinations. to promote sales. to manage inventory. to manage profit and capital.
Micro economic theories which deal with these issues are:
a.theory of demand.
b.theory of production and production decions.
c.analysis of market structures and the pricing theory.
d.profit analysis and profit management.
E theory of caqpital and investment decision.
Macro economics applied to business environment.
There are various macro economi issues which affect the business
environment. these are
1.the type of economic system prevailing.
2.general trends in production,employment,income,prices,savings and
3. the structure of financial institutions.
4,trends in labor market ( the extent of productivity).
5.the sophistication of the capital market.
6.political environment and the social system which has direct bearing on the
production process and the distribution of goods and services within the
7.issues related to foreing trade.
Managerial economics is concerned with the economic environment which has
a direct bearing on the business world. It is important for any business
manager to analyse the various macro economic variables so that they can take
prudent business decisions. The various industrial politicies continuously
needs to be studied time and again to know the benefits and the norms which
needs to be undertake,
Some areas which has a direct bearing on the business world of any economy
are concentration of economic power, growth of monopoly, state of technology,
existence of mass poverty, taxation policy,labour policy, business cycles,
economic growth and economic factors .
Macro economic issues :
The various macroeconomic issues which affect the business decisions can be
broadly categorized into following:
issues related to macro variables: general trends in the economic
activities of the country ,investment climate, trends in output and
employment, and the price trends. These factors have a direct bearing
on the prospects of a private business. when a firm is planning to start
up a new firm they must know the general trend of the economy.
Issues related to government policies: the government polices needs to
be understood time and again by the business manaers to update its
strategy and planning ,in order to get the maximum profit.
Issues related to foreign trade: globalization has brought the countries
closer to such an extent that the fluctuations in any one part of the world
,affects the others. the recent example is of the recession in US in
2007.the fluctuations in the exchange market also affects the domestic
business directly. therefore the trends in international arena needs to be
closely examined by the business managers so that they can formulate
policies of their firms ,accordingly. The prospects in the international
market needs to be carefully and continuously studied so that the
maximum profit is achieved together with the presence in global markets.