UNIT-1
Meaning, Nature and Scope of Economics
Meaning and Concept
The word economics has been derived from two Greek words; Oikos which means household
and Neimein which means management. Thus the literary meaning of economics is the study of
management of the household. Further it implies that economics is that domain of knowledge
which is concerned with the management of unlimited wants with limited resources by
household. The definition of economics has undergone perceptible changes. Broadly speaking,
the various definitions of economics can be listed under the following heads:(1)
(2)
(3)
(4)
Wealth Definition
Welfare Definition
Scarcity Definition
Growth Definition
 Wealth Definition:- This definition was given by Adam Smith in his book “An Inquiry
into the nature and causes of wealth of Nations” published in 1776.As the title of
book suggests that Adam Smith defines economics as the study of the nature and causes
of the generation of wealth of a nation. According to Adam Smith “Goods have both
value-in-use (utility) and value-in-exchange (price).He defined wealth as all the goods
which command value-in- exchange. He says that economics seeks to explain and
analyse the generation of wealth and also its distribution. In this definition Smith has
tried to explain the factors which are responsible for the generation of wealth. He argued
that the larger amount of wealth and betterment of the whole society could be achieved
by efficient allocation of resources through the market mechanism. In spite of all the
merits, the wealth definition has been criticized.
Criticism:-
(i)
It has given all the emphasis on wealth and ignored man and his welfare.
(ii)
Adam Smith has restricted the meaning of wealth as he included in wealth only
material goods like tea, biscuits, and butter etc. and excluded immaterial goods
like the services of the doctors, soldiers and teachers etc.
(iii)
He gave the concept of economic man who satisfies his own interest without
having the social interests.
(iv)
He says wealth as an end in itself but does not explain the means to achieve it.
 Welfare Definition: - This definition was given Alfred Marshall in his book “Principles
of Economics” which was published in the year 1980.Marshall defines economics as
the science of welfare. In his definition the emphasis was shifted from wealth to man and
also from wealth to welfare. According to Marshall, “Economics is a study of man’s
actions in the ordinary business of life. It enquires how man gets his income and how he
spends it.” Thus it is on the one hand the study of wealth and on the other and most
important side, a part of the study of man. He pointed out that wealth is not an end in
itself but it is only a means to an end and the end is the promotion of human welfare.
Through welfare definition of Marshall, no doubt, is a great improvement over the wealth
definition of Adam Smith, it is also not free from the criticism.
Criticism
(i)
Marshall’s view of economics is narrow and unscientific.
(ii)
Material welfare can’t be measured by any scale and can’t be accepted as an end
of economics.
(iii)
It included only material welfare and excluded non- material welfare.
(iv)
Marshall offered normative view of economics. But economics is neutral
between ends and does not give value judgment.
 Scarcity Definition: - This definition was given by Leonel Robbins. He defines
economics as a science of scarcity or choice in his famous book “An Essay on the
Nature and Significance of Economic Science” published in the year 1932.According
to Robbins, “Economics is the science which studies the human behavior as a relationship
between ends and scarce means which have alternative uses.”
This definition has the following fundamental features:(i)
Unlimited Wants (ends)
(ii)
Limited Means
(iii)
Limited means have the alternative uses.
This definition is analytical rather than classificatory. It focused on a particular aspect of
behaviour, eg. Behavior concerned with the utilization of scarce resources to achieve unlimited
wants.
Criticism:(i) The concept of ends and means is not in conformity to human actions.
(ii) Knight has criticized that economics is only concerned with means and not ends. It should
discuss the alternative ends and not only means for a given end.
(iii)Robbins has reduced economics merely to the value theory. Theory of economic growth
now a day has become a very important branch of economics but Robbins’ definition does not
cover it.
(iv) Robertson has criticized this definition and says that this definition is too narrow and too
wide. It is too narrow because it excludes the concepts like- employment policy, relation
between capital and labour etc. It is too wide because the problem of resources allocation may
also arise in certain other fields not generally included within the scope of economics.
In spite of these drawbacks, scarcity definition is more scientific and analytical than the older
definitions and has greater degree of acceptability.
 Growth Definition: - This definition was given by Paul A.Samuelson. Though Robbins’
definition is the most accepted one. Due to lack of practicability modern economist felt
that the better allocation and efficient use of means for economic growth should also be
the subject matter of economics. Thus the modern and modified definition of economics
can be explained in the language of Samuelson “Economics is the study of how men and
society choose, with or without the use of money, to employ scarce productive resources
which could have alternative uses, to produce commodities over time, and distribute them
for consumption now and in future among various people and groups of society.” This
definition is dynamic and incorporates both the problem of choice and problem of
development. The subject matter of economics has become so wide, so it is difficult to
define the economics in a nut shell. This definition is comprehensive and a suitable
definition involving wealth, welfare, choice of economic growth. We can conclude the
following points from the definition:(i)
Economics is a science that studies those activities which are concerned with
the efficient consumption, production, exchange and distribution of scarce
means which have alternative uses.
(ii)
The purpose of economics is to achieve maximum satisfaction of wants and
increasing of welfare as well as economic growth.
Nature of Economics
There is a difference of opinion among economists regarding the nature of economics. Some
consider it as a science and some as an art. If economics is a science, then is it a positive or
normative science?
A. Economics as a Science: - A science can be defined as systematized body of knowledge
as certainable by observation and experimentations. It is a body of generalizations,
principles, theories or laws which traces out a causal relationship between cause and
effect. On the basis of this we can summarise for any discipline to be a science it must
have the following characteristics:(i)
It must be systematized body of knowledge.
(ii) It should have its own methodological apparatus.
(iii) It should have its own laws and theories.
(iv) The laws and theories can be tested by observation and experimentation.
(v) Self – corrective.
(vi) Universal validity.
Arguments in Favour of Economics as a Science
(i)
(ii)
(iii)
(iv)
(v)
Systematized body of knowledge: In economics there is a systematized
collection, classification and analysis of economic facts. For example,
economics is divided into consumption,production,exchanages,distribution and
public finance which have their laws and theories on whose basis these
departments are studied and analysed in a systematic manner.
Scientific Laws: - Laws of economics are similar to the laws of other science.
There is a causal relationship between two or more phenomenon. As in physics
the law of Newton states that there is an equal and opposite reaction to every
action similarly in economics, the law of demand tells that other things
remaining the same, fall in price leads to increase in demand and rise in price
leads to decrease in demand.
Experiments: - As experiments are the part and parcel of science so in
economics. Different economic laws have been experimented. In the case of
economic experiment, there is no need of laboratory and we treat the whole
social and national system as laboratory. For example to control inflation
government applied various monetary and fiscal measures it is an economic
experiment.
Universal: - The laws of economics have the universal validity like the laws of
science. The law of diminishing returns, law of demand, law of diminishing
marginal utility etc.are equally applicable in all countries.
Self – corrective Nature: - Like science, economics is self corrective in nature.
Under new facts and observations economists revise their theories in different
fields of economics related to macroeconomics, monetary economics,
international economics, public finance and economic development.
B. Economics as an Art: - Many economists considered economics as an art.
Art is
the practice of knowledge. Mere knowledge or developing theories become irrelevant
without practical aspects. We can conclude that an art has the following features:(1) Practice of knowledge.
(2) Art teaches to do.
(3) Art gives solution to the problem.
(4) Art is practical.
Arguments in Favour of Economics as an Art
(i)
(ii)
Solution to the problem:- the various branches of economics provide practical
solution to various economic problems. Economics solves the fundamental
problems of an economy like allocation of scarce resources in satisfying the
different wants.
Practical application: - The art is the practical application of knowledge.
When we apply the economic law only then we come to know that whether
their results are true or false. Price determination guides the policy makers to
manage supply and to maintain price stability. Role of advertisement in
monopolistic market , all these theories are practically applicable in day to day
life to make different decisions.
Economics: A positive science or a Normative Science
 Positive Economics: - Positive statements are objective statements
dealing with matters of fact or the question about how things actually
are. Positive statements are made without obvious value – judgment
and emotions. Positive economics can be described as what is, what
was, and what probably will be. Positive statements are based on
economic theory rather than emotion. Often these statements will be
expressed in the form of a hypothesis that can be analyzed 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 lead to an increase in the active labour supply.
 A national minimum wage is likely to cause a
Concentration in the demand for low- skilled labour.
 Normative Economics:- Normative statements are subjective- based
on opinion only with or without a basis in fact or theory. They are more
valuable statements that focus on “what ought to be”.
It is important to be able to distinguish between these statements –
particularly when heated arguments and debates are taking place.
 The decision to grant autonomy to private banks is unwise and
should be reversed.
 A national minimum wage is totally undesirable as it does not
help poor and causes higher unemployment and inflation.
 The national minimum wage should be increased by 10% as a
method of reducing poverty.
 Protectionism is the only proper way to improve the living
standards of workers whose employment is threatened by cheap
imports.
Scope of economics
Stonier and Hague have divided the subject matter of economics into
which can be discussed as follows:-
three categories



Economic Theory: - it is theoretical part of economics. It contains
economic theories and economic tools. It is divided into static and
dynamic economics. It is also known as Economic Analysis.
Applied Economics: - It attempts to apply the results of economic
analysis to descriptive economics. Industrial economics, managerial
economics, and agricultural economics are some of the examples of
applied economics.
Descriptive Economics: - In descriptive economics, relevant facts
about a particular economic subject or topic are collected for the
purpose of study. The subject ‘Indian Economics’ is the example of
descriptive economics.
Scope of economics
We know economics as a branch of knowledge which deals with the allocation of
scarce resources. The problem of resource allocation has been regularly faced by the individuals,
enterprises, and nations over the years. In the field of economics in recent decades the use of
mathematical tools and statistical methodology has become increasingly important. Further
economics is not the study of choice making behavior only. Major national and international
issues become the part of modern economic science. Currently the theory of economic growth
has occupied an important place in the study of economics and it studies how the national
income grows over the years.
Economics has two major branches:
(1) Microeconomics
(2) Macroeconomics
ECONOMICS
MICROECONOMICS
MACROECONOMICS
(1) Microeconomics: It can be defined as that branch of economic analysis which studies
the economic behavior of the individual unit,may be a person, a household, a firm, or a n
industry. It is a study of one particular unit rather than all the units combined together. An
important tool used in microeconomics is that of Marginal Analysis. Some of the
important laws and principles of microeconomics have been derived directly from the
marginal analysis.
The followings are the fields covered by microeconomics:
 Theory of Consumer Behaviour and Demand
 Theory of Production and Costs
 Theory of Distribution or Factor pricing
 Theory of Economic Welfare
FIGURE- SCOPE OF MICRO ECONOMICS
MICRO ECONOMICS
PRODUCTION
FUNCTION
THEORY OF
DEMAND
THEORY OF
SUPPLY
THEORY OF
PRICING
DETERMINATION
OPTIMUM
ALLOCATION OF
RESOURCES
FACTOR PRICING
WAGES
INTEREST
WELFARE
ECONOMICS
RENT
PROFIT
(2) Macroeconomics: Macroeconomics can be defined as that branch of economic analysis
which studies the behaviour of not one particular unit, but of all the units combined
together. Macroeconomics is a study of aggregates. It is the study of the economic system
as a whole; national income, aggregate demand, aggregate supply, total consumption,
total savings and total investment. The followings are the fields covered by
macroeconomics:
 Theory of Income, Output and Employment
 Theory of Business Cycles
 Theory of General Price level with theory of inflation and deflation
 Theory of Economic Growth
 Macro Theory of Distribution dealing with the relative shares of wages and
profits in the total national income
 Theory of National Income

Theory of Money
MACROECONOMICS
Theory of
national
income
Theory of
employment
Theory of
general price
level &
inflation
Theory of
economic
growth
Theory of
International
trade
Macro theory
of
distribution
Difference between Microeconomics and Macroeconomics
1
2
3
Microeconomics
Macroeconomics
It is the study of economic actions of
individuals and small groups of
individuals. It includes individual
household, firm, industry, particular
commodity and individual price. It
deals with determination of price
and output in individual markets.
Its central problem is price
determination of commodities and
factors of production.
Its main tools are demand and
supply of the commodity and factor.
It is the study of aggregate. It includes national
income, national output ,aggregate demand,
aggregate supply, general price level etc.
Its central problem is the determination of level
of income and employment.
Its main tools are aggregate demand and
aggregate supply of the economy as a whole.
4
5
6
Microeconomics is based on the
partial equilibrium analysis which
helps to explain the equilibrium
conditions of an individual, a firm,
an industry and a factor.
Its aims at optimum allocation of
resources i.e. the objective of
microeconomics on demand side is
to maximize utility whereas on the
supply side is to maximize the
profits at the minimum cost.
In microeconomics, the study of
equilibrium conditions is analyzed at
a particular period of time.
Macroeconomics is based on general equilibrium
analysis which is an extensive study of a number
of economic variables, their interrelations and
interdependence for understanding the working
of the economic system as a whole.
Its aims at determination of aggregate output,
national income, price level and employment
level in the economy. The objectives include
price stability, economic growth and balance of
payment stability.
Macroeconomics is based on time lags, rates of
change, and past and expected value of the
variables in future.
Meaning of Science: The word science comes from the Latin “scientia”, meaning knowledge.
Science refers to a system of acquiring knowledge. The term science also refers to the organized
body of knowledge gained by using a system. In other words science may be described as any
systematic field of study or the knowledge gained from it. It is a systematic enterprise of
gathering knowledge about the nature and organizing and condensing that knowledge into
testable laws and theories.
Scientific method is the standard for science. It includes the use of careful observation,
experimentation, measurement, mathematics, and replication. The use of the scientific method to
make new discoveries is called scientific research. Science as defined above is sometime called
pure science to differentiate it from applied science, which is the application of research to
human needs. Fields of science are commonly classified in the following two ways:


Natural sciences, the study of the natural world, and
Social sciences, the systematic study of human behaviour and the society.
Meaning of Engineering: Engineering can be defined as the application of scientific and
mathematical principles used for practical purpose like design, manufacture, and operation of
efficient and economical structures, machines, processes, and systems.
Engineers apply the sciences of the physics and mathematics to find suitable solutions to
problems. More than ever, engineers are now required to have knowledge of relevant sciences
for their design projects; as a result, they keep on learning new material throughout their career.
The crucial and unique task of the engineer is to identify, understand, and interpret the
constraints on a design in order to produce a successful result. It is usually not enough to build a
technically successful product; it must also meet further requirements. Constraints may include
available resources, physical, imaginative or technical limitations, and other factors as
requirements for cost, safety, marketability, productibility, and serviceability. By understanding
the constraints, engineers can fix the limit within which the production can be made.
Meaning of Technology: Technology word comes from the Greek word “techno logia” where
techno means an art, skill, or craft and logia means the study of something, or the branch of
knowledge of a discipline.
Technology can be broadly defined as the entities, both material and immaterial, created by the
application of mental and physical effort in order to achieve some value. In this usage,
technology refers to the tools and machines that may be used to solve real-world problems.
Types of Technology
In our daily life we can observe the following types of technology:
 Labour intensive technology: The technology where more laour is
used in comparison to capital to produce a unit of output. It is more
appropriate for the underdeveloped countries where labour is in
abundance and capital is in scarce.
 Capital intensive technology: The technology where more capital is
used in comparison to labour to produce a unit of output. It is more
appropriate for the advanced countries, where capital is in abundance
and labour is in scarce.
 Neutral technology: It is neither labour saving nor capital saving.
 Intermediate technology: It is that technology which is midway
between capital intensive technology and labour intensive technology.
For example, manufacturing a washing machine which works on
electricity (when electricity is available) as also can be operated by
hand (when electricity is not available).
The level of technology is an important determinant of economic development of a country.
Development of economy though an ongoing process and dependent upon injections of new
technology is subject to constraints of its capacity to generate and absorb the technological
change. Technology leads to greater output, shorter working hours and creation of skilled jobs,
production of newer and better goods of standardised quality and more efficient use of raw
materials.
Role of Science, Engineering and Technology
Science, Engineering and Technology have significantly affected the human ability to control
and adapt to their natural environments. They have affected the society in a number of ways.
Some of them may be discussed as follows:
1. Economic Growth: With the advent of new technology emerging from science and
better machines etc. developed by engineers both industrial and agricultural growth in an
economy gains momentum even with the limited resources.
2. Increase in Production: The adoption of new and modern technology leads to greater
increase in the output of the economies of the world.
3. Increase in Efficiency: Better equipments and techniques lead to growth in output
without a proportional increase in input which means a rise in productivity and
efficiency.
4. Better Infrastructure: all the economies of the world are investing in infrastructure for
achieving the objective of economic development. Building up of good infrastructure is
largely dependent on science and technology. Safety and other specifications of an
infrastructure project are taken care of by the engineers.
5. Better Standard of living: People of the country and of the world in general now enjoy a
better standard of living with new innovations which is making life more comfortable and
enjoyable. Science, engineering and technology have added both comforts as well as
luxuries to the life.
6. Faster Means of Communication: Telephones, mobiles and internet are the gifts of
science and engineering to human beings which have made the world a global village and
reduced communication barriers to facilitate business and personal life.
7. Global Competitiveness: The countries which are technologically sound and ahead in
innovations are today the leading economies of the world. In the global era only those
economies can be competitive which have adopted good science and technology policies
and adopting the advanced technologies.
Engineering Economics
Meaning: Engineering economics is a part of economics for application to engineering projects.
Engineers seek solutions to the problems and economic viability of each potential solution is
normally considered along with the technical aspects.
Characteristics of Engineering Economics
1. Engineering economics is a traditional and important part of engineering practice.
2. Engineering economics is concerned with application of economic principles in technical
and managerial decision making. The broad economic principles are:(a) Effects of various costs.
(b) Production lot size on cost.
(c) Capital investment.
(d) Rate of depreciation
(e) Demand and supply including forecasting
(f) Economies of scale
3. Engineering economics is both microeconomics and macroeconomics in nature when
applied to engineering problems. For example, the study of demand analysis is mostly
concerned with individual or household as a small unit of study. Whereas, the study of
impact of taxes on raw-materials is a macro concept.
4. Engineering economics also includes certain concepts and principles from other fields
such as statistics, accounting and management etc.
5. Engineering economics aids decision making aspects of an engineer and it avoids the
abstract nature of economic theory.
6. Engineering economics is mostly an application tool, whereas economics is a social
science with a broad characteristic.
7. Engineering economics provides an analytical and scientific approach resulting in
qualitative decisions.
Scope of Managerial Economics in Engineering Perspective
The scope of managerial economics can be discussed under the following heads:
1. It has wide scope in manufacturing, construction, mining and other engineering
industries. Examples of economic application are as follows:
(i) Selection of location and site for a new plant.
(ii) Production planning and control.
(iii) Selection of equipment and their replacement analysis.
(iv) Selection of a material handling system.
2. Better decision making on the part of engineers.
3. Efficient use of resources results in better output and economic development.
4. Cost of production can be reduced.
5. Alternative courses of action using economic principles may result in reduction of prices
of goods and services.
6. Elimination of waste can result in application of engineering economics.
7. More capital will be made available for investment and growth.
8. Improves the standard of living with the result of better products, more wages, and
salaries, more output etc. from the firm applying engineering economics.
Meaning of Managerial Economics
Managerial economics is a science which deals with the use of basic economic concepts, theories
and analytical tools suitable in the decision- making process of a business firm.
In other words, managerial economics is a science which is concerned with those aspects of
economic theory and its applications that are directly relevant to the managerial practice in the
decision- making process of a business firm.
According to Milton H. Spencer and Louis Siegelman, “Managerial economics is the integration
of economic theory with business practice for the purpose of facilitating decision- making and
forward planning by management.”
According to Haynes, Mote and Paul, “Managerial economics is applied in decision making. It is
a special branch of economics bridging the gap between abstract economic theory and
managerial practice.”
Bryan Carsberg defines, “Managerial economics is the application of basic economic theory to
the practical problems of a business firm.”
Nature of Managerial Economics
1. Pragmatic in nature: It is pragmatic in nature because it deals with making economic
theory more application- oriented. Further managerial economics is concerned with the
use of analytical tools of economic theory in solving practical managerial problems and
improving decision- making in business.
2. Micro –economic in nature: Managerial economics is micro-economic in nature
because it involves the application of the micro-economic concepts and theories.
Microeconomics deals with the single units- single firm, single industry, single demand,
price, and consumer and not with a whole. As it deals with the behaviour of small units
including firm, industry so it is micro- economic in nature.
3. Normative in nature: Managerial economics is normative in nature because it not only
deals with the different theories, principles, different dependent and independent
variables but also prescribes what the firms should do in different situations keeping them
in consideration. For e.g., economic theory can tell us the relationship between the price
of a product and its quantity supplied but it doesn’t tell us whether the outcome of this
relationship is good or bad. This is positive nature of economic theory but managerial
economics on the other hand not only explains the impact of change in price on supply or
vice versa but also suggests whether such course of action should be taken or not. Thus
managerial economics is normative in nature which generally not only tells ‘what is’ but
also tells us ‘what ought to be’, i.e. to suggest the best course of action.
4. Macro-economic in nature: Managerial Economics is macro-economic in nature
because apart from studying the internal environment of a firm it also studies the external
environment of the firms. The firms have to analyse the economic environment such
general price level, industrial relation, taxation policy of the governments, business
cycles etc. in which they take decisions. Managerial economics helps the firms to cope up
with the negative impact of the external environment.
5. Goal-oriented: Managerial Economics is goal-oriented in nature as it mainly aims at
achieving maximum objectives of the business firms. The objectives of a firm include the
objective of profit maximization, sales maximization, growth maximization, long run
survival etc.
6. Application-oriented: managerial economics is an application-oriented science in the
sense that it is concerned with economics applied in practical decision-making in
business.
7. Tool in the different fields: managerial economics serves as a tool in the study of
business administration especially in the functional areas such as finance, accounting,
marketing, personnel management and production management.
Scope of Managerial Economics
The scope of managerial economics includes all those economic concepts, theories and
analytical tools which can be used to analyse business environment and to find solutions
for practical business problems. The scope of managerial economics covers two areas of
decision making which are as follows:
Scope of
Mnagerial
Econmics
Internal or
Operational
Issues
1. Internal or Operational Issues
External or
Environment
Issues
Operational decisions are those which the manager takes as his official role. These are
concerned with the issues which arise in within the business firms and so they are under
the control of management. These decisions are delegated or distributed in different
hierarchy of the management. They deal with the general aspects as what to produce, how
to produce, and for whom to produce. The internal or operational issues can further be
divided under the following as the scope of managerial economics:(i)
Demand analysis and forecasting: Demand analysis is of great importance in
managerial economics. it seeks to identify and measure the factors that determine
the demand for a product in the product market. The demand for a firm’s product
reflects what the consumers actually buy. In every business firm, executive
manager has to estimate current demand and forecast future demand for the output
produced by the firm. Such demand decisions can be evaluated through an
analysis of consumer behaviour. The important aspects dealt with under demand
analysis are: individual and market demand; demand estimation; demand
function; demand distinctions; demand forecasting and elasticity of demand and
its relevance in decision- making in business.
Demand forecasting attempts to estimate the likely demand for a
product in future periods. If future demands are identified, production can be
better planned.
(ii)
Production analysis: Production analysis helps the firm to achieve the optimal
levels in the production process. It helps to get maximum output with minimum
level of inputs of a firm. The main concepts dealt under the production analysis
are: production functions, returns to scale, isoquants, economies and
diseconomies of scale.
(iii)
Cost analysis: cost analysis plays an important role in decision-making of a
business firm. It is discussed in monetary terms of the product produced in the
business firm. The main aspects dealt with under cost analysis are: cost concepts,
cost behaviour in the short run and long run, cost functions, cost determinants,
cost control and cost reduction. Cost analysis especially deals with the various
cost concepts and their practical usefulness in managerial decision-making.
(iv)
Pricing analysis: pricing analysis is a core concept of managerial economics. It
plays an important role in profit planning. The success of a firm depends upon
correct price decisions taken by it. If the price is too high, the firm may not find
enough consumers to buy its product. If the price is set too low, the firm may not
be able to cover its costs. Thus, setting an appropriate price is important for every
business firm. The pricing decision depends on the types of market. If the market
is perfect competition, monopoly, monopolistic, oligopoly and duopoly etc, the
firm takes the decision about fixation of price accordingly. The main aspects dealt
with under pricing analysis are: concepts of market mechanism, price
determination under different markets, pricing policies, pricing methods and
approaches.
Profit analysis: profit is the index of good performance of a business firm.
Generally, firms aim at making profits. But the survival of every business firm
depends upon its ability to earn profit. Hence, decisions concerning level of profit,
rate of profit, reinvestment of profit, etc., are relevant in every business firm now
a days. The main aspects covered under the profit analysis are: nature and
measurement of profit, profit theories, profit policies, profit planning and control
(break-even analysis) and profit forecasting.
Investment analysis: As the capital is scarce and expensive factor of production,
issues related to the decision making about it are important. The major concerning
issues related to capital investment are as follows:
 Choice of source of funding
 The choice of investment project
 Evaluation of capital efficiency
 Most efficient allocation
(v)
(vi)
(vii)
Strategic or long term planning: Strategic or long term planning requires
decisions to frame and to achieve the long term goals and objectives of a firm.
Managerial economics helps a firm to come up with decisions related to the
strategic planning and to achieve those strategic goals and objectives.
1. External or Environmental Issues
In managerial economics the external or environmental issues refer to the business
environment of a firm in which it operates. These external or Environmental issues
can be either political, social or economic within which the firm is operating. A study
of these External or Environmental Issues include the study of:
(i)
Nature of the economic system existing in the country.
(ii)
Business cycle phases through which each firm has to undergo.
(iii) Working pattern of the financial institutions like banks, insurance companies,
share market etc in the country.
(iv)
Trends in the foreign trade.
(v)
Trends in the labour and capital markets in the country.
(vi)
Policies of the government related to industries, monetary policy, fiscal policy
and pricing policy, etc.
Finally, we can conclude that external issues are dealt with the help of study of
macro-economic aspects while the internal issues are dealt with the help of study of micro-
economic aspects. The use of both micro-economic and macro-economic aspects for business
decision making is provided by Managerial economics.