MODULE 1: Introduction to Managerial Economics
Learning Outcomes:
At the end of the course, the student is able to:
explain what economics is;
explain what managerial economics is;
discuss the importance of economic theory and concepts;
distinguish microeconomics from macroeconomics;
differentiate positive from normative economics; and
Explain functions of managerial economist.
Teaching-Learning Activity:
In this module, you will get the definition of economics, managerial economics
and the basic economic concepts. Individual activities and activities that will ask you to
share and discuss with your co-learners are also provided. The application of concepts
will be through case study.
Economics Defined
PROF STIGLER says
“economics is the study of principles governing the allocation of scarce means among
competing ends”
Generally, Economics can be defined as a social science which deals with the
proper allocation and efficient use of available resources for the maximum satisfaction
of human wants.(Fajardo,1995)
Deals with the allocation of scarce resources to satisfy the unlimited needs and wants.
The science of scarcity; our responses and the consequences of those responses.
The science of how individuals and societies deal with facts.
Economics is by necessity concerned with choice.(Villegas, 1993)
The Foundation of Economics
1. Needs and wants
2. Resources
NEEDS - the basic essentials for living
- cannot be foregone
WANTS- desires that give higher level of satisfaction
Note where your needs would end that is where you start wanting. Meaning we need
to be satisfied first with the basic necessities (food, clothing, shelter) before we can start
wanting.
RESOURCES are the inputs to produce the goods and services in the society. In
economics we term it as the factors of production. They are the basic resources
because they constitute the basic needs in production. They are the basic tools used in
the production of goods and services.
The factors of production are:
1. Land- the god-given resources ; the environment; refers to all natural resources
2. Labor - human resources utilized in the production activities in the society
3. Capital- man-made resources ; financial resources in the economy;
4. Entrepreneur- people responsible in combining the 3 factors of production; decides
for the combination of these factors; sources of techniques, innovation in the society
Managerial Economics Defined
Mansfield says
“ is concerned with the application of economic principles and methodologies to the
decision process within the organization. It seeks to establish rules and principles to
facilitate the attainment of desired economic goals of management”
Spencer and Siegelman
“it is the integration of economic theory with business practice for the purpose of
facilitating decision making and forward planning by management”
Joel Dean
“the purpose of managerial economics is to show how economics analysis can be used
in formulating business policies”
McNair and Meriam calculate
“managerial economics deals with the use of economic modes of thought to analyze
business situation”
Henry and Hayne
“managerial economics is economics applied in decision making . It is a special branch
of economics that bridges the gap between abstract theory and managerial
practices”
Best of all..Prof Evan J. Douglas
“managerial economics is concerned with the application of economic principles and
methodologies to the decision-making process within the firm or organization under the
conditions of uncertainty”
Key Points in these Definitions
It is application / integration of principles and methodologies of economics
On business issues
To make choices
For the attainment of desired economic goals
Future policies/ planning
Under the current condition of uncertainty
FEATURES OF MANAGERIAL ECONOMICS
It is more realistic , pragmatic and highlights the practical application of various
economic theories to solve business and management problems.
It is a science of decision-making. Focuses on decision-making process, decision models
and decision variables and their relationships
Both conceptual and metric in nature, assists the decision-maker through precise and
evident measurement of various economic variables and their interrelationships.
Uses various macroeconomic concepts like national income, inflation, deflation, trade
cycles to understand and adjust its policies to the environment in which the firm
operates
Gives importance to the study of non-economic variables having implications on
economic performance of the firm
Uses the services of many other related sciences like mathematics, statistics,
engineering, accounting, operation research and psychology to find solutions to
business and management problems.
IMPORTANCE OF MANAGERIAL ECONOMICS
1. Useful in business organization
2. Helpful in chalking out business policies
3. For business planning
4. Cost control
5. Coordination of business activities
6. Demand forecasting and business predictions
7. Profit planning and control
8. Helpful in solutions of business taxation problems
9. For price determination
10. Useful in understanding the mechanism of economic system
11. Analysis of effects of government policies and measurement of the efficiency of the
Firm
BRANCHES OF ECONOMICS
MICROECONOMICS
Deals with the individual behavior of consumers, firms, workers and investors as
well as the markets that these units comprise.
MACROECONOMICS
Deals with aggregate economic variables , such as the level and growth rate of
national output, interest, inflation and unemployment
APPROACHES OF ANALYSIS
POSITIVE ANALYSIS
Analysis describing relationships of cause and effects; deals with explanation
and predictions.
NORMATIVE ANALYSIS
Analysis examining questions of “what ought to be?”; what is the best with value
judgment.
MIX FUNCTIONS OF MANAGERIAL ECONOMIST
1. Economics for Managers
Time is spent on explaining to managers at different levels of the organization
some basic Macroeconomics and Microeconomics principles which can help them
organize the numerous business and economic data.
2. Ethics of Rational decision-making
Spends time especially in live-in sessions to spell out to top executives the types
of value judgments they have to make in order to develop systematic decision rules on
how to allocate scarce resources among competing corporate objectives.
3. Model -building oriented towards profit planning
Managerial economics in its purest form- a great deal of cooperation is needed
from the line managers of various functional departments of divisions in learning how to
build and use economic models.
MOST FREQUENT MODELS USED:
Sales forecasting
Cost analysis
Productivity analysis
Capital budgeting
Pricing
4. Psycho-sociological theories
Time spent on economic consulting devoted to the performance evaluation or
determination of effectiveness in the use of resources; design of reward packages; and
job enrichment and productivity
SCHEMES ON GENERATING POWER FOR MANAGERS
I. OUTSIDE –IN APPROACH
Involves the continuous surveying, forecasting and analyzing the environment
MANAGERS STARTS WITH QUESTIONS:
1.What are the most significant market opportunities or consumer needs to be met?
2.Which of these opportunities or needs should we try to meet?
II. INSIDE –OUT APPROACH
Stresses the capability profile of the firm
Thorough listing of strengths and weaknesses of the firm serves as a guide to investing
prospecting.
References:
Managerial Economics by Villegas
Introductory to Macroeconomics by Pagoso et al
Introductory to Microeconomics by Pagoso et al
Economics by Fajardo