ANUJA M. CHAVAN
PROF. AVDHESH YADAV
Economics is the study of the production
and consumption of goods and the transfer
of wealth to produce and obtain those
Economics explains how people interact
within markets to get what they want or
accomplish certain goals. Since economics
is a driving force of human interaction,
studying it often reveals why people and
governments behave in particular ways.
According to McNair
consists of the use of
economic modes of
thought to analyze
Economics is: “the study of how people
allocate scarce resources.”
Managerial economics focuses on how
managers allocate their scarce resources:
Economics can be divided into two broad
micro economics : Microeconomics focuses
on the behavior of the individuals on the
economic stage, that is, firms and
individuals and their interaction in markets.
macro economics: Macroeconomics is the
study of economic system as a whole.
It is an application of the part of
microeconomics that focuses on the topics that
are of greatest interest and importance to
Managerial Economics includes:
Characteristics of Managerial
Managerial Economics is micro-economic in
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 avoids
difficult abstract issues of economic theory but
involves complications ignored in economic theory to
face the overall situation in which decisions are
Managerial Economics, however, is concerned with
what decisions ought to be made and hence involves
Production and Supply
Production analysis is narrower in scope than cost analysis. Production analysis frequently proceeds in physical terms while
cost analysis proceeds in monetary terms. Production analysis mainly deals with different production functions and their
Supply analysis deals with various aspects of supply of a commodity. Certain important aspects of supply analysis are supply
schedule, curves and function, law of supply and its limitations. Elasticity of supply and Factors influencing supply.
Pricing Decisions, Policies and Practices
Pricing is a very important area of Managerial Economics. In fact, price is the ness of the revenue of a firm and as such the
success of a business firm largely depends on the correctness of the prices decisions taken by it. The important aspects
dealt with under this area are :- Price Determination in various Market Forms, Pricing methods, Differential
Pricing, Product-line Pricing and Price Forecasting.
Business firms are generally organized for the purpose of making profits and, in long run, profits provide the chief measure
of success. In this connection, an important point worth considering is the element of uncertainty exiting about profits
because of variations in costs and revenues which, in turn, are caused by torso both internal and external to the firm. If
knowledge about the future were fact, profit analysis would have been a very easy task. However, in a world of
certainty, expectations are not always realized so that profit planning and measurement constitute the difficult are of
Managerial Economics. The important acts covered under this area are :- Nature and Measurement of Profit, Profit Testing
and Techniques of Profit Planning like Break-Even Analysis.
Of the various types and classes of business problems, the most complex and able some for the business manager are likely
to be those relating to the firm’s investments. Relatively large sums are involved, and the problems are so complex that their
disposal not only requires considerable time and labour but is a term for top-level decision. Briefly, capital management
implies planning and trolls of capital expenditure. The main topics dealt with are :- Cost of Capital, Rate return and
Selection of Project.
Principle of Economics can help a Manager in taking
decisions in various business situations. These can be
summarized with the help of the following diagram –
We need to understand the reasons for consumption, factors affecting
consumption, constraints faced by the consumers, the decision-making
process of the consumer as regards price to be paid, quantity to be
purchased, allocation of resources between different needs, etc.
Theory of Demand helps in developing an understanding between
Price and quantity demanded.
Price Elasticity helps us understand the ability and willingness to pay
of different categories of consumers. This also helps us in Market
Cross Price Elasticity helps in identifying competitors which may not
be essentially within the same product category – eg. Should softdrinks manufacturers be seen as competitors for Tea?
Theory of Consumer’s Equilibrium helps in understanding how a
consumer allocates his income between different needs.
Having understood the various factors that affect demand for a
product and the decision-making process of a consumer helps business
managers in devising more effective sales, marketing and advertising
Production is perhaps the most important activity in a business organization. A Business Manager has to
take several decisions regarding production – eg. What to produce, what should be the plant capacity, what
should be the capacity utilization, which technology to use, etc.
While organizing of production activity, Business Managers have to take several factors into consideration,
such as –
(a) Objective of the Firm – To begin with the firm has to decide its objective. A Firm could have various
objectives such as profit maximization, sales maximization, maximization of market share, etc
(b) Profit Maximization – In traditional theory we examine a firm that has profit maximization as its central
objective. In order to maximize profits a firm has to minimize costs and maximize its revenues. Thus, a
deeper understanding of the Costs and Revenues is required for achieving this objective.
(c) Revenues – Revenues of a firm depend on the demand scenario and the competitive scenario in the
market. The understanding of the above two would be essential for a business manager to predict the
revenues that the business will be able to generate.
(d) Demand scenario – To decide on the plant capacity and capacity utilization, an understanding of quantity
demanded in the market in different time periods is important
(e) Market Structures – In addition to the quantity demanded, one has to understand the competitive
scenario. How many players are competing for the given market demand? What is the market structure and
how will it impact the firm’s own sales?
(f) Costs – In order to maximize profits, a firm needs to minimize costs. Costs are impacted by several
factors. Primary among them are quantity of production and factor prices.
(g) Technology – Technology has multi-dimensional impact on costs. On one hand technology determines what
combination of various factors is to be used – eg. capital-intensive technology or labor intensive technology.
(h) Factor Pricing – Technology dictates a certain combination of factors that need to be used.
Finally, businesses operate in a given social, political and economic
There is a symbiotic relationship between the business and its
A business organization, through its operations, causes an impact
on the surrounding socio-economic conditions. So also, the socioeconomic environment prevailing in the outer world has an impact on
From time to time, Business Managers are required to foresee the
changes in the outer world, analyze their likely impact on their
business and take necessary corrective actions.
Events from the economic environment such as changes in
government policies, tax structures, trade regulations, changes in
key variables such as interest rates, inflation, etc., business
cycles and growth projections are some of the important events
that directly or indirectly impact every business activity.
Knowledge of macroeconomics is quite often required to be able to
predict these events in the economy and understand the likely
impact of these changes on business.
As pointed out earlier, a Business Manager
deals with a group of human beings plating
different roles – e.g.. consumers, suppliers,
share-holders, workers, etc.
Economics studies the fundamental
motivating factors behind behavior of these
different economics agents.
This knowledge would thus help the Business
Manager in influencing behavior of these
economic agents in a manner that enables
the business to achieve its objectives.
An important part of study of economics is
to understand the decision criterion of
different economic agents such as
consumers, firms, workers, etc.
Economics aims at arriving at a logical
method of arriving at a decision given the
objectives that the economic agent has to
achieve and the constraints within which she
This technique is helpful to a Business
Manager in taking the numerous decisions
that she is required to take during the
course of her work.
The above techniques of decision-making
studied in economics can be used for taking
a wide range of decisions including those
regarding allocation of resources, capital
management, distribution and logistics, etc.
e.g.. If a decision has to be taken for
distributing a capital of Rs. 1 million
between various used A, B and C, the
technique of Marginal Analysis tells us that
the Capital should be distributed in such a
manner that the marginal returns from each
use is equal.
The decision criteria tells what information
would be required so as to enable us to take
the right decision.
One can use this input in designing a proper
MIS that is relevant and useful
e.g.. In the above case the MIS should be
designed to give the manager information
about marginal returns. Instead, if the MIS
gives information about average and total
returns, it would not help in the decisionmaking process.
Economics introduces us to certain
differences between good accounting
decisions and good business decisions.
It tells us how a result which may seemingly
be good and proper in accounts may, in-fact
be a wrong business decision.
e.g.. it may not be taking into account
opportunity costs or replacement costs.
Economics helps Business Managers in enlarging their
scope of Cost-Benefit Analysis.
Economics informs us that the C-B Analysis should
not be looked at from the narrow perspective of
immediate increase in profitability to business.
Along with this a more comprehensive Social CostBenefit Analysis is also essential to understand the
long-term implications of business on the economy and
Such an understanding can also be leveraged to
enhance the overall profitability of business.
e.g.. Ability of business to generate employment in
the economy can be used as leverage in extracting
tax concessions from the government.