Introduction to
Managerial Economics
Course Objectives
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Explain What is Managerial Economics
Describe the Purpose of Managerial Economics
Explain the Principles of Managerial Economics
List the Objectives of a Business Firm
Describe the Role of Environmental Analysis in ME
Explain Role of Cost Analysis in ME
Explain the Classification of Market Structures
Explain What is Demand
Explain the Law of Demand
Explain the Why Demand Curve has Negative Slope
List the Exceptions to Law of Demand
Explain Price Elasticity of Supply & Supply Curve
Describe Determinants of Price Elasticity of Supply
Explain How Managers can Apply ME
List the Benefits of Managerial Economics
Introduction
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‘Zen Garments’ is a large and
reputed garments
manufacturing company.
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It has established a niche for
itself in the garments
industry and is a leader in its
industry and segment.
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In summer, it being an offseason, Zen announced a
huge ‘Off Season Sale’ and
offered a discount of 75% on
its winter wear collection.
Introduction
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The Managers at Zen did not
correctly forecast such a
huge demand and so the
company was not prepared
for the overwhelming
response of the customers
to this sale.
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The demand was so huge
that the company ran out of
its winter wear stocks and
could not fulfil all of its
customer’s demands.
Introduction
Now, let us see what
happened in winter?
Introduction
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In winter, owing to the
Christmas Season, the
discount on winter wear was
a nominal 20% as it was the
on-season.
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This time the Managers at
Zen had taken care to keep
huge stocks ready for
meeting the demand of
customers in the on-season.
Introduction
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However, owing to the
nominal discount, the
demand was far less than
what the Managers had
predicted.
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Zen also incurred huge
losses due to the vast
amount of inventory of
winter wear that it had
maintained for the winter
season.
Introduction
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Hence, you can understand
that understanding the
concepts of demand and
supply and other concepts of
microeconomics are crucial
for the efficient working of
Managers to ensure the
smooth and successful
running of any business.
Introduction
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This is where ‘Managerial
Economics’ can help
Managers as it is an
‘amalgamation of economic
theory with business
practices so as to ease
decision-making and future
planning by management.’
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Managerial Economics
assists the managers of a
firm in a rational forecasting
of demand and supply and
solving obstacles faced in
the firm’s activities.
Introduction
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Managerial Economics
makes use of economic
theory and concepts and
helps in formulating logical
managerial decisions.
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Managerial Economics is a
science dealing with
effective use of scarce
resources.
Introduction
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It guides the managers in
taking decisions relating to
the firm’s customers,
competitors, suppliers as
well as relating to the
internal functioning of a
firm.
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Let us learn about
‘Introduction to
Managerial Economics’
in detail.
What is Managerial Economics?
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Managerial Economics can be defined as: ‘Amalgamation of
economic theory with business practices so as to ease
decision-making and future planning by management.’
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Managerial Economics assists the managers of a firm in a
rational solution of obstacles faced in the firm’s activities.
Purpose of Managerial Economics
Managerial Economics is useful wherever there are scarce resources and it helps to
ensure that managers make effective and efficient decisions concerning customers,
suppliers, competitors as well as within an organization. The fact of scarcity of
resources gives rise to the following three fundamental questions:
What to produce?
How to produce?
For whom to
produce?
The purpose of use of Managerial Economics principles in a firm is to answer these
questions. Let us try to understand how a manager can use Managerial Economics
principles to answer the three questions.
Opportunity Cost Principle
• Opportunity Cost Principle
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The ‘opportunity cost’ of a decision
means the sacrifice of alternatives
required by that decision.
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If there are no sacrifices, there is no
cost.
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According to Opportunity Cost
Principle, a firm can hire a factor of
production if and only if that factor
earns a reward in that
occupation/job equal or greater
than its opportunity cost.
Uses of Managerial Economics
The use of Managerial
Economics is not limited to
profit-making firms and
organizations. But it can also be
used to help in decision-making
process of non-profit
organizations such as hospitals,
educational institutions, etc. It
enables optimum utilization of
scarce resources in such
organizations as well as helps in
achieving the goals in most
efficient manner. Managerial
Economics is of great help in
price analysis, production
analysis, capital budgeting, risk
analysis and determination of
demand.
Managerial Economics & Environmental Analysis
Managerial Economists should carry out a thorough analysis of the
environment of a business. Thus, Managerial Economists should analyze the
four environmental influences on a business such as:
Economic
Social
Political
Technological
Industry Competition
• Role of Market Analysis in Managerial Economics
Brand Competition
Hence, the competition faced by companies has
been classified based on the degree of product
substitution in the following categories:
IndustryCompetition
Competition
Industry
Product Competition
Generic Competition
A competition in which a company considers all
companies making the same product or class of
products as its competitors is known as an
‘Industry Competition’. For example: Pepsi
would consider all other soda manufacturers as
its competitors.
Law of Demand
The ‘Law of Demand’ states that there is an
inverse relationship between quantity
demanded of a commodity and its price,
other factors being constant. In other
words, higher the price, lower the demand
and vice versa, other things remaining
constant.
Demand Curve
A ‘Demand Curve’ is a diagrammatic
representation of Demand Schedule.
It is a graphical representation of
price-quantity relationship.
The individual demand curve shows
the highest price which an individual
is willing to pay for different
quantities of the commodity.
Law of Diminishing Marginal Utility
• Law of Diminishing Marginal Utility
• ‘Law of Diminishing Marginal Utility’ is the basic
cause of the law of demand.
• The ‘Law of Diminishing Marginal Utility’ state
that as an individual consumes more and more
units of a commodity, the utility derived from it
goes on decreasing.
Real Life Example
Rachel is very fond
of mangoes. She
eats six mangoes
in ten minutes.
Eating mangoes
gives Rachel a
sense of
satisfaction or
happiness.
Real Life Example
Do you think the
amount of satisfaction
that Rachel would get
from eating the last
mango would be the
same as she gets from
the first one?
Example of Price Elasticity of Supply
Let us consider an example for better understanding of
‘Price Elasticity of Supply’.
Let’s say that for a given product X, the price earlier was
$3 and the units supplied were 300.
Now, the price increased to $3.5 and the units supplied
have changed to 500. In this case, the calculation will be
as follows:
= (500 - 300) / 300 * 100 / ($3.5 - $3) / $3 * 100
= 66.66% / 16.66%
=4
Perishable vs. Non Perishable
Perishable vs. Non Perishable
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Storage capacity is not the only issue.
The supplier also needs to consider
whether or not the goods that they
hold are perishable or not.
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Perishable goods have a limited shelf
life and the buyers know it.
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The buyers can wait for some time
and producers will have to lower the
prices or take the losses that arise
from wastage.
Role of Managerial Economics in Business Decisions
Managerial Economics helps in achieving business objectives
by making strategic business decisions as follows:
It helps to maximize organization’s response to
demands and opportunities.
It helps to overcome organization’s threats.
It helps to reverse organization’s weaknesses.
How Managers can Apply Managerial Economics?
Some of the ways in which a Manager can apply Managerial Economics are:
If a manager wants to increase the price of the
product due to increase in cost of production, he
should analyze the price elasticity of demand for
that product so that price rise is not followed by
substantial fall in the demand of the product. It
is the application of demand analysis to the real
world situation.
Managers should determine the price and output
with the acquaintance of market structures and
approaches pertinent for determination of price
and output in the given market setup.
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