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Unit-1
MANAGERIAL ECONOMICS
Basic Concept and Introduction
Whenever a baby born in this world he/she has needs so many things to survive in this world such as sunlight,
water, air (oxygen), milk, food, clothing and shelter (housing) etc. some of these requirements are met freely
(free of cost) like sunlight and oxygen etc because these are available in abundance. These type of wants are
'Non-economic Wants' in Economics. But, to meet some other requirements ( like milk, food, clothings and
shelter (housing) etc) one has to pay something in exchange. One has to pay a price for these scarce resources in
terms dollars (currency), other goods& resources (for barter or exchange) or may has to render some service in
exchange. Thus these types of requirements or wants are called 'Economic Wants' in Economics. Therefore, the
Economics studies that how the people meet their Economic Wants through managing these Scarce Resources.
MEANING OF ECONOMICS:
The word Economics originates from the Greek work Oikonomikos which can be divided into two
parts:
(a) Oikos, which means Home, and
(b) Nomos, which means Management
Thus, Economics means Home Management. The head of a family faces the problem of managing the
unlimited wants of the family members within the limited income of the family. In fact, the same is true for a
society also. If we consider the whole society as a family, then the society also faces the problem of tackling
unlimited wants of the members of the society with the limited resources available in that society. Thus,
Economics means the study of the way in which mankind organizes itself to tackle the basic problems of
scarcity. All societies have more wants than resources. Hence, a system must be devised to allocate these
resources between competing ends
DEFINITIONS OF ECONOMICS
We have now formed an idea about the meaning of Economics. This at once leads to a general definition
of Economics. Economics is the social science that studies economic activities.
Economists at different times have emphasised different aspects of economic activities, and have arrived
at different definitions of Economics.
These definitions can be classified into four groups:
1. Wealth definitions,
2. Material welfare definitions,
3. Scarcity definitions, and
4. Growth-centered definitions
Adam Smiths Definition
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Adam Smith, considered the founding father of modern Economics, defined Economics as the study of
the nature and causes of nations wealth or simply as the study of wealth. The central point in Smiths definition
is wealth creation. Implicitly, Smith identified wealth with welfare. He assumed that, the wealthier a nation
becomes the happier are its citizens. Thus, it is important to find out, how a nation can be wealthy. Economics is
the subject that tells us how to make a nation wealthy. Adam Smiths definition is a wealth-centered definition
of Economics
Lionel Robbins Definition
According to Robbins, Economics is a science which studies human behaviour as a relationship
between ends and scarce means which have alternative uses.
The principal features of scarcity definitions are as follows:
1.

2.

3.

4.

5.

Human wants are unlimited: The scarcity definition of Economics states that human wants
are unlimited. If one want is satisfied, another want crops up. Thus, different wants appear one
after another.
Limited means to satisfy human wants: Though wants are unlimited, yet the means for
satisfying these wants are limited. The resources needed to satisfy these wants are limited. For
example, the money income (per month) required for the satisfaction of wants of an individual
is limited. Any resource is considered as scarce if its supply is less than its demand.
Alternative uses of scarce resources: Same resource can be devoted to alternative lines of
production. Thus, same resource can be used for the satisfaction of different types of human
wants. For example, a piece of land can be used for either cultivation, or building a dwelling
place or building a factory shed, etc
Efficient use of scarce resources: Since wants are unlimited, so these wants are to be ranked
in order of priorities. On the basis of such priorities, the scarce resources are to be used in an
efficient manner for the satisfaction of these wants
Need for choice and optimisation: Since human wants are unlimited, so one has to choose
between the most urgent and less urgent wants. Hence, Economics is also called a science of
choice. So, scarce resources are to be used for the maximum satisfaction (i.e., optimisation) of
the most urgent human wants.

For the purpose of study and teaching Pro.Rangnar Frish has classified economics into two broad categories.
These are: Micro-economics and Macro-economics.These two words have been derived from Greek words
Micro and Macro, which means small and large respectively.
MICRO-ECONOMICS: The study of an individual consumer or a firm is called micro-economics. It is also
called as the theory of firm.
MACRO-ECONOMICS: The study of aggregate or total level of economic activity in a country in a country is
called macro-economics
Nature of Economics
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It includes Economics is a science or an Art, or is it a Positive or Normative science.

Economics as a Science
Science is a systematized body of knowledge that traces the relationship between cause and effect. Another
attribute of science is that its phenomena should be amenable to measurement. Applying these characteristics,
we find that economics is a branch of knowledge where the various facts relevant to it have been systematically
collected, classified and analyzed. Economics investigates the possibility of deducing generalizations as regards
the economic motives of human beings. The motives of individuals and business firms can be very easily
measured in terms of money. Thus, economics is a science
Economics as an Art
An art is a system of rules for the attainment of a given end. A science teaches us to know; an art teaches us to
do. Applying this definition, we find that economics offers us practical guidance in the solution of economic
problems. Science and art are complementary to each other and economics is both a science and an art.
Economics as a Positive Science
Positive economics is a branch of economics that focuses on the description and explanation of phenomena, as
well as their casual relationships. It focuses primarily on facts and cause-and-effect behavioral relationships,
including developing and testing economic theories. As a science, positive economics focuses on analyzing
economic behavior. It avoids economic value judgments.
For example, positive economic theory would describe how money supply growth impacts inflation, but it does
not provide any guidance on what policy should be followed. "The unemployment rate in India is higher than
that in the China" is a positive economic statement. It gives an overview of an economic situation without
providing any guidance for necessary actions to address the issue.
Other examples
(i) The main cause of price-rise in India is increase in money supply.
(ii) Production of food grains in India has increased mainly because of increase in irrigation facilities and
consumption of chemical fertilisers.
(iii) The rate of population growth has been very high partly because of high birth rate and partly because of
decline in death rate.
Normative Economics
Normative economics is a branch of economics that expresses value or normative judgments about economic
fairness.Normative science relates to normative aspects of a problem i.e., what ought to be. Under normative
science, conclusions and results are not based on facts, rather they are based on different considerations like
social, cultural, political, religious and son are basically is subjective in nature, an expression of opinions
(i) Inflation is better than deflation.
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(ii) More production of luxury goods is not good for a poor country like India.
(iii) Inequalities in the distribution of wealth and incomes should be reduced.
Conclusion
Economics is concerned with human well-being as well as ethical values. It is science and an art, since the
scientific principles are applied practically. It is both positive and normative science since the actual happening
and the future happenings are dealt. Hence the scope and nature of economics deals in with all the above as
explained by the economists.
Scope of economics
Economics is a social science. The subject matter of economics deals with the analysis of economic problems of
people in the society and the satisfaction of their wants. With the evolutionary changes of the society and its
civilization, the subject matter scope of economics has expanded. Scope of economics is discussed below:
1. As social science economics deals with the economic activities of human being. One person day to day
money earning and money spending activities constitute the subject matter of economics. For example,
parents affection and nursing service for their children are not the subject matter of economics.
2. Resources are needed to satisfy people's wants. So, the availability of resources and their use are
important subject matter of economics. Adam Smith has termed economics as the Science of Wealth.
3. People's wants are unlimited. But the resources to satisfy the wants are scarce. Economics discusses how
men can get the maximum satisfaction by using the scarce means to satisfy wants on the basis of
priority. So, as subject matter of economics, the scarcity of resources is considered very important.
4. People's wants are related to production, exchange, distribution and consumption. Again, currency,
banking system, public finance, trade etc is also parts of economic activities. Economics discuss these
issues also. Besides, how economic development of the country is achieved through the means of
economic planning is also included in the subject matter of economics.
5. Economics discusses the economic problems and economic activities and indicates proper solution to
these problems. Economics also discuses about the value judgment of human actions and behavior.

Management
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Management is the science and art of getting things done through people in formally organized groups. It is
necessary that every organisation be well managed to enable it to achieve its desired goals. Management
includes a number of functions: Planning, organizing, staffing, directing, and controlling. The manager while
directing the efforts of his staff communicates to them the goals, objectives, policies, and procedures;
coordinates their efforts; motivates them to sustain their enthusiasm; and leads them to achieve the corporate
goals.

Managerial Economics
Introduction
Managerial Economics as a subject gained popularity in USA after the publication of the book Managerial
Economics by Joel Dean in 1951.
Managerial Economics refers to the firms decision making process. It could be also interpreted as Economics
of Management. Managerial Economics is also called as Industrial Economics or Business Economics.
Managerial Economics is the use of economic analysis to make business decisions involving the best use
of an organizations scarce resources. Economics is concerned with the problem of scarce resources among
competing wants. Those economic principles, concepts, methods, tools and techniques that can be applied
practically to solve the problems of business management is known as managerial economics. Managerial
economics is a part of economics and it is concerned with decision making.
Definitions:
The use of economic analysis in the formulation of business policies is known as
managerial economics.
------- Joel Dean.
Business Economics consists of the use of economic modes of thought to analyze business
situations.
------- Mc Nair and Meriam

Nature of Managerial Economics

Managerial economics is, perhaps, the youngest of all the social sciences. Since it originates from Economics, it
has the basis features of economics.
The other features of managerial economics are explained as below:
(a) Close to microeconomics: Managerial economics is concerned with finding the solutions for different
managerial problems of a particular firm. Thus, it is more close to microeconomics.
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(b) Operates against the backdrop of macroeconomics: The macroeconomics conditions of the economy
are also seen as limiting factors for the firm to operate. In other words, the managerial economist has to
be aware of the limits set by the macroeconomics conditions such as government industrial policy,
inflation and so on.
(c) Normative statements: A normative statement usually includes or implies the words ought or
should. They reflect peoples moral attitudes and are expressions of what a team of people ought to
do. For instance, it deals with statements such as Government of India should open up the economy.
Such statement are based on value judgments and express views of what is good or bad, right or
wrong. One problem with normative statements is that they cannot to verify by looking at the facts,
because they mostly deal with the future. Disagreements about such statements are usually settled by
voting on them.
(d) Prescriptive actions: Prescriptive action is goal oriented. Given a problem and the objectives of the
firm, it suggests the course of action from the available alternatives for optimal solution. If does not
merely mention the concept, it also explains whether the concept can be applied in a given context on
not. For instance, the fact that variable costs are marginal costs can be used to judge the feasibility of an
export order.
(e) Applied in nature: Models are built to reflect the real life complex business situations and these
models are of immense help to managers for decision-making. The different areas where models are
extensively used include inventory control, optimization, project management etc. In managerial
economics, we also employ case study methods to conceptualize the problem, identify that alternative
and determine the best course of action.
(f) Offers scope to evaluate each alternative: Managerial economics provides an opportunity to evaluate
each alternative in terms of its costs and revenue. The managerial economist can decide which is the
better alternative to maximize the profits for the firm.
(g) Interdisciplinary: The contents, tools and techniques of managerial economics are drawn from different
subjects such as economics, management, mathematics, statistics, accountancy, psychology,
organizational behavior, sociology and etc.
(h) Assumptions and limitations: Every concept and theory of managerial economics is based on certain
assumption and as such their validity is not universal. Where there is change in assumptions, the theory
may not hold good at all.

Scope of Managerial Economics:

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The scope of managerial economics refers to its area of study. Managerial economics is primarily concerned
with the application of economic principles and theories to five types of resource decisions made by all types of
business organizations.
The scope of managerial economics covers two areas of decision making
a. Operational or Internal issues
b. Environmental or External issues

a. Operational issues:
Operational issues refer to those, which wise within the business organization and they are under the control of
the management. Those are:
1. Theory of demand and Demand Forecasting
2. Pricing and Competitive strategy
3. Production cost analysis
4. Resource allocation
5. Profit analysis
6. Capital or Investment analysis
7. Strategic planning
1. Demand Analyses and Forecasting:
A business firm convert raw material into finished products and these products are sold in the market. Hence the
firm has to estimate and forecast the demand before starting production. The firm will prepare production
schedule on the basis of demand forecast
Demand analysis provides:
1. The basis for analyzing market influences on the firms; products and thus helps in the adaptation to
those influences.
2. Demand analysis also highlights for factors, which influence the demand for a product.
2. Pricing and competitive strategy:
Pricing decisions have been always within the preview of managerial economics. Pricing policies are merely a
subset of broader class of managerial economic problems. Price theory helps to explain how prices are
determined under different types of market conditions. Competitions analysis includes the anticipation of the
response of competitions the firms pricing, advertising and marketing strategies. Product line pricing and price
forecasting occupy an important place here.
3. Production and cost analysis:
Production analysis is in physical terms. While the cost analysis is in monetary terms cost concepts and
classifications, cost-out-put relationships, economies and diseconomies of scale and production functions are
some of the points constituting cost and production analysis.
4. Resource Allocation:
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Managerial Economics is the traditional economic theory that is concerned with the problem of optimum
allocation of scarce resources. Marginal analysis is applied to the problem of determining the level of output,
which maximizes profit. In this respect linear programming techniques has been used to solve optimization
problems. In fact lines programming is one of the most practical and powerful managerial decision making tools
currently available.
5. Profit analysis:
Profit making is the major goal of firms. There are several constraints here an account of competition from other
products, changing input prices and changing business environment hence in spite of careful planning, there is
always certain risk involved. Managerial economics deals with techniques of averting of minimizing risks.
Profit theory guides in the measurement and management of profit, in calculating the pure return on capital,
besides future profit planning.
6. Capital or investment analyses:
Capital is the foundation of business. Lack of capital may result in small size of operations. Availability of
capital from various sources like equity capital, institutional finance etc. may help to undertake large-scale
operations. Hence efficient allocation and management of capital is one of the most important tasks of the
managers. The major issues related to capital analysis are:
1. The choice of investment project
2. Evaluation of the efficiency of capital
3. Most efficient allocation of capital
Knowledge of capital theory can help very much in taking investment decisions. This involves, capital
budgeting, feasibility studies, analysis of cost of capital etc.
7. Strategic planning:
Strategic planning provides management with a framework on which long-term decisions can be made which
has an impact on the behavior of the firm. The firm sets certain long-term goals and objectives and selects the
strategies to achieve the same. Strategic planning is now a new addition to the scope of managerial economics
with the emergence of multinational corporations. The perspective of strategic planning is global.
It is in contrast to project planning which focuses on a specific project or activity. In fact the integration of
managerial economics and strategic planning has given rise to be new area of study called corporate economics.

b. Environmental or External Issues:

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An environmental issue in managerial economics refers to the general business environment in which the firm
operates. They refer to general economic, social and political atmosphere within which the firm operates. A
study of economic environment should include:
a. The type of economic system in the country.
b. The general trends in production, employment, income, prices, saving and investment.
c. Trends in the working of financial institutions like banks, financial corporations, insurance companies
d. Magnitude and trends in foreign trade;
e. Trends in labour and capital markets;
f. Governments economic policies viz. industrial policy monetary policy, fiscal policy, price policy etc.

The environmental or external issues relate managerial economics to macro economic theory while operational
issues relate the scope to micro economic theory. The scope of managerial economics is ever widening with the
dynamic role of big firms in a society.

Meaning of Science, Engineering and Technology:

Science, Engineering, and Technology are often confused with each other. All three are closely related but mean
different things. Lets start with a quote that brings out the difference between Science & Engineering:
Scientists study the world as it is; engineers create the world that has never been.
Theodore von Krmn
As per the quote, we can observe that science is a study of the natural world while Engineering is creating new
things based on that study. However, I would like to modify the quote in order to bring out a comparison
between science, engineering and technology:
Science is the study of the natural world as it is; engineering is creating new tools, devices, and processes
based on scientific knowledge; technology is the sum total of all the engineered tools, devices and processes
available.
Me ;)
In the above quote, we can clearly see the difference as well as the interconnection between science,
engineering, and technology. This can be explained using the image that follows:
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Now that we know the basic definitions and the overall comparison between the three, lets move to a set of
alternate differences between them. The differences below may seem redundant, and thats because they are.
They are all different ways of saying the same thing. Choose whichever appeals you the most:
1. Science is knowledge of the natural world put together, Engineering is creation based on the scientific
knowledge put together, and Technology is the set of engineered creations put together.
2. Science comes from observation of the world, Engineering comes from aquiring and applying knowledge,
and Technology comes from repeated application and approval of the engineered tools.
3. Science is about creating meaning of natural phenomenon, Engineering is about creating new devices, tools
and processes, and Technology is about creating a collection of engineered and tested tools for the mankind.
Heres another way to look at it:

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CONCLUSION
In a nutshell,
A Scientist studies Nature,
A Technologist manipulates Nature,
And An Engineer exploits technology for human purposes.
Example
Technology: Fire can be used to cook food.
Science: Burning wood produces heat, water, and carbon dioxide. Heat denatures proteins in food.
Engineering: Building a fireplace and chimney makes it easier to cook with fire without filling the room
with smoke.
While Scientists may, at times, may conduct scientific studies for the sake of discovery, Engineers and
Technologists always try to have in mind the ultimate benefit of humankind and results of their work are
invariably beneficial for human purposes.
Engineering is the art of optimally using technology and is primarily concerned with how to direct to useful and
economical ends the natural phenomena which scientists discover and formulate into acceptable. Engineering
therefore requires the creative imagination to innovatively apply technology in order to obtain useful
applications of natural phenomena. It seeks newer, cheaper, better technologies of using natural sources of
energy and

materials.

So it looks like the Engineer is the one who is most useful to society and humankind, isn't it?

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