Managerial Economics

By :Gaurav Gupta
Wants of each household are unlimited
but the means (wealth) to satisfy them r limited
or Scare.

Each household like to utilise his wealth in such

a way as to satisfy most of his wants.
Scarcity and choice

 Scarcity means that the supply of resources

is less than the demand for resources.

 Choice is the outcome of scarcity.

Choice refers to the process of selection from

available limited alternatives.
Maximising behaviour or optimizing behaviour

 Thus economics is a social science. Its basic

function is to study how people- individual
,household, firms and nations-maximise their
gains (satisfaction) from their limited
resources and opportunity.
 Thus it is study of choice making behaviour
of the people.
 Optimizing behaviour means selecting the
one out of available option.
Economics
 Micro
 Microeconomics studies the
economic activity at the
individual level.
 Ex:Demand for salt by an
individual household
 Macro
 Macroeconomics studies
the economic activity as a
whole.
Ex:Aggreate demand for all
goods and services in a
economy
How nations allocate their
resources so that economic
welfare of society can be
maximise.
Problems of Economy

 Unlimited wants
 Limited or scare means
Central problem of economy

 Problem of allocation of resources

 What to produce how much to produce
 How to produce
 Whom to produce
 How to achieve full utilisation of resources
 How to achieve growth of resource.
Managerial Economics

 It should be thought of applied micro economics.

 It is an application of microeconomics to take

managerial decision.

 Defines as the study of economics theories, logic

and tools of economic analysis that are used in the
process business decision making.
Objective of a Firm

 Primaryobjective to make profit.

 Maximisation of sales revenue
 Maximisation of firm growth rate
 Maximisation of managers utility function
 Making a satisfactory rate of profit
Opportunity cost

 Canbe defined as the income forgone which

a businessman could make from second best
use of his resources.
Accounting profit Vs Economic profit

 A/c profit does not take into account the opportunity

cost but economic profit does.
 A/c profit = TR- (W+R+I+M)
 Economic profit= Tr-(Explicit Cost +Implicit Cost)

W=Wages, R=Rent,I= Intrest,M=Cost of material

Marginal concept

 Widely used in economics

 Refers to the change (Increasing or
decreasing) in total quantity or value due to
one unit change in determinant.
 Ex MC= TCn-TCn-1(Page 43 dnd)
 Ex TR=TRn-TRn-1
Business decision

 The decision rule: Firm faced problem how

much to produce so that profit is maximum.
 A simple rule that a business activity must
be carried out so long as it MR>MC
 So for profit maximisation economist use
marginal principal and set necessary
condition for profit maximisation o/p.
 Thus the profit is maximum when MR=MC
Limitations

 Itcan be applied only where the

management has the TC and TR data for
each and every unit or where the
management is fully aware of the cost of
producing one additional unit end price
expected to be received from the sale of that
unit.
Profit maximisation as a business
objective

 P= TR-TC (Two condition must satisfy)

1-Mr = Mc (First order condition)
2-Decreasing MR and Rising MC(second order condition)

MR:is the revenue obtained from the production and sales of

one additional unit of output.and Marginal cost is the cost
arising due to production of one additional unit.
 Let TR= f(q) and TC = f(q) then
 P= F(q)tr- F(q)tc
 First order condition
 Dp/dq=DTR/dq-DTC/dq=0
 DTR/dq = DTC/dq
 Thus MR=MC

Second order condition

 D2P/Dq2=D2TR/dq2-D2TC/Dq2
 Second order condition require that
 D2TR/Dq2-D2TC/Dq2<0
 D2Tr/Dq2<D2Tc/Dq2

 Do numerical ex From Dnd(Text) page 28