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Introduction to Managerial

Economics

Session 1

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Session Objectives

What is managerial economics?

Why study managerial economics?

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Economics is the art of making

the most of life- GB Shaw

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Economics

Definitions from Books:

L. J. Gitman

Economics is the study of how a society uses scarce resources to

produce and distribute goods and services.

K. E. Case

Economics is the study of how individuals and societies choose to

use the scarce resources that nature and previous generations have

provided.

Economics is the study ofrational choice under

conditions of scarcity

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Scarcity and Rational Choice

Scarcity

Imbalance between the

amount of something that people want

amount of something that is freely available

Rational Choice

How to use the scare resources

Making calculated self interested decisions

Considering costs and benefits and maximizing the

outcome (e.g., maximizing satisfaction)20 August 2012 Session 1 5

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Economics as a Dismal Science

How do individuals and firms trade-off between

alternatives to make themselves as well-off as

possible

Deals with scarcity

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Knowledge of scarcity

helps create abundance

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Importance of an

Understanding of Economics

Relationships with other firms

Interaction with the market

Market interaction with the macro-economy

Macro-economys interaction with global

economy

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Economics Includes

Behavior of human beings . . .

As individuals . . . (microeconomics)

And as a group . . . (macroeconomics)

For satisfying wants . . . (demand / consumption)

By using resources . . . (supply / production)

That are scarce and have alternate uses . . . (distribution

/ market / policies)

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Examples of microeconomic and macroeconomic concerns

Production Prices Income Employment

Microeconomics Production/Output

in IndividualIndustries and

Businesses

How much steel

How many offices

How many cars

Price of Individual

Goods and Services

Price of medical

care

Price of petrol

Food prices

Apartment rents

Distribution of

Income and Wealth

Wages in the auto

industry

Minimum wages

Executive salaries

Poverty

Employment by

IndividualBusinesses &

Industries

Jobs in the steel

industry

Number of

employees in a firm

Macroeconomics National

Production/Output

Total IndustrialOutput

Gross Domestic

Product

Growth of Output

Aggregate Price

Level

Consumer pricesProducer Prices

Rate of Inflation

National Income

Total wages and

salaries

Total corporateprofits

Employment and

Unemployment in

the Economy

Total number of jobs

Unemployment rate

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Economics is both Positive and

Normative

It is positive when it is confined to

statements of cause and effects and to

functional relations of economic variables.

It is normative when it involves norms and

standards mixing them with cause-effect

analysis.

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Positive Economics - What it is , What

was and What will be Eg. Physics, Chemistry - How things work or

behave

Normative EconomicsWhat ought tobe

Eg. Ethics How we should behave

Distribution of income in India is unequal

Distribution of income in India should be equal20 August 2012 Session 1 13

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Methods

Model Building

Ceteris paribus Other things remaining constant

Static, Comparative

Marginalism

Decision criteria optimization

Normative v/s Positive

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Theories and Models

Theories involve models, and models involvevariables.

A modelis a formal statement of a theory.

Models are descriptions of the relationship

between two or more variables.

A variable is a measure that can change from

observation to observation.

Ockhams razor is the principle that irrelevant

detail should be cut away. Models are

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Theories and Models

Pitfalls to avoid in formulating economic

theory:

Thepost hoc, ergo propter hoc fallacy refersto a common error made in thinking about

causation: If event A happened before event

B, it is not necessarily true that A caused B.

Thefallacy of composition is the erroneousbelief that what is true for a part is also true

for the whole.

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Management

Management in all business and

organizational activities is the act of getting

people together to accomplish desired goals

and objectives using available resourcesefficiently and effectively

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Managerial Economics

Managerial economics is the integration of the economictheory with business practice for the purpose of facilitating

decision making and forward planning by management.

Managerial economics is concerned with the application ofeconomic concepts and economic analysis to the problems of

formulating rational managerial decisions.Mansfield

Managerial economics is the integration of economic theorywith business practice for the purpose of facilitating decision

making and forward planning by management

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How Is Managerial Economics Useful? A powerful analytical engine.

Evaluating Choice Alternatives Identify ways to efficiently achieve goals.

Specify pricing and production strategies.

Provide production and marketing rules to help

maximize net profits. Making the Best Decision

Managerial economics can be used to efficiently meetmanagement objectives.

Managerial economics can be used to understandlogic of company, consumer, and governmentdecisions.

The basis for some of the more rigorous analysis ofissues in Marketing and Strategic Management.

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Management science: is essentially concerned with techniques for the improvement of

decision-making and hence it is essentially normative; firms are not assumed to find

the optimal solutions for themselves. They are found by the researchers who then

present them as prescriptions for what the firm should do.

Managerial economics: is often concerned with finding optimal solutions to decision

problems. However, the primary purpose of using models is to predict how firms will

behave, not to advise them what ought to do. Managers are assumed to find the

optimal solutions for themselves and that is how predictions are made.

Links between Managerial Economics

and Management Science

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Queries ?????

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