MANAGERIAL
ECONOMICS
LECTURE NOTES
, CONTENTS
Chapter Title Page No.
I INTRODUCTION 5
II OBJECTIVES OF BUSINESS FIRMS 11
III ANALYSIS OF INDIVIDUAL DEMAND 16
IV ANALYSIS OF MARKET DEMAND AND
DEMAND ELASTICITIES 23
V DEMAND FORECASTING 30
VI THEORY OF PRODUCTION 35
VII THEORY OF COST AND BREAK-EVEN
ANALYSIS 40
VIII MARKET STRUCTURE AND PRICING
DECISIONS 45
IX CAPITAL BUDGETING AND
INVESTMENT UNDER CERTAINTY 57
X INVESTMENT DECISIONS UNDER RISK
AND UNCERTAINTY 63
XI NATIONAL INCOME:
CONCEPT AND MEASUREMENT 66
XII BUSINESS CYCLES AND STABILIZATION 72
, CHAPTER – I
INTRODUCTION
OBJECTIVE
Managerial economics (also called business economics), is a branch of economics that applies
microeconomic analysis to specific business decisions. As such, it bridges economic theory and economics in
practice. It draws heavily from quantitative techniques such as regression and correlation, Lagrangian calcu-
lus, [[linear If there is a unifying theme that runs through most of managerial economics it is the attempt to
optimize business decisions given the firm’s objectives and given constraints imposed by scarcity.
Almost any business decision can be analyzed with managerial economics techniques, but it is most
commonly applied to:
• Risk analysis - various uncertainty models, decision rules, and risk quantification techniques are
used to assess the riskiness of a decision.
• Production analysis - microeconomic techniques are used to analyze production efficiency, opti-
mum factor allocation, costs, economies of scale and to estimate the firm’s cost function.
• Pricing analysis - microeconomic techniques are used to analyze various pricing decisions including
transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing
the optimum pricing method.
• Capital budgeting - Investment theory is used to examine a firm’s capital purchasing decisions.
DEFINITIONS
Managerial economics is most easily understood as the applications of economic analysis to business
problems. This comes in a wide variety of subject matter and a number of very different approaches to the
subject.
Managerial economics and microeconomics are closely associated as most of the economics
analysis found in books has its origin in theoretical microeconomics. Topics like the theory of demand the
profit- making, optional prices and advertising expenditures and the impact of market structure on the firm’s
behaviour are all approached using the economist’s standard intellectual ‘tool kit’ which consists of trading
and testing models.
‘Managerial economics is concerned with the application of economics concepts and economics
to the problems of formulating rational decision making’
-Mansfield
‘‘Managerial economics is the integration of economics theory with business practices for the
purpose of facilitating decision making and forward planning by management’’
-Spencer and Seigelman
5
, ‘Managerial economics is concerned with the application of economics principles and methodologies
to the decision-making process within the firm or organization. It seeks to establish rules and principles to
facilitate the attainment of the desired economics goals of management’’
–Douglas
‘‘Managerial economics applies the principles and methods of economics to analyze problems faced
by management of a business, or other types of organizations and to help find solutions that advance the
best interests of such organizations’’. -Davis and Chang
These definitions of managerial economics together reveal the nature of managerial economics.
Three major factors have contributed to the emergence of managerial economics as a separate
course of managerial studies they are (a) changing market condition (b) the increment of the use of
economics logic concepts theories and tools of economics analysis in the process of business decision
making. (c) Rapid increase in demand for professionally trained managerial power.
WHAT IS MANAGERIAL ECONOMICS
Economics theories and analytical tools that are widely applied to business decision-making constitute
managerial economics. First of all let us understand what is economics. Economics is a social science where
the basic function is to study how people, individuals households, firms and nations maximize their gains
from their limited resources and opportunities. It is in economics terminology is called maximizing behaviour
or more appropriately optimizing behaviour. Optimizing behaviour is selecting the best out of available options
with the objective of maximizing gains from the given resources. Economics is thus a social science which
studies human behaviour in relation to optimizing allocation of available resources to achieve the given ends.
The analytical tools and techniques, economic laws and theories developed by economists constitute the
body of economics. Business decision making with present scenario makes use of economic laws and tools
of economic analysis resulting in the emergence of a separate branch of study called ‘Managerial
Economics’
Working knowledge of economics is essential for managers, as they have to take a number of
decisions in conformity with the goals of the firm under the condition of uncertainty and risk. The process of
decision-making comprises of four main stages.
1. Determining and defining the objective to be achieved.
2. Collection and analysis of information regarding economics, social, political and technological
environment and seeing the necessity and occasion for decision.
3. Inventing, developing and analysis of possible course of action.
4. Selecting a particular course of action from available alternation.
6
ECONOMICS
LECTURE NOTES
, CONTENTS
Chapter Title Page No.
I INTRODUCTION 5
II OBJECTIVES OF BUSINESS FIRMS 11
III ANALYSIS OF INDIVIDUAL DEMAND 16
IV ANALYSIS OF MARKET DEMAND AND
DEMAND ELASTICITIES 23
V DEMAND FORECASTING 30
VI THEORY OF PRODUCTION 35
VII THEORY OF COST AND BREAK-EVEN
ANALYSIS 40
VIII MARKET STRUCTURE AND PRICING
DECISIONS 45
IX CAPITAL BUDGETING AND
INVESTMENT UNDER CERTAINTY 57
X INVESTMENT DECISIONS UNDER RISK
AND UNCERTAINTY 63
XI NATIONAL INCOME:
CONCEPT AND MEASUREMENT 66
XII BUSINESS CYCLES AND STABILIZATION 72
, CHAPTER – I
INTRODUCTION
OBJECTIVE
Managerial economics (also called business economics), is a branch of economics that applies
microeconomic analysis to specific business decisions. As such, it bridges economic theory and economics in
practice. It draws heavily from quantitative techniques such as regression and correlation, Lagrangian calcu-
lus, [[linear If there is a unifying theme that runs through most of managerial economics it is the attempt to
optimize business decisions given the firm’s objectives and given constraints imposed by scarcity.
Almost any business decision can be analyzed with managerial economics techniques, but it is most
commonly applied to:
• Risk analysis - various uncertainty models, decision rules, and risk quantification techniques are
used to assess the riskiness of a decision.
• Production analysis - microeconomic techniques are used to analyze production efficiency, opti-
mum factor allocation, costs, economies of scale and to estimate the firm’s cost function.
• Pricing analysis - microeconomic techniques are used to analyze various pricing decisions including
transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing
the optimum pricing method.
• Capital budgeting - Investment theory is used to examine a firm’s capital purchasing decisions.
DEFINITIONS
Managerial economics is most easily understood as the applications of economic analysis to business
problems. This comes in a wide variety of subject matter and a number of very different approaches to the
subject.
Managerial economics and microeconomics are closely associated as most of the economics
analysis found in books has its origin in theoretical microeconomics. Topics like the theory of demand the
profit- making, optional prices and advertising expenditures and the impact of market structure on the firm’s
behaviour are all approached using the economist’s standard intellectual ‘tool kit’ which consists of trading
and testing models.
‘Managerial economics is concerned with the application of economics concepts and economics
to the problems of formulating rational decision making’
-Mansfield
‘‘Managerial economics is the integration of economics theory with business practices for the
purpose of facilitating decision making and forward planning by management’’
-Spencer and Seigelman
5
, ‘Managerial economics is concerned with the application of economics principles and methodologies
to the decision-making process within the firm or organization. It seeks to establish rules and principles to
facilitate the attainment of the desired economics goals of management’’
–Douglas
‘‘Managerial economics applies the principles and methods of economics to analyze problems faced
by management of a business, or other types of organizations and to help find solutions that advance the
best interests of such organizations’’. -Davis and Chang
These definitions of managerial economics together reveal the nature of managerial economics.
Three major factors have contributed to the emergence of managerial economics as a separate
course of managerial studies they are (a) changing market condition (b) the increment of the use of
economics logic concepts theories and tools of economics analysis in the process of business decision
making. (c) Rapid increase in demand for professionally trained managerial power.
WHAT IS MANAGERIAL ECONOMICS
Economics theories and analytical tools that are widely applied to business decision-making constitute
managerial economics. First of all let us understand what is economics. Economics is a social science where
the basic function is to study how people, individuals households, firms and nations maximize their gains
from their limited resources and opportunities. It is in economics terminology is called maximizing behaviour
or more appropriately optimizing behaviour. Optimizing behaviour is selecting the best out of available options
with the objective of maximizing gains from the given resources. Economics is thus a social science which
studies human behaviour in relation to optimizing allocation of available resources to achieve the given ends.
The analytical tools and techniques, economic laws and theories developed by economists constitute the
body of economics. Business decision making with present scenario makes use of economic laws and tools
of economic analysis resulting in the emergence of a separate branch of study called ‘Managerial
Economics’
Working knowledge of economics is essential for managers, as they have to take a number of
decisions in conformity with the goals of the firm under the condition of uncertainty and risk. The process of
decision-making comprises of four main stages.
1. Determining and defining the objective to be achieved.
2. Collection and analysis of information regarding economics, social, political and technological
environment and seeing the necessity and occasion for decision.
3. Inventing, developing and analysis of possible course of action.
4. Selecting a particular course of action from available alternation.
6
