• Now a days we are using economy, economy.• Each and every economy means reduction on

the cost (cost reduction economy).• So where ever we want to purchase, we will

always think about reduction of cost this is consumer point of view.

• Similarly in the organization point of view economics means reduction of cost of production and gaining maximum profits.

• Fighter consumer or organization always thinks about profit in the business transaction.

• Profit=revenue- cost • In order to gain profit we have to reduce eighter

cost or increase revenue.• Revenue = no. units sold X selling price unit• Cost = fixed cost + variable cost.• So profit ‘P’ =( no. of units sold X selling price

per unit) __ (fixed cost + variable cost).

• In present competitive environment increasing the revenue is difficult the only way to gain maximum profit is reduction of cost.

• In the cost we cannot reduce fixed cost.• It is possible to reduce only variable cost.• All these kind of cost reduction techniques will Explained through managerial economics.• M.E consists of both micro & macro

economics.

• Micro economics deals with within the organization economics activities.

• Macro economics deals with economic activities outside the organization.

Managerial economics

• Economics: economics is a study of human activity both at individual and national level.

• The economists of early age treated economics merely as the science of wealth.

• The reason for this is clear. • Every one of us is involved in efforts aimed at

earning money and spending this money to satisfy our wants such as food, clothing shelt

Introduction The word Economics is derived from the Greek words “OKIOS NEMEIN” meaning household management . Man is bundle of desires. Goods and services satisfy these wants. But almost all the goods are scarce. To produce goods land, labour, capital and organization are needed. Economic problem arises because of scarcity. Economics is a study of economic problems. Wants are motive force for economic activity. Wants leads to efforts. Efforts secures satisfaction.

Economic definition• McGowan and Moyer: • Managerial economics is the application of economic

theory and methodology to decision-making problems faced by both public and private institutions.

• Mc Nair and Merriam: • managerial economics consists of the use of economic

modes of thought to analyze business situation. and • Spencer the and siege man: • managerial economics is “ the integration of economic

theory with business practices for the purpose of facilitating decisionmaking and forward planning by management.

• Haynes, mote and Paul:• Managerial economics refers to those aspects

of economics and its tools of analysis most relevant to the firm’s decision making process.

Characteristics of managerial economics

• 1. Close to micro economics: • It studies the problems and principles of an

individual business firm or an individual industry.

• It aids the management in forecasting and evaluating the trends of the market.

• Normative economics: (setting a standard or norm)

• It is concerned with varies corrective measure that a management undertakes under various circumstances.

• It deals with goal determination, decision making and optimal utilization of available resource, come under the banner of managerial economics.

• Pragmatic: (realistic)• Managerial economics is pragmatic.• In pure microeconomic theory, analysis is

performed, based on certain exceptions, which are far from reality.

• However, in managerial economic, managerial issues are resolved daily and difficult issues of economic theory are kept a bay.

• Uses theory of firm: • Managerial economics employs economic

concepts and principles, which are known as the theory of firm or “economics of the firm”. Thus , its scope is narrower than that of pure economic theory.

• 5. Takes the help of macro economics:• M.E. incorporates certain aspects of macro

economic theory. these are essential t o comprehending circumstances and environments that envelop the working conditions of an individual firm or an industry.

• Knowledge of macro economic issues such as business cycles, taxation policies, industrial policy of the government, price and distribution policies, wage policies, and anti monopoly policies and so on, is integral to the successful functioning of a business enterprise.

• Aims at helping the management:• M.E. aims at supporting the management in taking

corrective decisions and charting plans and policies for future.

• 7. A scientific art:• science is a system of rules and principles

engendered for attaining given ends. Scientific methods have been created as the optimal path to achieving one’s goals.

• M.E. has been is also called a scientific art because it helps the management in the best and efficient utilization of scarce economic resources.

• It considers production cost, demand, price, profit, risk etc.

• It assists the management in singling out the most feasible alternative.

• ME. Facilitates good and result oriented decisions under conditions of uncertainty.

• Prescriptive rather than descriptive: • M.E. Is a normative and applied discipline. • It suggests the application of economic

principles with regard to policy formulation, decision making and future planning.

• It not only describes the goals of an organization but also prescribes the means of achieving these goals.

Scope of managerial economics

• The main focus in M.E. is to find an optimal solution to Managerial problem.

• The problem may relate to production, reduction or control of costs, determination of price of given product or service, make or buy decisions, inventory decisions, capital management or profit planning and management, investment decisions or human resource management.

• While all these are problems the managerial economist makes use of the concepts, tools and techniques of economics and other related disciplines to find an optimal solution to a given managerial problems.

Concepts and techniques of managerial economics

Managerial decision areas

•Production•Reduction or control of cost•Determination of price of a given product or service.•Make or buy decision.•Inventory decisions•Capital management•Profit planning and management.•Investment decisions

Optimal solutions

Linked with other disciplines

• M.E. is closely linked with many other disciplines such as economics, accountancy, mathematics, statistics, operations research, psychology and organization behavior.

• Economics: • M.E. is the offshoot of economics and hence

the concepts of managerial economics is the application of these in the real life.

• In the process of addressing various managerial problems, several empirically estimated functions such as demand function, cost function, revenue function and so on are extensively used.

• Economics and Managerial economics both are concerned with the problems of scarcity and resource allocation.

• If the economist is concerned with study of markets, the managerial economist is interested in studying the impact of such markets on the performance of a given firm.

• Operations research:• Decision making is the main focus in

operations research and managerial economics.

• If managerial economics focuses on problems of decision making.

• Operation research focuses on solving the managerial problems.

• In other words operations research is the tool for finding the solutions for many a managerial problems.

• Model building is one area of common exercise.• It is used to establish economic and logical

relationships among the given variables.• It refers to both minimization of costs and

maximization of revenues.

• Mathematics:• M.E. is concerned with estimating and

predicting the relevant economic factors for decision making and forward planning.

• In this process he extensively makes use of the tools and techniques of mathematics such as algebra, calculus, exponentials, vectors input-output tables and such other .

• Statistics: • statistics deals with different techniques useful to

analyze the cause and effect relationships in a given variable or phenomenon.

• It also empowers the manager to deal with the situations of risk and uncertain through its techniques such as probability .

• The business environment for the managerial economist is full of risk and uncertainty and he extensively makes use of the statistical techniques such as averages, measures of dispersion,correlation,regression,time series,interpolation,probability, and so on.

• Accountancy: • the accountant provides accounting information

relating to costs, revenues, receivables, payables, profits/losses ethane this forms the basis for the managerial economist to act upon.

• This forms authentic source of data about the performance of the firm.

• The main objective of accounting function is to record, classify and interpret the given accounting data.

• The managerial economist profusely depends upon accounting data for decision making and forward planning.

• Psychology: • consumer psychology is the basis on which

managerial economist act upon.• How the customer reacts to a given change in price or

supply and its consequential effect on demand/profits is the main focus of study in managerial economics.

• We assume that the behavior of the consumer is always rational, which is reality is not so , psychology contributes towards understanding the behavior implications, attitudes and motivations of each of the microeconomic variables such as consumer, supplier/seller. investor, worker or an employer.

• Organizational behavior: • O.B enables the managerial economist to

study and develop behavioral models of the firm integrating the manager’s behavior with that of the owner.

• This further analyses the economic rationality of the firm in a focused way.