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MBA- 1st Semesterfor preparing production schedules and employing resources. It will helpmanagement to maintain or strengthen its market position and profit base.Demand analysis also identifies a number of other factors influencing thedemand for a product. Demand analysis and forecasting occupies a strategicplace in Managerial Economics.2. Cost and production analysis: A firm’s profitability depends much on its costof production. A wise manager would prepare cost estimates of a range ofoutput, identify the factors causing are cause variations in cost estimates andchoose the cost-minimising output level, taking also into consideration thedegree of uncertainty in production and cost calculations. Productionprocesses are under the charge of engineers but the business manager issupposed to carry out the production function analysis in order to avoidwastages of materials and time. Sound pricing practices depend much on costcontrol. The main topics discussed under cost and production analysis are: Costconcepts, cost-output relationships, Economics and Diseconomies of scale andcost control.3. Pricing decisions, policies and practices: Pricing is a very important areaof Managerial Economics. In fact, price is the genesis of the revenue of a firm adas such the success of a business firm largely depends on the correctness of theprice decisions taken by it. The important aspects dealt with this area are: Pricedetermination in various market forms, pricing methods, differential pricing,product-line pricing and price forecasting.4. Profit management: Business firms are generally organized for earningprofit and in the long period, it is profit which provides the chief measure ofsuccess of a firm. Economics tells us that profits are the reward for uncertaintybearing and risk taking. A successful business manager is one who can formmore or less correct estimates of costs and revenues likely to accrue to the firmat different levels of output. The more successful a manager is in reducinguncertainty, the higher are the profits earned by him. In fact, profit-planningand profit measurement constitute the most challenging area of ManagerialEconomics.9 P ag e

MBA- 1st Semester5. Capital management: The problems relating to firm’s capital investmentsare perhaps the most complex and troublesome. Capital management impliesplanning and control of capital expenditure because it involves a large sum andmoreover the problems in disposing the capital assets off are so complex thatthey require considerable time and labour. The main topics dealt with undercapital management are cost of capital, rate of return and selection of projects.6. Government Regulation: There are endless implications of governmentregulations on the business firm and at times the legal environment of businessis as important as the economic environment. So, it is necessary to examine lawrelated applications of economic principles.7. Management of Public Sector Enterprises:-Managerial economics can alsobe applied to the decision making process of non-profit seeking and publicsector enterprises. Economists in various government departments and publicsector organizations are also concerned with project evaluation and costbenefit analysis. MANAGERIAL ECONOMICS IN RELATION WITH OTHER DISCIPLINESManagerial economics has a close linkage with other disciplines and fields ofstudy. The subject has gained by the interaction with Economics, Mathematicsand Statistics and has drawn upon Management theory and Accountingconcepts. Managerial economics integrates concepts and methods from thesedisciplines and brings them to bear on managerial problems.10 P a g e

MBA- 1st Semester1. Managerial Economics and Economics:Managerial Economics is economics applied to decision making. It is a specialbranch of economics, bridging the gap between pure economic theory andmanagerial practice. Economics has two main branches—micro-economics andmacro-economics.Micro-economics:-‘Micro’ means small. It studies the behaviour of theindividual units and small groups of units. It is a study of particular firms,particular households, individual prices, wages, incomes, individual industriesand particular commodities. Thus micro-economics gives a microscopic view ofthe economy.The roots of managerial economics spring from micro-economic theory. Inprice theory, demand concepts, elasticity of demand, marginal cost marginalrevenue, the short and long runs and theories of market structure are sourcesof the elements of micro-economics which managerial economics draws upon.It makes use of well known models in price theory such as the model formonopoly price, the kinked demand theory and the model of pricediscrimination.11 P a g e

MBA- 1st SemesterMacro-economics:-‘Macro’ means large. It deals with the behaviour of thelarge aggregates in the economy. The large aggregates are total saving, totalconsumption, total income, total employment, general price level, wage level,cost structure, etc. Thus macro-economics is aggregative economics.It examines the interrelations among the various aggregates, and causes offluctuations in them. Problems of determination of total income, totalemployment and general price level are the central problems in macroeconomics.Macro-economies is also related to managerial economics. The environment, inwhich a business operates, fluctuations in national income, changes in fiscal andmonetary measures and variations in the level of business activity haverelevance to business decisions. The understanding of the overall operation ofthe economic system is very useful to the managerial economist in theformulation of his policies.Macro-economics contributes to business forecasting. The most widely usedmodel in modern forecasting is the gross national product model.2. Managerial Economics and Theory of Decision Making:The theory of decision making is relatively a new subject that has a significancefor managerial economics. In the process of management such as planning,organising, leading and controlling, decision making is always essential.Decision making is an integral part of today’s business management. A managerfaces a number of problems connected with his/her business such asproduction, inventory, cost, marketing, pricing, investment and personnel.Economist are interested in the efficient use of scarce resources hence they arenaturally interested in business decision problems and they apply economicsin management of business problems. Hence managerial economics iseconomics applied in decision making.3. Managerial Economics and Operations Research:Mathematicians, statisticians, engineers and others join together anddeveloped models and analytical tools which have grown into a specializedsubject known as operation research. The basic purpose of the approach is to12 P a g e

MBA- 1st Semesterdevelop a scientific model of the system which may be utilized for policymaking.The development of techniques and concepts such as Linear Programming,Dynamic Programming, Input-output Analysis, Inventory Theory, InformationTheory, Probability Theory, Queuing Theory, Game Theory, Decision Theoryand Symbolic Logic.4. Managerial Economics and Statistics:Statistics is important to managerial economics. It provides the basis for theempirical testing of theory. It provides the individual firm with measures ofappropriate functional relationship involved in decision making. Statistics is avery useful science for business executives because a business runs onestimates and probabilities.Statistics supplies many tools to managerial economics. Suppose forecastinghas to be done. For this purpose, trend projections are used. Similarly, multipleregression technique is used. In managerial economics, measures of centraltendency like the mean, median, mode, and measures of dispersion, correlation,regression, least square, estimators are widely used.Statistical tools are widely used in the solution of managerial problems.For example: Sampling is very useful in data collection. Managerial economicsmakes use of correlation and multiple regression in business problemsinvolving some kind of cause and effect relationship.5. Managerial Economics and Accounting:Managerial economics is closely related to accounting. It is recording the financial operation of a business firm. A business is started with the main aim ofearning profit. Capital is invested / employed for purchasing properties such asbuilding, furniture, etc and for meeting the current expenses of the business.Goods are bought and sold for cash as well as credit. Cash is paid to creditsellers. It is received from credit buyers. Expenses are met and incomesderived. This goes on the daily routine work of the business. The buying of13 P a g e

MBA- 1st Semestergoods, sale of goods, payment of cash, receipt of cash and similar dealings arecalled business transactions.The business transactions are varied and multifarious. This has given rise to thenecessity of recording business transaction in books. They are written in a setof books in a systematic manner so as to facilitate proper study of their results. There are three classes of accounts:(i) Personal account,(ii) Property accounts, and(iii) Nominal accounts.Management accounting provides the accounting data for taking businessdecisions. The accounting techniques are very essential for the success of thefirm because profit maximization is the major objective of the firm.6. Managerial Economics and Mathematics:Mathematics is another important subject closely related to managerialeconomics. For the derivation and exposition of economic analysis, we requirea set of mathematical tools. Mathematics has helped in the development ofeconomic theories and now mathematical economics has become a veryimportant branch of economics.Mathematical approach to economic theories makes them more precise andlogical. For the estimation and prediction of economic factors for decision making and forward planning, mathematical method is very helpful. The importantbranches of mathematics generally used by a managerial economist aregeometry, algebra and calculus.The mathematical concepts used by the managerial economists are thelogarithms and exponential, vectors and determinants, input-out tables.Operations research which is closely related to managerial economics ismathematical in character. MANAGERIAL ECONOMICS IN DECISION MAKING.Managerial economics uses a wide variety of economic concepts, tools, andtechniques in the decision-making process. These concepts can be placed inthree broad categories:14 P a g e

MBA- 1st Semester1. The theory of the firm, which describes how businesses make a variety ofdecisions.2. The theory of consumer behavior, which describes decision making byconsumers.3. The theory of market structure and pricing, which describes the structureand characteristics of different market forms under which business firmsoperate. ROLE OF MANAGERIAL ECONOMICS IN DECISION MAKINGManagerial economics, or business economics, is a division of microeconomicsthat focuses on applying economic theory directly to businesses. Theapplication of economic theory through statistical methods helps businessesmake decisions and determine strategy on pricing, operations, risk,investments and production. The overall role of managerial economics is toincrease the efficiency of decision making in businesses to increase profitRole Of ManagerialEconomics In DecisionMakingPricingElasticvs. sk1) Pricing:- Managerial economics assists businesses in determining pricingstrategies and appropriate pricing levels for their products and services. Somecommon analysis methods are price discrimination, value-based pricing andcost-plus pricing.2) Elastic vs. Inelastic Goods:- Economists can determine price sensitivity ofproducts through a price elasticity analysis. Some products, such as milk, areconsider a necessity rather than a luxury and will purchase at most price points.This type of product is considered inelastic. When a business knows they areselling an inelastic good, they can make marketing and pricing decisions easier15 P a g e

MBA- 1st Semester3) Operations and Production:- Managerial economics uses quantitativemethods to analyze production and operational efficiency through scheduleoptimization, economies of scale and resource analyses. Additional analysismethods include marginal cost, marginal revenue and operating leverage.Through tweaking the operations and production of a company, profits rise ascosts decline.4) Investments:- Many managerial economic tools and analysis models areused to help make investing decisions both for corporations and savvyindividual investors. These tools are use to make stock market investingdecisions and decisions on capital investments for a business. For example,managerial economic theory can be used to help a company decide betweenpurchasing, building or leasing operational equipment.5) Risk:- Uncertainty exits in every business and managerial economics canhelp reduce risk through uncertainty model analysis and decision-theoryanalysis. Heavy use of statistical probability theory helps provide potentialscenarios for businesses to use when making decisions. MANAGERIAL DECISION MAKING PROCESS (5 STEPS)16 P a g e

MBA- 1st SemesterDecision making is crucial for running a business enterprise which faces a largenumber of problems requiring decisions.Which product to be produced, what price to be charged, what quantity of theproduct to be produced, what and how much advertisement expenditure to bemade to promote the sales, how much investment expenditure to be incurredare some of the problems which require decisions to be made by managers.The five steps involved in managerial decision making process areexplained below:1. Establishing the Objective:-The first step in the decision making process isto establish the objective of the business enterprise. The important objective ofa private business enterprise is to maximize profits. However, a business firmmay have some other objectives such as maximization of sales or growth of thefirm.But the objective of a public enterprise is normally not of maximization ofprofits but to follow benefit-cost criterion. According to this criterion, a publicenterprise should evaluate all social costs and benefits when making a decisionwhether to build an airport, a power plant, a steel plant, etc.17 P a g e

MBA- 1st Semester2. Defining the Problem:-The second step in decision making process is oneof defining or identifying the problem. Defining the nature of the problem isimportant because decision making is after all meant for solution of theproblem. For instance, a cotton textile firm may find that its profits aredeclining.It needs to be investigated what are the causes of the problem of decreasingprofits. Whether it is the wrong pricing policy, bad labour-managementrelations or the use of outdated technology which is causing the problem ofdeclining profits. Once the source or reason for falling profits has been found,the problem has been identified and defined.3. Identifying Possible Alternative Solutions (i.e. Alternative Courses ofAction):- Once the problem has been identified, the next step is to find outalternative solutions to the problem. This will require considering the variablesthat have an impact on the problem. In this way, relationship among thevariables and with the problems has to be established.In regard to this, various hypotheses can be developed which will becomealternative courses for the solution of the problem. For example, in case of theproblem mentioned above, if it is identified that the problem of declining profitsis due to be use of technologically inefficient and outdated machinery inproduction. The two possible solutions of the problem are:(1) Updating and replacing only the old machinery.(2) Building entirely a new plant equipped with latest machinery.The choice between these alternative courses of action depends on which willbring about larger increase in profits.4. Evaluating Alternative Courses of Action:-The next step in businessdecision making is to evaluate the alternative courses of action. This requires,the collection and analysis of the relevant data. Some data will be availablewithin the various departments of the firm itself, the other may be obtainedfrom the industry and government.The data and information so obtained can be used to evaluate the outcome orresults expected from each possible course of action. Methods such asregression analysis, differential calculus, linear programming, cost- benefit18 P a g e

MBA- 1st Semesteranalysis are used to arrive at the optimal course. The optimum solution will beone that helps to achieve the established objective of the firm. The course ofaction which is optimum will be actually chosen. It may be further noted thatfor the choice of an optimal solution to the problem, a manager works undercertain constraints.The constraints may be legal such as laws regarding pollution and disposal ofharmful wastes; they way be financial (i.e. limited financial resources); theymay relate to the availability of physical infrastructure and raw materials, andthey may be technological in nature which set limits to the possible output tobe produced per unit of time. The crucial role of a business manager is todetermine optimal course of action and he has to make a decision under theseconstraints.5. Implementing the Decision:- After the alternative courses of action havebeen evaluated and optimal course of action selected, the final step is toimplement the decision. The implementation of the decision requires constantmonitoring so that expected results from the optimal course of action areobtained. Thus, if it is found that expected results are not forthcoming due tothe wrong implementation of the decision, then corrective measures should betaken.However, it should be noted that once a course of action is implemented toachieve the established objective, changes in it may become necessary fromtime to time in response in changes in conditions or firm’s operatingenvironment on the basis of which deci

MANAGERIAL ECONOMICS INTRODUCTION OF MANAGERIAL ECONOMICS Managerial Economics (also called Business Economics) a subject first introduced by Joel Dean in 1951, is essentially concerned with the economic decisions of business managers.