Introduction to managerial economics

scarcity

Unlimited choice Limited resources

What to produce? How to produce? For whom to produce?

Economics is the social science that studies the production, distribution, and consumption of goods and services.

Managerial economics (sometimes referred to as business economics), is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units.

Relationship to economic theory 1. Micro economic 2. Macro economicNature of Economics 1. Normative economic 2. Positive economic

Managerial Economics Model

OPPORTUNITY COST PINCIPLE

• Argues that a decision to accept an employment for any factor of production is good if the total reward for the facto in that occupation is greater or atleast no less than Factor’s opportunity cost.

MARGINAL OR INCEMENTAL PRINCIPLE

• States that given the objective of Profit maximization, a decision is sound if and only if it leads to increase in profits, which would arise in either of following cases– If it causes TR to increase more than TC or– If it causes TC to Decline less than the total Cost

DISCOUNTING OR COMPOUNDING PRINCIPLE

• States that when a decision involves money reciepts or payments over a period of time, all the money transactions must be valued at a common period to be meaningful for decision analysis.

EQUI-MARGINAL PRINCIPLE

• States that a rational decision maker would allocate or hire his resources in such a way that the ratio of marginal returns and marginal costs of various uses of a given resource or of various resources in a given use is same.

TIME PERSPECTIVE PRINCIPLE

• Argues that the decision maker must give due consideration both to the short and long run consequences of his decision, giving appropriate weights to the various time periods, before arriving at the decision.