Managerial Economics Pdf Bharathiar University

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Syllabus :Managerial Economics

UNIT I
Managerial Economics - meaning, nature and scope - Managerial Economics and business
decision making - Role of Managerial Economist - Fundamental concepts of Managerial
Economics- Demand Analysis - meaning, determinants and types of demand - Elasticity of
demand.

UNIT II
Supply meaning and determinants - production decisions - production functions - Isoquants,
Expansion path - Cobb-Douglas function.
Cost concepts - cost - output relationship - Economies and diseconomies of scale - cost
functions.

UNIT III
Market structure - characteristics - Pricing and output decisions - methods of pricing -
differential pricing - Government intervention and pricing.

UNIT IV
Profit - Meaning and nature - Profit policies - Profit planning and forecasting - Cost volume
profit analysis - Investment analysis.

UNIT V
National Income - Business cycle - inflation and deflation - balance of payments - Monetary
and Fiscal Policies.
Syllabus :Managerial Economics
CONTENTS
1.0 Aims and Objectives
1.1 Introduction
1.2 Meaning of Managerial Economics
1.3 Nature of Managerial Economics
1.3.1 Contribution of Economic Theory to Managerial Economics
1.3.2 Contribution of Quantitative Techniques to Managerial Economics
1.4 Economics and Managerial Decision-making
1.5 Scarcity and Decision-making
1.6 Scope of Managerial Economics
1.7 Let Us Sum Up
1.8 Lesson-end Activity
1.9 Keywords
1.10 Questions for Discussion
1.11 Model Answer to “Check Your Progress”
1.12 Suggested Readings
1.0 AIMS AND OBJECTIVES
The main objectives of this lesson is to give basic introduction of managerial
economics. Here, we will also discuss role of economics in managerial
decision-making. After study this lesson you will be able to:
(i) understand the meaning and nature of managerial economics
(ii) understand the role of economic theory and quantitative techniques in managerial
economics
(iii) discuss the role of economics in managerial decision-making
(iv) describe interrelationship between scarcity and decision-making
(v) know the subject-matter of managerial economics.
1.1 INTRODUCTION
Managerial economics draws on economic analysis for such concepts as cost,
demand, profit and competition. A close interrelationship between management and
economics had led to the development of managerial economics. Viewed in this
“problems
of choice’’ or alternatives and allocation of scarce resources by the firms.
1.2 MEANING OF MANAGERIAL ECONOMICS
Managerial Economics is a discipline that combines economic theory with managerial
practice. It tries to bridge the gap between the problems of logic that intrigue
economic theorists and the problems of policy that plague practical managers.1 The
subject offers powerful tools and techniques for managerial policy making. An
integration of economic theory and tools of decision sciences works successfully in
optimal decision making, in face of constraints. A study of managerial economics
enriches the analytical skills, helps in the logical structuring of problems, and provides
adequate solution to the economic problems. To quote Mansfield,2 “Managerial
Economics is concerned with the application of economic concepts and economic
analysis to the problems of formulating rational managerial decisions.” Spencer and
Siegelman3 have defined the subject as “the integration of economic theory with
business practice for the purpose of facilitating decision making and forward planning
by management.”
1.3 NATURE OF MANAGERIAL ECONOMICS
1.3.1 Contribution of Economic Theory to Managerial Economics
Baumol4 believes that economic theory is helpful to managers for three reasons.
Firsts, it helps in recognising managerial problems, eliminating minor details which
might obstruct decision-making and in concentrating on the main issue. A manager
is able to ascertain the relevant variables and specify relevant data. Second, it
offers them a set of analytical methods to solve problems. Economic concepts like
consumer demand, production function, economies of scale and marginalism help in
analysis of a problem. Third, it helps in clarity of concepts used in business analysis,
which avoids conceptual pitfalls by logical structuring of big issues. Understanding
of interrelationships between economic variables and events provides consistency
in business analysis and decisions. For example, profit margins may be reduced
despite an increase in sales due to an increase in marginal cost greater than the
increase in marginal revenue.
Ragnar Frisch divided economics in two broad categories – macro and micro.
Macroeconomics is the study of economy as a whole. It deals with questions relating
to national income, unemployment, inflation, fiscal policies and monetary policies.
Microeconomics is concerned with the study of individuals like a consumer, a
commodity, a market and a producer. Managerial Economics is micro-economics in
nature because it deals with the study of a firm, which is an individual entity. It
analyses the supply and demand in a market, the pricing of specific input, the cost
structure of individual goods and services and the like. The macroeconomic conditions
of the economy definitely influence working of the firm, for instance, a recession
has an unfavourable impact on the sales of companies sensitive to business cycles,
while expansion would be beneficial. But Managerial Economics encompasses
variables, concepts and models that constitute micro-economic theory, as both the
manager and the firm where he works are individual units.
1. Dean, J; Managerial Economics, Englewood Cliffs.
2. Mansfield, E (ed); Managerial Economics and Operations Research, Norton & Co. Inc., New York, 1966,
p. 11.
3. Spencer, M H and Siegelman, L; Managerial Economics, Irwin, Illinois, 1969, p. 1.
4. Baumol, W J; ‘What can Economic Theory Contribute to Managerial Economics’; American Economic
Review, Volume 51, No. 2, May 1961.
1.3.2 Contribution of Quantitative Techniques to Managerial Economics
Mathematical Economics and Econometrics are utilised to construct and estimate
decision models useful in determining the optimal behaviour of a firm. The former
helps to express economic theory in the form of equations while the latter applies
statistical techniques and real world data to economic problems. Like, regression is
applied for forecasting and probability theory is used in risk analysis. In addition to
this, economists use various optimisation techniques, such as linear programming, in
the study of behaviour of a firm. They have also found it most efficient to express
their models of behaviour of firms and consumers in terms of the symbols and logic
of calculus.
Thus, Managerial Economics deals with the economic principles and concepts, which
constitute ‘Theory of the Firm’. The subject is a synthesis of economic theory and
quantitative techniques to solve managerial decision problems. It is micro-economic
in character. Further, it is normative since it makes value judgements, that is, it
states what goals a firm should pursue. Fig. 1.1 summarises our discussion of the
principal ways in which Economics relates to managerial decision-making.
Figure 1.1: Managerial Economics and Related Disciplines
Managerial Economics plays an equally important role in the management of nonbusiness
organisations such as government agencies, hospitals and educational
institutions. Regardless of whether one manages the ABC hospital, Eastman Kodak
or College of Fine Arts, logical managerial decisions can be taken by a mind trained
in economic logic.
1.4 ECONOMICS AND MANAGERIAL DECISION
MAKING
The best way to become acquainted with Managerial Economics is to come face to
face with real world decision problems. Many companies have applied established
principles of Managerial Economics to improve their profitability. In the past decade,
a number of known companies have experienced successful changes in the
economics of their business by using economic tools and techniques. Some cases
have been discussed here.
Example 1: Reliance Industries has maintained top position in polymers by building
a world-scale plant and upgrading technology. This has resulted in low operating
costs due to economies of scale. Reliance Petroleum Ltd. registered a net profit of
Rs. 726 crores on sales of Rs. 14,308 crores for the six months ended September
Managerial Decision Problems
Economic Theory Quantitative Techniques
Supply, Demand, Cost, Mathematical Economics and
Competition, etc. Econometrics
MANAGERIAL ECONOMICS
Application of Economic theory
and Quantitative techniques
to solve
Managerial Decision Problems
Optimal Managerial Decision Making
largest manufacturer and exporter.
The overall economies of scale are in favour of expansion. This expansion will
further consolidate the position of RPL in the sector and help in warding off rivals.5
Example 2: Leading multinational players like Samsung, LG, Sony and Panasonic
cornered a large part of Indian consumer durables market in the late 1990s. This
was possible because of global manufacturing facilities and investment in
technologies. To maintain their market share, they resorted to product differentiation.
These companies introduced technologically advanced models with specific product
features and product styling.6
Example 3: For P&G7, the 1990s was a decade of ‘value-oriented’ consumer. The
company formulated policies in view of emergence of India as ‘value for money’
product market. This means that consumers are willing to pay premium price only
for quality goods. Customers are “becoming more price-sensitive and quality
conscious…more focussed on self satisfaction…”7 It can, therefore, be said that
consumer preferences and tastes have come to play a vital role in the survival of
companies.
Example 4: In late 1990s, HLL earned supernormal profits by selling low-priced
branded products in the rural areas. This was a result of market segmentation policy
adopted by the company. The company considers the rural market as a separate
market. It is now developing packages for the rural market with products, packaging,
and pricing tailor made for the rural consumers.8
To ward off rivals and to make it a better competitor the company resorted to
mergers and acquisitions. Merger of BBIL with HLL in 1996 made it the largest
conglomerate in the consumer goods market in India. Over the years HLL has
acquired Kissan and Dipys from UB group; Dollops from Cadburys in 1993; and
International Bestfoods in 2000, to achieve economies of scope.
Example 5: Apple, the company that began the PC revolution, had always managed
to maintain its market share and profitability by differentiating its products from the
IBM PC compatibles. However, the introduction of Microsoft’s Windows operating
system gave the IBM and IBM compatible PCs the look feel, and ease of use of the
Apple Macintosh. This change in the competitive environment forced Apple to lower
its prices to levels much closer to IBM compatibles. The result has been an erosion
of profit margins. For example, between 1991 and 1993, Apple’s net profit margins
fell from 5 to 1 per cent.
In all the above examples, decision making has primarily been economic in nature
as it involves an act of choice. The decision of Reliance Industries to build a plant
of international scale and to further expand capacity was made on the basis of the
law of returns to scale and economies of scale. Similarly, the MNCs in the
consumer durables market in India emphasised on global manufacturing facilities
coupled with product differentiation to capture and maintain a major portion of market
share. It should be noted that scale economies are sufficient for RPL as it operates
under homogenous oligopoly (refer Chapter 7). But consumer durables market falls
under differentiated oligopoly market structure, so it requires emphasis on
differentiation as well. Likewise, Apple had always managed to maintain market
share due to product differentiation.
5. The Economic Times, 12 Jan 2001.
6. The Economic Times, 24 July 2000.
7. The Economic Times, Brand Equity, 11-17 August, 1999.
8. The Economic Times, 30 August, 2000.
Fast moving consumer goods (FMCG) companies, P&G and HLL took concepts of
consumer demand analysis, namely, consumer preferences and market segmentation
respectively, to maintain their dominant position in various product categories.
Selection of product portfolio of P & G is an expression of consumer choice for
quality products. HLL strategy to earn supernormal profits by catering to rural
areas is an economic decision based on selection of an expanding market segment.
The objective of HLL of being the largest firm in the industry was achieved by
economies of scope acquired through mergers and acquisitions.
1.5 SCARCITY AND DECISION MAKING
Robbins has defined Economics as “the science that studies human behaviour as a
relationship between ends and scarce means which have alternative uses”. Human wants
are virtually unlimited and non-satiable, but the means to satisfy them are limited.
Managerial Economics hence has evolved as a discipline of choice making. But
why does scarcity arise? A resource is scarce if demand for it exceeds its supply.
Scarcity is, therefore, a relative term. Anything that commands a price is a scarce
item, called economic good, and the rest are free goods. Any item which is a free
good today in a particular society may become an economic good tomorrow. Thus,
scarcity can be defined as a condition in which resources are not available in adequate
amounts to satisfy all the needs and wants of a specified group of people. The
problem of scarcity, and thereby, choice would not have arisen if resources of
production had been in abundance. A choice has to be made between ends (unlimited
wants) and means (limited resources). Due to scarcity of resources, we have to
constantly match the ends and means. Fig. 1.2 explains the problem of choice making.
Figure 1.2: Scarcity and Basic Choice Problem
A firm has to allocate the available resources among various activities of the unit.
Resource constraints can be in form of limited supply of men, materials, machines,
money and managerial ability. Following examples illustrate this point:
1. Production manager of Asian Paints may face a choice making decision of producing
paints for domestic or industrial use, due to scarcity of titanium dioxide.
2. Marketing manager of Maruti Udyog has to decide whether to push up sales of Alto or
Wagon R or Gypsy in view of limited advertisement outlay.

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