1. Introduction of Managerial
Economics

2. Introduction
• Managerial economics applies economic theory and
methods to business and administrative decision
making. Managerial economics prescribes rules for
improving managerial decisions. Managerial economics
also helps managers recognize how economic forces
affect organizations and describes the economic
consequences of managerial behavior. It links
traditional economics with the decision sciences to
develop vital tools for managerial decision making.
• Managerial economics identifies ways to efficiently
achieve goals. For example, suppose a small business
seeks rapid growth to reach a size that permits efficient
use of national media advertising. Managerial
economics can be used to identify pricing and
production strategies to help meet this short-run
objective quickly and effectively.

3. DEFINITION OF ECONOMICS
• Robbins has defined economics as, “The
science which studies human behavior as a
relationship between ends and scarce means
which have alternative uses.” This definition
seems to emphasis on three basic issues—
ends, scarce means, and alternative
applications

4. Cont…
• According to Samuelson and Nordhaus (1998);
• “Economics is the study of how societies use
scarce resources to produce valuable commodities
and distribute them among different people.”
• “Behind this definition are two key ideas in
economics: that goods are scarce and that society
must use its resources efficiently. Indeed,
economics is an important subject because of the
fact of scarcity and the desire of scarcity”.

5. SCOPE OF ECONOMICS
• The horizon of economics is gradually expanding. It is no more a
branch of knowledge that deals only with the production and
consumption. However, the basic thrust still remains on using the
available resources efficiently while giving the maximum
satisfaction or welfare to the people on a sustainable basis. Given
this, we can list some of the major branches of economics as under:
• 1. Microeconomics: This is considered to be the basic economics.
Microeconomics may be defined as that branch of economic
analysis which studies the economic behavior of the individual unit,
may be a person, a particular household, or a particular firm. It is a
study of one particular unit rather than all the units combined
together. The microeconomics is also described as price and value
theory, the theory of the household, the firm and the industry.
Most production and welfare theories are of the microeconomics
variety.

6. • 2. Macroeconomics: Macroeconomics may be
defined as that branch of economic analysis
which studies behaviour of not one particular
unit, but of all the units combined together.
Macroeconomics is a study in aggregates. Hence
it is often called Aggregative Economics. It is,
indeed, a realistic method of economic analysis,
though it is complicated and involves the use of
higher mathematics. In this method, we study
how the equilibrium in the economy is reached
consequent upon changes in the macro-variables
and aggregates.

7. • 3. International economics: As the countries of the modern
world are realising the significance of trade with other
countries, the role of international economics is getting
more and more significant nowadays.
• 4. Public finance: The great depression of the 1930s led to
the realization of the role of government in stabilizing the
economic growth besides other objectives like growth,
redistribution of income, etc. Therefore, a full branch of
economics known as Public Finance or the fiscal economics
has emerged to analyze the role of government in the
economy. Earlier the classical economists believed in the
laissez faire economy ruling out role of the government in
economic issues.

8. • 5. Development economics: As after the second world war many
countries got freedom from the colonial rule, their economics
required different treatment for growth and development. This
branch developed as development economics.
• 6. Health economics: A new realisation has emerged from human
development for economic growth. Therefore, branches like health
economics are gaining momentum. Similarly, educational
economics is also coming up.
• 7. Environmental economics: Unchecked emphasis on economic
growth without caring for natural resources and ecological balance,
now, economic growth is facing a new challenge from the
environmental side. Therefore, Environmental Economics has
emerged as one of the major branches of economics that is
considered significant for sustainable development.

9. • 8. Urban and rural economics: Role of location is quite
important for economic attainments. There is also much
debate on urban-rural divide. Therefore, economists have
realised that there should be specific focus on urban areas
and rural areas. Therefore, there is expansion of branches
like urban economics and rural economics. Similarly,
regional economics is also being emphasised to meet the
• challenge of geographical inequalities. There are many
other branches of economics that form the scope of
economics. There are welfare economics, monetary
economics, energy economics, transport economics,
demography, labour economics, agricultural economics,
gender economics, economic planning, economics of
infrastructure, etc.

10. MANAGERIAL ECONOMICS AND
TRADITIONAL ECNOMICS:
• Managerial is usually described as the
economics applied in managerial decision
making. It is that branch of economics which
bridges the gap between pure economics
theory and managerial practice. But there are
certain differences between managerial
economics and traditional economics. The
following table gives the differences between
managerial economics and traditional
economics.

11. Traditional Economics Managerial Economics
Traditional economics is both Managerial economics is only
microecomics and macroeconomics in microeconomic in nature
nature
Traditional economic as a wide scope. It Managerial economics has a limited
deals with each and every aspect of the scope. It is concerned with decision
firm. making and economic theories that guide
the managerial decision-making.
Traditional economics is both normative Managerial economics is a normative
and positive sciences science.
Traditional economics is concerned with Managerial economics deals with
theoretical aspects of the firm. practical aspects of the firm.
Traditional economics consider only the Managerial economics considers both
economic aspects of a problem while economic and non economic aspects of a
decision making. problem while decision-making.
Traditional economics deals with both Managerial economics is concerned with
micro and macro of a firm decision making of a firm.

12. Positive Economics
• Positive economics can be described as “what is, what was, and
what probably will be” economics. Statements are based on
economic theory rather than raw emotion. Often these statements
will be expressed in the form of a hypothesis that can be analysed
and evaluated.
• Examples:
• A rise in interest rates will cause a rise in the exchange rate and an
increase in the demand for imported products
• Lower taxes may stimulate an increase in the active labour supply
• A national minimum wage is likely to cause a contraction in the
demand for low-skilled labour
• The UK economy now has lower unemployment than Germany
• The American stock market has boomed in recent years

13. Normative Economics
Normative economics is based on the normative statements.
Normative statements are concerned with what are to be? In this
case, economics is not concerned with real life experiences rather, it
is concerned with, how things should operate. As against the
positive economics, the normative economics can not be
challenged based upon any fact.
• Examples:
• The decision to grant independence for the Bank of England is
unwise and should be reversed
• A national minimum wage is totally undesirable as it does not help
the poor and causes higher unemployment and inflation
• The national minimum wage should be increased to �5 as a
method of reducing poverty
• Protectionism is the only proper way to improve the living
standards of workers whose jobs are threatened by cheap imports

14. Opportunity Cost
• Scarcity of resources is one of the more basic concepts of economics.
Scarcity necessitates trade-offs, and trade-offs result in an opportunity
cost. While the cost of a good or service often is thought of in monetary
terms, the opportunity cost of a decision is based on what must be given up
(the next best alternative) as a result of the decision. Any decision that
involves a choice between two or more options has an opportunity cost.
• Opportunity cost contrasts to accounting cost in that accounting costs do
not consider forgone opportunities. Consider the case of an MBA student
who pays $30,000 per year in tuition and fees at a private university. For a
two-year MBA program, the cost of tuition and fees would be $60,000.
This is the monetary cost of the education. However, when making the
decision to go back to school, one should consider the opportunity cost,
which includes the income that the student would have earned if the
alternative decision of remaining in his or her job had been made. If the
student had been earning $50,000 per year and was expecting a 10% salary
increase in one year, $105,000 in salary would be foregone as a result of
the decision to return to school. Adding this amount to the educational
expenses results in a cost of $165,000 for the degree.

15. 'Marginal Analysis'
• An examination of the additional benefits of an activity
compared to the additional costs of that activity. Companies
use marginal analysis as a decision-making tool to help
them maximize their profits. Individuals unconsciously use
marginal analysis to make a host of everyday decisions.
• Marginal analysis is also widely used in microeconomics
when analyzing how a complex system is affected by
marginal manipulation of its comprising variables.

16. Economic Model
•
A model is a simple description of a system which
used for explaining how something works or
calculating what might happen, etc: a
mathematical model for determining the safe
level of pesticides in food, a realistic model of
evolution
• An econometric model is a set of equations,
representing the behaviour of the economy, that
has been estimated using historical data.

17. Static and Dynamic Econnomics
• Dynamic Economics:-
• Changes in an economic system over time,
particularly those reflected in the behavior of
markets, businesses, and the general economy.

18. Cont…
• Static Economics:-
• In economic static mean the studies focus only
on particular period of time. It is similar to
taking a photo when you press the button for a
shot then the photo is just at a particular point of
time. In economic most paper is a static
analysis, for instance, we say the market is in
equilibrium when demand and supply equate
one another, which is graphically represent by
the intersection point of demand and supply
curve. This is a static analysis since we just only
see the picture at a point of time.