7/31/2019 Session 1 - Introduction to ME
1/22
Introduction to Managerial
Economics
Session 1
7/31/2019 Session 1 - Introduction to ME
2/22
Session Objectives
What is managerial economics?
Why study managerial economics?
7/31/2019 Session 1 - Introduction to ME
3/22
Economics is the art of making
the most of life- GB Shaw
7/31/2019 Session 1 - Introduction to ME
4/22
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
20 August 2012 Session 1 4
7/31/2019 Session 1 - Introduction to ME
5/22
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
7/31/2019 Session 1 - Introduction to ME
6/22
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
20 August 2012 Session 1 6
7/31/2019 Session 1 - Introduction to ME
7/22
Knowledge of scarcity
helps create abundance
20 August 2012 Session 1 7
7/31/2019 Session 1 - Introduction to ME
8/22
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
Session 120 August 2012 8
7/31/2019 Session 1 - Introduction to ME
9/22
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)
20 August 2012 Session 1 9
7/31/2019 Session 1 - Introduction to ME
10/22
7/31/2019 Session 1 - Introduction to ME
11/22
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
20 August 2012 Session 1 11
7/31/2019 Session 1 - Introduction to ME
12/22
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.
20 August 2012 Session 1 12
7/31/2019 Session 1 - Introduction to ME
13/22
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
7/31/2019 Session 1 - Introduction to ME
14/22
Methods
Model Building
Ceteris paribus Other things remaining constant
Static, Comparative
Marginalism
Decision criteria optimization
Normative v/s Positive
20 August 2012 Session 1 14
7/31/2019 Session 1 - Introduction to ME
15/22
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
simplifications, not complications, of reality.20 August 2012 Session 1 15
7/31/2019 Session 1 - Introduction to ME
16/22
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.
20 August 2012 Session 1 16
7/31/2019 Session 1 - Introduction to ME
17/22
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
20 August 2012 Session 1 17
7/31/2019 Session 1 - Introduction to ME
18/22
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
20 August 2012 Session 1 18
7/31/2019 Session 1 - Introduction to ME
19/22
20 August 2012
Session 1
19
7/31/2019 Session 1 - Introduction to ME
20/22
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.
20 August 2012 Session 1 20
7/31/2019 Session 1 - Introduction to ME
21/22
21
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
20 August 2012 Session 1
7/31/2019 Session 1 - Introduction to ME
22/22
Queries ?????
20 August 2012 Session 1 22