Dr.

Smita Shukla

INTRODUCTION TO MANAGERIAL
ECONOMICS
WHAT IS ECONOMICS?

 Economics is the branch of knowledge concerned

with the production, consumption and transfer of
wealth.
 It is the study of how scarce resources are
allocated to fulfill the infinite wants of consumers.
 Economists study choices we make as individuals,
and consequences of those choices
 Economists also study more subtle and indirect
effects of individual choice on our society
WHAT IS MICROECONOMICS?
 Micro
 Micro comes from Greek word mikros, meaning
“small”
 Microeconomics
 Study of behavior of individual households, firms,
and governments
 Choices they make
 Interaction in specific markets

 Focuses on individual parts of an economy,

rather than the whole

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MACROECONOMICS

 Macro
 Macro comes from Greek word, makros, meaning
“large”
 Macroeconomics
 Study of the economy as a whole
 Focuses on big picture and ignores fine details

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THE ECONOMIC PROBLEM

 Unlimited Wants

 Scarce Resources – Land, Labour, Capital

 Resource Use

 Choices
SCARCITY
 The excess of wants resulting from having limited
resources (land, labor, capital and entrepreneurs)
in satisfying the endless wants of people.
 It is a universal problem for societies – it is not
limited to poor countries.
 To the economist, all goods and services that have
a price are relatively scarce. This means that they
are scarce relative to people’s demand for them.
CHOICES

 Scarcity means that both economies and

firms have to make choices.
 What to produce, what is in highest demand

 How to produce, the least cost method

 For whom, people who are willing and able to

pay the price

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FACTORS IN DECISION MAKING

 People face tradeoffs.

 Opportunity cost.

 Making decisions at the margin.

 People respond to incentives.

 OPPORTUNITY COSTS

•Alleconomic questions and problems arise from scarcity.

•Economics assumes people do not have the resources to
satisfy all of their wants.
•Therefore, we must make choices about how to allocate
those resources.
• The cost of the next best use of your time or money when
you choose to do one thing rather than another is
opportunity cost.

Let's say you have Five hundred rupees. What would you
like to spend it on? There are a million things you would
love to spend the five hundred on, but let's imagine there
are only three things out there you really want to buy:
Pizza, Book, and movie tickets.
 MARGINAL ANALYSIS
 Marginal = additional or incremental

 MB=MC

 Marginal Benefit=Marginal Cost

 Cost-Benefit analysis is a central tool of many

decision makers

 incremental benefits available from any changes are

compared to the incremental costs of making the
change
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 “GOOD” ECONOMIC DECISIONS
 Marginal benefits > marginal costs
 Examples of marginal benefits:

↑ profit
↑ revenue
↓ cost
↑ safety
↓ risk
Marginal costs = opposite of above examples
MARGINAL ANALYSIS
(EXAMPLES)

Incremental Y/
Y X Incremental X

TR Units of output MR

TC Units of output MC

TP Units of input MP
MANAGERIAL ECONOMICS

 Managerial Economics is microeconomics

applied to decisions made by business

managers.
 BUSINESS ADMINISTRATION

DECISION PROBLEMS

TRADITIONAL ECONOMICS : DECISION SCIENCES :

THEORY AND METHODOLOGY TOOLS AND TECHNICS

MANAGERIAL ECONOMICS :
INTEGRATION OF ECONOMIC
THEORY AND
METHODOLOGY WITH TOOLS
AND TECHNICS BORROWED
FROM OTHER DECIPLINES

OPTIMAL SOLUTIONS TO
BUSINESS PROBLEMS
 GOALS OF A BUSINESS FIRM
- SINGLE GOAL OR MULTIPLICITY OF GOALS

1. PROFIT MAXIMIZATION - REVENUE MAXIMIZATION

COST MINIMIZATION

2. WEALTH MAXIMIZATION - VALUE MAXIMIZATION.

3. WILLIAM J. BAUMOL - SALES REVENUE MAXIMIZATION -

SUBJECT TO ATTAINMENT OF DESIRED
PROFIT TARGET.

4. WILLIAMSON'S MODAL – MANAGERIAL UTILITY MAXIMIZATION

5. HERBERT SIMON - SATISFYING BEHAVIOR THEORY

6. EDITH PEN ROSE - SIZE (GROWTH) MAXIMIZATION

7. K.W. ROTHSCHILD - LONG RUN SURVIVAL

ECONOMIC RESOURCES

Two broad categories:

 Property resources
 Land

 Capital

 Human resources
 Labour

 Entrepreneurial ability

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LAND

 Broader than commonly understood

 An economic resource which includes all the
natural resources that go into the production of
goods and services
 Income received by land is rent

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CAPITAL

 All the manufactured aids to production

used to produce goods and services and
distribute them to the final consumer
without directly satisfying human wants
 The process of producing and accumulating
these capital goods is known as investment
 Payment for capital is interest

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LABOUR

 Broader than commonly used

 All human physical and mental talents
(excluding entrepreneurial talent) that can be
used in producing goods and services
 Income accruing to labour is wage

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ENTREPRENEURIAL ABILITY

 A specialised form of human resource

 Involves the combining of the other resources
to produce a product, make non-routine
decisions, innovate, and bear risk
 Profit is the reward for entrepreneurship

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