MANAGERIAL

ECONOMICS

By

SANDHYA SINGH

MBA (HR & FINANCE) B.SC(cs).

HOD

SGGM College of Professional Studies Mathura

NEESHU SHARMA

MBA (HR & Finance), MA(Economics)

Assistant Proffessor

Venkateshwara Group of Institution, Meerut (U.P.)

(An ISO 9001:2008 Certified Company)

Vayu Education of India2/25, Ansari Road, Darya Ganj, New Delhi-110 002

MANAGERIAL ECONOMICS

Copyright © VAYU EDUCATION OF INDIA

ISBN: 978-93-83137-57-2

First Edition: 2013

Rs. 160/-

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PREFACE

BACKGROUND AND PURPOSE

As in the previous editions, the primary objective of the next edition of Basic

Econometrics is to provide an elementary but comprehensive introduction to

econometrics without resorting to matrix algebra, calculus, or statistics beyond the

elementary level.

In this edition I have attempted to incorporate some of the developments in the

theory and practice of econometrics that have taken place since the publication of

the third edition in 1995. With the availability of sophisticated and user-friendly

statistical economic such as cost, monopoly oligopoly. perfect competition , etc it is

now possible to discuss several econometric techniques that could not be included

in the previous editions of the book. I have taken full advantage of these statistical

packages in illustrating several examples and exercises in this edition.

I was pleasantly surprised to find that my book is used not only by economics

and business students but also by students and researchers in several other disciplines,

such as politics, international relations, agriculture, and health sciences. Students in

these disciplines will find the expanded discussion of several topics very useful.

–Author

TABLE OF CONTENTS

Preface (v)

UNIT 1: NATURE AND SCOPE 1

1.0 Introduction 1

1.1 Managerial Economics 2

1.2 Other Discipline of Managerial Economics 5

1.3 Meaning of Managerial Economists 6

1.4 Its relationship with other subjects 8

1.5 Decision Making 10

1.6 Fudamental Economic Tools 13

1.7 Incremental concept 20

1.8 Principle of time perspective 22

1.9 Discounting 23

1.10 Equimarginal principle 26

Exercise

UNIT 2: DEMAND ANALYSIS 28

2.0 Introduction 28

2.1 Analysis of Demand 28

2.2 Demand Schedule 30

2.3 Demand Curve 31

2.4 Why the Demand Curve Slopes Downward or Reasons for the

Law of Demend 32

2.5 Exceptions to the Law of Demend 33

2.6 Law of Demand 37

2.7 Elasticity of Demand 40

2.8 Income Elasticity of Demand 43

2.9 Revenue concept 43

2.9.1 Total Expenditure Method 47

2.10 Demand Forecasting (D.F) 48

2.11 Methods of Demand Forecasting (For Established Products 52

2.12 Demand Function 58

2.13 Supply 58

2.14 Marginal Utility Analysis 60

2.15 Concept of Revenue 63

Exercise

UNIT 3: COST CONCEPT 70

3.0 Introuction 70

3.1 Cost concept 70

3.2 Classification of Cost 76

3.3 Determinants of Cost 80

3.4 Cost-Output Relations 80

3.5 Short-Run Cost-Output Relation 81

3.6 Long-Run Cost-Output Relations 85

3.7 Internal and External Economics and Diseconomics of Scale 88

3.8 Cost Control 91

3.9 The points of distinction between Cost reduction and

Cost control are as follows: 93

3.10 Cost Analysis 93

Exercise

UNIT 4: PRICING 102

4.0 Introduction 102

4.1 Perfect Competition 102

4.2 Imperfect Competition 105

4.3 Price and Rice and Output Determination Mination Under Monopoly 106

4.4 Price and output Determination Under Monopoly or Equilibrium of

Monopolist 113

4.5 Price and output Determination Under Monopoly or

Equilibrium of Monopolist 116

4.6 Comparision Between perfect Competition and Monopolistic Competition 120

4.7 Comparision between Imperfect Competition and Monopoly 121

4.8 Comparision Betwee Imperfect Competition and Monopoly 122

4.9 Oligoply 123

4.10 Price Determination Under Olifopoly 124

4.11 Pricing Under Collusion (Collusive Oligopoly) 127

Exercise

(viii) Managerial Economics

Contents (ix)

UNIT 5: PROFIT MGT AND INFLATION 102

5.0 Introduction 132

5.1 Definition 132

5.2 Breakeven Analysis 132

5.3 Inflation 133

5.4 National Income 145

5.5 RBI(Reserve bank of india) 151

5.6 Foreign Direct Investment 153

5.7 Monetary Policy 158

5.8 Alternative Price Policies 164

5.9 Instruments of Monetary Policy 170

5.10 Fiscal Policyt 178

Exercise

INDEX 187

ABOUT THE AUTHOR

Sandhya singh

Sandhya singh MBA (HR & FINANCE) B.SC(cs).Pursuing P.hd from

Venkateshwara group of institution, Meerut. she has been teaching Managerial

Economics from last 4 years in renowned colleges of Uptu, Mtu.

She has authored many books like Industrial management for

Polytechnic,Organisation Behaviour,Industrial Relation Etc.

she has presented & published good no. of research papers in national &

international seminars & conference & journals

Neeshu Sharma

Neeshu Sharma mba (hr & finance), MA (Economics) is working as assist.

prof. in venkateshwara group of institution, meerut. she has been teaching production

management from last 4 years in renowned colleges of uptu,mtu.

she has authored many books like, managerial economics, industrial law,

manufacturing , maintenance and waste management etc.

she has presented & published good no. of research papers in national &

international seminars & conference & journals.

ABOUT THE BOOK

This Book applies economic theory and methods to business and administrative

decision making. Managerial economics prescribes rules for improving managerial

decisions. Managerial economics also helps managers recognize how economic

forces affect organizations and describes the economic consequences of managerial

behavior. It links economic concepts with quantitative methods to develop vital

tools for managerial decision making.

Evaluating Choice Alternatives

Managerial economics identifies ways to efficiently achieve goals. For example,

suppose a small business seeks rapid growth to reach a size that permits efficient

use of national media advertising. Managerial economics can be used to identify

pricing and production strategies to help meet this short-run objective quickly and

effectively. Similarly, managerial economics provides production and marketing rules

that permit the company to maximize net profits once it has achieved growth or

market share objectives.

NATURE AND SCOPE

Nature and Scope: Nature and Scope of Managerial Economics, its

relationship with other subjects. Fundamental Economic Tools-Opportunity

cost concept, Incremental concept, Principle of time perspective, Discounting

principle and Equimarginal principle.

1.0 INTRODUCTION

Managerial economics is the science of directing scarce resources to

manage cost effectively. It consists of three branches: competitive

markets, market power, and imperfect markets. A market consists of

buyers and sellers that communicate with each other for voluntary

exchange. Whether a market is local or global, the same managerial

economics apply.

Mean of Economics

Economics is a tool & techniques of making optimum use of the

available resources to achieve the given goal. A working knowledge of

economics not necessary of a formal degree is essential the requirement

of the managers..

According to Robbins: “Economics is concerned with the best

possible use of limited resources.”

Characteristics of Economics

The characteristics of Economics are as follow:

(i) Economics analysis is an aid (help) to understand business

policy in given environment.

(ii) Economics is guide to management.

(iii) Economics provide a set of concept (thinking).

(iv) Economics concept is a tool & techniques of analysis.

1

Unit

2 Managerial Economics

1.1 MANAGERIAL ECONOMICS

Managerial Economics

Managerial Economics tells the way of how to use available economics

for also achieve. Prefers to the integration of Economics theory with

business practice. Economics provide a tool, managerial economics

apply these tools to the Management of Business.

According to ‘Jeal Dean’

The purpose of Managerial Economics is to how economics analysis

can be used in formulating policies.”

It is that body of economics knowledge, which is used in analyzing

business. Problem for taking appropriate business decision &

formulating forward plans.

Qualities of Manager

The basic qualities of a successful manager are as follows:-

1. Knowledge: A substantial and expanding or basic knowledge

of management is very important for a manager in the

concerned field.

2. Competent Application: A manager should have skilled and

judicious utilization of knowledge in the solution of complex

and important problems.

3. Professional body: Manager have regulation of entry into the

profession and conduct of members by the representative body.

4. Self control: An established code of conduct enforced by the

profession membership.

5. Social Responsibility: Managers primarily motivated by the

desire to serve others and the community. Managers recognize

their social responsibility towards customers, workers and

other groups.

6. Director: Directing is the qualities of good manager. Manager

make directing of staffing, planning & controlling. It includes

communication with subordinates, providing them leadership

and also motivating them.

7. Results through other: The managers cannot do everything

themselves. They must have the necessary ability and skills to

get work accomplished through the efforts of other. They must

Nature and Scope 3

motivate the subordinates for the accomplishment of the tasks

assigned to them.

Characteristics of Managerial Economics

1. Micro Economics: Micro Economics is the study of the

behaviour and problem of individual economic unit (firm). To

read (study) only one firm.

2. Macro Economics: Macro Economics is analysis &

understand the general business(firm) must operate

environment in which the business operate. Study the

environment of many firms.

3. Economics of firm: Managerial Economics use that body of

economics, concepts & principles which is known as the ‘Theory

of firm’ or ‘Economics of the firm.’

4. Managerial Economics is Normative: It deals, with future

planning, policies making, decision making & how to make full

use of economic principles.

Importance of Managerial Economics

1. Predicting Economics quantities: A manager has to take

most of his decisions in the environment. Economics analyses

makes prediction about economic event possible by analyzing

various economic data such as cost, profit, demand, capital,

price and output.

2. Estimating Economics relationship: Economics analyses the

estimate of relationship between economic variables of income

elasticity, price elasticity cost elasticity.

4 Managerial Economics

3. Basic of business policies: Economics analysis on the basis

of business policy manager takes all the decision for the firm

and formulate plans for profit, capital, cost and price.

4. To assist in planning: Business Economics helps in decision

making maximizing the profit of the firm.

5. To assist in Organization: It is the function of organization

managerial economics helps in this work efficiently of whole

firms or department can be checked out by the calculation of

rate of return. The efficiency of department can be improved

after checking the efficiency.

6. To assist in controlling: For the purpose of controlling,

business activities, business unit & their actual performance

are compare with there pre-determine goal.

7. Forecasting: Forecasting is necessary for the success of the

firm.

8. To assist in understanding the effect of External Force:

The external force at the time of policies formulating of the

firm, such as business cycle, industrial policies, licensing etc.

9. Co-ordination between principle and practice: Many

schemes seems the best but these schemes cannot be applied

in practical form in the firm. Conditions of firm has always

changed so it must co-ordination between principle and

practice

Scope of Managerial Economics

Demand analyses & Demand forecasting: It is the most

important scope of Managerial Economics because all future activities

and decision depends on it, law of demand, demand curve, elasticity

of demand determination of demand, types of demand and demand

forecasting are include in demand analyses & demand forecasting.

1. Cost analyses: The knowledge of different cost element is

necessary for every successful businessman. This part of subject

includes the concept of cost, cost curves, cost analyses under

the cost analyses. We analysis the cause of change in cost.

2. Output analyses: Output analysis also an important part of

Managerial Economics for the efficient organization of the

production process, output analyses is necessary for prefer

profit planning output analyses always measured in physical

Nature and Scope 5

unit.

3. Price Policies: Influence the demand conditions & earning of

a firm, price policies are necessary for every firm.

Price policies Demand Earning of firm

High � Low � Low

Low � High � High

4. Profit Management: To earn the profit is the first object of

each firm. Profit is the measurement of success of each firm

under it profit are forecasting after taking into consideration

the various effecting factor. All the efforts are make for

maximum profit of the firm.

15. Capital Management: Capital is the Life power of the

business. We can’t think about any business without capital.

Capital Management of firm is a complex topic. Stable success

of the firm depends on a good capital Management.

6. Macro Economics: - The activity of a firm are also affected by

external forces, such as trade cycle, national income, industrial

policy, tax policy.

1.2 OTHER DISCIPLINE OF MANAGERIAL ECONOMICS

1. Managerial Economics & Statistic: Statistic tools are a great

aid in business decision making. Statistic techniques are used

6 Managerial Economics

in concerning collecting processing & analyzing data, testing

the validity of the economics low, they are applied to business

analyzing. It is the use in future forecasting & decision making.

2. Mathematics: The major problem of a business man is how to

a minimum cost or how to maximum profit. Mathematics

concept & techniques are widely used in finding out answer to

these question.

3. Accounting: The profit & loss statement of a firm tells how

well the firm has done.

4. Operation research: Linear programming model, game

theory, Inventory models transportation problems, assignment

problems.

5. Economics: Managerial Economics the fundamental problems

of a economic. It is economics applied to firm in decision making

such as demand, production, cost, price, profit analysis.

6. Decision making: Decision theory has been developed for

solving of the problem.

1.3 MEANING OF MANAGERIAL ECONOMISTS

Managerial Economists is that administrator (officer) of business

organization who is appointed to give advice on economics matter of

business organization in developed country is managerial economics

is known as professional person and economist having specialization

in management is able to solve the completed problem of decision

making and forward planning by his special knowledge.

“A person who helps in the process of decision making & forward

planning is know as Managerial Economics”

Role of Managerial Economics

1. Setting the objectives

2. Analysis of problem

3. To reduce risk

4. Economy of Effort

5. Economy performance of the jobs

6. Achievement of the objectives

7. Selection of the best alternatives.

8. Implementing the decision.

Nature and Scope 7

1. Setting of the objectives: First step is setting of objectives is

every organization have some duties, that have to be completed

to make a organization successful. Objective of business cannot

be attend because lack of time and material.

2. Analysis of problem: The duties of business economics is to

analysis the problem to reduce that what is the problem in

real situation. By understanding the correct meaning of

problem, its become easy to find out the solution of that

problem.

3. To reduce risk: The most important duties of a business

economists is to reduce the risk by his capability normally in

business the risk cannot be complete reduced because business

activities are conducted uncertain environment.

4. Economy of effort: It is the duty of a business economist that

he must keep in mind, while evaluating the business

alternatives that which of the alternatives is helpful forgetting

maximum result with minimum effort.

5. Economy performance of the jobs: While making evaluation

of objective, It is the duty of business economist to keep

in mind the view that which of the objectives takes less time in

performance & of the objectives takes less time in performance

& of jobs because management have to take decision

immediately in this way time factor is importance service

of performance of job, saving to time is very necessary

efficiently. [To achieving their objective by performance in

some time.]

6. Achievement of the objectives: A business economist

can achieve success in management science only when he

keeps in his mind that resource are limited. An objective

should be achieved with these limited resources. Therefore,

performance of job should be in such a way so that the minimum

resources should be used. [To achieve their object by limited

resources.]

7. Selection of the best alternatives: After collecting various

alternatives be have to choose best alternatives. So to achieve

the target of business. Business economist choose the best

alternative on the basis of experience & research in real

situation.

Managerial Economics By Sandhya Singh

Publisher : Vayu Education ISBN : 9789383137572 Author : Sandhya Singh

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