Managerial economics is the

integration of economic
theory with business practice
for the purpose of facilitating
decision making and forward
planning by management
Applies
economics tools and
techniques to business
and
administrative decision
making
From frictional
profit theory :
• Profit from
noncompetition
• Profit from innovation
• Profit from efficiency
☻ Demand is the quantity of a
good or service that customers
are willing and able to purchase
during a specific period under a
given set of economic
conditions.
Managerial economics is used to manage
cost effectively.
It consists of three branches:
competitive markets,
market power,
and imperfect markets.
A market consists of buyers and sellers
that communicate with each other for
voluntary exchange. Whether a market is
local or global, the same managerial
economics apply
Concepts of ME
 A seller with market power will have
freedom to choose suppliers, set prices,
and use advertising to influence
demand. A market is imperfect when
one party directly conveys a benefit or
cost to others, or when one party has
better information than others.
 An organization must decide its vertical
and horizontal boundaries. For effective
management, it is important to
distinguish marginal from average
values and stocks from flows.
Application.
(a) Businesses (such as decisions in relation
to customers including pricing and
advertising; suppliers; competitors or the
internal workings of the organization),
nonprofit organizations, and households.

 (b) The “old economy” and “new economy” in

essentially the same way except for two
distinctive aspects of the “new economy”: the
importance of network effects and scale and
scope economies.
i. network effects in demand – the benefit
provided by a service depends on the total
number of other users, e.g., when only one
person had email, she had no one to
communicate with, but with 100 mm users
on line, the demand for Internet services
mushroomed.
ii. scale and scope economies – scaleability is
the degree to which scale and scope of a
business can be increased without a
corresponding increase in costs, e.g., the
information in Yahoo is eminently scaleable
(the same information can serve 100 as well
as 100 mm users) and to serve a larger
number of users, Yahoo needs only increase
the capacity of its computers and links.
iii. Note: the term open technology (of the
Internet) refers to the relatively free
 Nature of Managerial Economics
 1) Integration of Economic Theory and business management
:Managerial Economics is integration of traditional theoretical
concepts of economics with problems of managements of
business. It lies midway between economics and business
management and serves as a link between the two. Business
matter is said to be the subject matter of the managerial
economics.
 2) Application Oriented: IT deals with the application of
economic principles to the problems of the firm. It uses the
various financial data of profit and cost.
 3) Character of Microeconomics: micro economic means the
study of individual economic behavior where resources
are costly, e.g., how consumers respond to changes in
prices and income, how businesses decide on
employment and sales voters’ behavior and setting of
tax policy.
 4) Concerned with the reckoning of profit only
Scope of Managerial Economics
 (a) Microeconomics – the study of individual economic
behavior where resources are costly, e.g., how
consumers respond to changes in prices and income,
how businesses decide on employment and sales,
voters’ behavior and setting of tax policy.
 (b) Managerial economies – the application of
microeconomics to managerial issues (a scope more
limited than microeconomics).
 (c) Macroeconomics – the study of aggregate economic
variables directly (as opposed to the aggregation of
individual consumers and businesses), e.g., issues
relating to interest and exchange rates, inflation,
unemployment, import and export policies.
 THE ISSUES ADDRESSED BY
MANAGERIAL ECONOMICS

 WHAT TO PRODUCE?
 HOW TO PRODUCE?
 HOW TO DISTRIBUTE?
WHAT IS THE MARKET?

 Market is the platform where

consumers and producers seek to
maximize satisfaction and profits
respectively ,with and negotiate and
arrive at the best possible solutions.

In the Market there are two prominent

forces
 Demand
 Supply
Economics shows the how the market
mechanisms are provides solution

If the outcome of the working of market

forces is the emergence of one large supplier ,
such as Microsoft , in the computer software
industry

 Will the supplier then exploit the market,

 Will the supplier become complacent about
efficiency because there is no one to compete
with?

Thus economics provides area of

regulation –directing the market forces to
MARKET IN MANAGERIAL ECONOMICS

 There are also such situations where the market fails

to give solutions for example
 Let us take the case where the Government decides to
build a lighthouse ,How much should the users be
charged ,and,if charged how can the non-payers be
prevented from the lighthouse ? The market will not
provide solutions because users will not reveal their
preference and the value attached to the services of
light house,because they can continue to use the light
from the lighthouse without revealing its worth to
them.This effectively means that the demand force is
nonexistent and so the market mechanism ,which relies
on the interaction between demand and the supply
 ECONOMICS
 MICRO ECONOMICS
1) Market Economy
a) Theory of Demand
b) Theory of production
(a+b =Theory of product pricing).
2) Theories of Distribution
i) Rent
ii) Wages
iii)Interest
iv) Profits
3) Welfare Economics
 Macro Economy
Different Policy to solve the major
Problems.
Economy problems-Poverty
,unemployment, inequalities in
income and wealth ,inflation and
deflation etc
Policies- Industrial, Trade etc
Scope of ME

 Demand Analysis
 Cost Analysis
 Pricing practices and policies
 Profit Management
 Capital budgeting
DEMAND ANALYSIS

 Any firm stands as an economic

organisms that turns its productive
recourses to good that are to be
demanded or sold in the market.
Thus ,demand analysis is quite
necessary for planning of the
business and it is the most important
turning point in managerial
economics, demand analysis
involves the study of demand
determinants, demand distinctions
Cost Analysis

 For sound profit planning and

control and also for better practices
, It is essential that economics cost
estimates be found out and effort s
be made to measure or quantify
them. The various factors that result
in variations in costs estimates
need special attention so as to be of
any use to management .The main
topics that come under cost analysis
are cost concepts, classification of
 Pricing practices and
policies
 Managerial economics has to deal
with pricing as a most important
field. Price gives the income of a
firm, and successful firm depends on
the accurate price decision taken by
it .the various important aspects that
are dealt with the managerial
economics are price determination in
various Markets, pricing policies and
strategies adopted by different firms,
differential pricing and price
Profit management
 Long run profit is the chief aim of all
enterprises . However, business runs
under the cover of uncertainty. There
are variations in Cost and incomes
which are the results of internal and
external factors. Future expectations
are difficult to realize and hence, it is
difficult for management to calculate
the exact planning.
Here managerial economics deals with
nature and measurement of profit
,choice of an appropriate price policy,
Break Even Analysis

 Owners and managers need to be familiar

with tools and techniques that aid them in
making short-term and long-term
decisions. One good tool that helps in
making decisions is known as Cost-
Volume-Profit Relationships.

 Cost-Volume-Profit Analysis deals with how

costs and profits change with a change in
volume. It analyzes the effects on profits
of changes in such factors as variable
costs, fixed costs, selling prices, volume,
and the mix of products sold
DEFINATION

 Break-Even Analysis, one of the

tools of Cost-Volume-Profit Analysis,
determines the break-even sales
which is the units and/or sales dollars
where total sales equals total costs
(expenses).
 Some examples of decisions where
Cost-Volume-Profit analysis can
provide help are:
 What price(s) should we charge for our products or
services ?
 How many units of a product should we produce ?
 Should we spend more on advertising ?
 Should we add or delete a product line ?
 Should we accept or decline a special order ?
 What sales mix (different products) should we strive
for ?
 What is the effect of a change to a different raw
material supplier ?
 Should we increase or decrease our work force ?
 How should we make our products ?
Simple Breakeven Analysis

 Two important definitions used in

break-even analysis are:
 Variable Costs (Expenses) are costs
that change directly in proportion to
changes in activity (volume).
 Fixed Costs (Expenses) are costs that
remain constant (fixed) for a given
time period despite wide fluctuations
in activity (volume).
 example to illustrate
break-even analysis.
 FleeMarket Bargains information, costs, and
prices:
 Sells cartoon watches that have a cost of
$10.00 (variable cost-expense)
 All unsold watches may be returned to the
supplier
 Booth rental costs $ 100.00 for the day (fixed
cost-expense)
 Selling price of the watches is $20.00
 We will use the above information to calculate
the number of watches (units) and the sales
dollars we need in order for our flea market
business to break even for the day.
 There are three methods that can be used to
calculate our break even point:
 Equation Method
 Methods used in Break even
Analysis
 Basic Breakeven Equation Method
Sales = Variable Expenses + Fixed
Expenses + Profit
.
 Contribution Margin Method
The Unit Contribution Margin is the difference
between your product's unit selling price and
its unit variable cost.
Unit Contribution Margin = Unit Sales Price -
Unit Variable Cost
 The graphical approach has an X-axis
(horizontal) that repesents Units (volume) and
a Y-axis (vertical) that represents Dollars and
contains lines for:
Sales
Variable Costs (Expenses)
Total Costs (Expenses)
Capital Budgeting

 A major problem facing a business

manager is the capital investment of
the firm .Capital Budgeting involves
planning and control of capital
expenses .Under this topic,
managerial economics includes
application of economic principles
and concepts and their adjustment
with various uncertainties brought up
before a business firm .
INCREAMENTAL
PRINCIPLE
INCREAMENTAL ANALYSIS

 The incremental reasoning is used in

accepting or rejecting a business
proposition or option. Whenever a
manager takes decision he asks the
question "Is it worthwhile?" The
implicit criterion is that incremental
benefit of the decision should exceed
its incremental costs. Decision or
action is worthwhile already if the
decision maker or is the firm can
expect to be better off than before.
 Original reasoning forces manager to
examine the changes in total
revenues and total costs resulting for
changes in production, sales, price
and related decisions. Wrong
decisions may follow if the focus is
on the concept of average rather
than on marginal analysis.

The two basic components of

incremental reasoning are
 1) Incremental cost
 2) Incremental Revenue
 TYPES
Incremental Cost :The encompassing change that a
company experiences within its balance sheet due to
one additional unit of production.

Incremental revenue: For a company, this is the total

amount of money received by the company for goods
sold or services provided during a certain time period. It
also includes all net sales, exchange of assets; interest
and any other increase in owner's equity and is
calculated before any expenses are subtracted. Net
income can be calculated by subtracting expenses from
revenue.

Refers to the increase of revenue between one

investment alternative and another. Incremental
revenue is used in financial decision making.
Incremental Revenue= New Revenue - Previous
Revenue