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KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATOREClass: I MBA Course Name: Managerial Economics
Course Code: 21MBAP103 Unit I Semester: I Year: 2021-23 Batch
UNIT-I-Consumer’s Behavior and Demand
SYLLABUS
Unit – I : Introduction – Meaning, Nature and scope of Managerial Economics, Significance in
decision Making. Consumer’s Behaviour and Demand: Meaning of Consumer’s Equilibrium –
Utility approach – The cardinal approach to consumer equilibrium - The Law of Diminishing
Marginal utility - Law of equi-marginal utility – The ordinal approach – Indifference curve approach
– Revealed Preference theory - Consumer’s surplus. Demand function - Concept of Demand –
Types of Demand – Determinants – Law of Demand – Exceptions to Law of Demand – Change in
Demand – Elasticity of Demand – Types – Measurement of Price elasticity of demand. Concept
of Supply – Determinants of supply – Law of Supply – Change in supply – Elasticity of Supply –
Types.
Meaning and Definitions of Managerial Economics
Managerial economics is a science that deals with the application of various economic theories,
principles, concepts and techniques to business management in order to solve business and
management problems. It deals with the practical application of economic theory and methodology
to decision-making problems faced by private, public and non-profit making organizations.
“Managerial Economics is the integration of economic theory with business practice for the
purpose of facilitating decision making and forward planning by the management”
According to Mc Nair and Meriam, “Managerial economics is the use of economic modes of thought
to analyze business situation”.
Brighman and Pappas define managerial economics as,” the application of economic theory and
methodology to business administration practice”.
Joel dean is of the opinion that use of economic analysis in formulating business and management
Prepared by C.Sagunthala, Assistant Professor, Dept of Management, KAHE, Page 1/69
, KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE
Class: I MBA Course Name: Managerial Economics
Course Code: 21MBAP103 Unit I Semester: I Year: 2021-23 Batch
policies is known as managerial economics.
SCOPE OF MANAGERIAL ECONOMICS
The term “scope” indicates the area of study, boundaries, subject matter and width of a
subject. The following topics are covered in this subject.
1. DEMAND ANALYSIS AND FORECASTING
A business firm is an economic organisation which is engaged in transforming productive resources
into goods that are to be sold in the market. A major part of managerial decision making depends on
accurate estimates of demand. A forecast of future sales serves as a guide to management for
preparing production schedules and employing resources. It will help management to maintain or
strengthen its market position and profit base. Demand analysis also identifies a number of other
factors influencing the demand for a product. Demand analysis and forecasting occupies a strategic
place in Managerial Economics.
2. PRODUCTION AND COST ANALYSIS
A firm’s profitability depends much on its cost of production. A wise manager would prepare cost
estimates of a range of output, identify the factors causing are cause variations in cost estimates and
choose the cost minimising output level, taking also into consideration the degree of uncertainty in
production and cost calculations. Production processes are under the charge of engineers but the
business manager is supposed to carry out the production function analysis in order to avoid
wastages of materials and time. Sound pricing practices depend much on cost control. The main
topics discussed under cost and production analysis are: Cost concepts, cost-output relationships,
Economics and Diseconomies of scale and cost control.
Prepared by C.Sagunthala, Assistant Professor, Dept of Management, KAHE, Page 2/69
, KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE
Class: I MBA Course Name: Managerial Economics
Course Code: 21MBAP103 Unit I Semester: I Year: 2021-23 Batch
3. PRICING DECISIONS, POLICIES AND PRACTICES
Pricing is a very important area of Managerial Economics. In fact, price is the genesis of the revenue
of a firm ad as such the success of a business firm largely depends on the correctness of the price
decisions taken by it. The important aspects dealt with this area are: Price determination in various
market forms, pricing methods, differential pricing, product-line pricing and price forecasting.
4. PROFIT MANAGEMENT
Business firms are generally organized for earning profit and in the long period, it is profit which provides
the chief measure of success of a firm. Economics tells us that profits are the reward for uncertainty bearing
and risk taking. A successful business manager is one who can form more or less correct estimates of costs
and revenues likely to accrue to the firm at different levels of output. The more successful a manager is in
reducing uncertainty, the higher are the profits earned by him. In fact, profit-planning and profit
measurement constitute the most challenging area of Managerial Economics.
5. CAPITAL MANAGEMENT
The problems relating to firm’s capital investments are perhaps the most complex and troublesome. Capital
management implies planning and control of capital expenditure because it involves a large sum and
moreover the problems in disposing the capital assets off are so complex that they require considerable time
and labour. The main topics dealt with under capital management are cost of capital, rate of return and
selection of projects.
6. LINEAR PROGRAMMING AND THE THEORY OF GAMES
The term linear means that the relationships handled are the same as those represented by straight lines and
programming implies systematic planning or decision-making. It implies maximization or minimization of a
linear function of variables subject to a constraint of linear inequalities. It offers actual numerical solution to
the problems of making optimum choices. It involves either maximization of profits or minimization of
costs. The theory of games basically attempts to explain what is the rational course of action for an
individual firm or an entrepreneur who is confronted with the a situation where in the outcome depends not
Prepared by C.Sagunthala, Assistant Professor, Dept of Management, KAHE, Page 3/69
, KARPAGAM ACADEMY OF HIGHER EDUCATION, COIMBATORE
Class: I MBA Course Name: Managerial Economics
Course Code: 21MBAP103 Unit I Semester: I Year: 2021-23 Batch
only on his own actions, but also on the actions of others who are also confronted with the same problem of
selecting a rational course of action. Both these techniques are extensively used in business economics to
solve various business and managerial problems.
7. STRATEGIC PLANNING
It provides a framework on which long term decisions can be made which have an impact on the behavior of
the firm. The perspective of strategic planning is global. In fact, the integration of business economics and
strategic planning has given rise to a new area of study called corporate economics.
8. OTHER AREAS
1. Macroeconomic management of the country relating to economic system, national income,
trade cycles Savings and investments and its impact on the working of a firm.
2. Knowledge and information about various government policies like monetary, fiscal,
physical, industrial, labor, foreign trade, foreign capital and technology, MNCs etc and their
impact on the working of a firm.
3. Impact of international changes, role of international financial and trade institutions in
formulating domestic polices of a firm.
Economic Analysis and Business Decisions
Business decision-making basically involves the selection of best out of alternative opportunities open to
the business organization. Decision making processes involve four main phases, including:
Phase One: Determining and defining the objective to be achieved.
Phase Two: Collection and analysis of information on economic, social, political, and technological
environment.
Phase Three: Inventing, developing and analyzing possible course of action
Phase Four: Selecting a particular course of action from available alternatives.
Prepared by C.Sagunthala, Assistant Professor, Dept of Management, KAHE, Page 4/69
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