Managerial Economics

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Managerial Economics


Managerial economics is the study of economic theories, logic, and economic analytical techniques that are utilised in the process of making corporate decisions. To analyse business issues, economic theories and techniques of economic analysis are used. Evaluate business choices and prospects in order to make an informed business decision. Managerial economics is fundamentally applied economics in the realm of business administration. It refers to business economics or managerial choices. It is concerned with all economic elements of management decision-making.


Mansfield, “Managerial economics is concerned with the application of economic concepts and economics to the problems of formulating rational decision making.    

Spencer and Seigelman ,” Managerial economics is the integration of  economic theory with business practice for the purpose of facilitating decision making and forward planning by management”.

Dauglas,” Managerial economics is concerned with the application of economic principles and methodologies to the decision- making process within the firm or organization. It seeks to establish rules and principles to facilitate the attainment of the desired economic goals of management.”  

Davis and Chang, “Managerial economics applies the principles and methods of economics to analyze problems faced by management of a business, or other type of organizations and to help find solutions that advance the best interest of such organization.”    

Law of diminishing Marginal Utility:  

The law states as a consumer increases the consumption of a product, the utility gained from successive units goes on decreasing. In other words, the rate of increase of total utility decreases as more and more units are consumed. Consider the case of a thirsty boy going to a general store on a summer day. Suppose normally a soft drink bottle possesses a utility of 7 utils. However, under such conditions the utility obtained from the first bottle will be higher, say 9 utils. However. When he consumes a second bottle soon after the first one, he will not get the same level of satisfaction. He may get 7 utils from the second bottle. Likewise, the utility for each successive bottle of soft drink will go on decreasing. A stage may come when he may develop such an aversion for the soft drink that he may even vomit on further consumption. In such cases, the utility may even become negative. We can also represent this example in Table 4.1

 TABLE 4.1 Total and Marginal Utility

Units of Coke

Total Utility TU (utils ) Marginal Utility, MU (utils)
























 Similar consumption behavior will be observed for any  product or service. This can also be graphically depicted as shown in Figure

Total Utility and Marginal Utility

Consumer equilibrium:  A Consumer is said to be in equilibrium when he has

(a).      Maximized his satisfaction

(b).      spend his entire income

 (c).     attained optimum allocation of expenditure and

(d).      consumed optimum quantity of each commodity.

Consumer equilibrium can be better understood by analyzing a situation wherein the consumer consumes a single commodity. This can then be generalized for multiple commodities Let a consumer with a certain money income consume a commodity 1. If assume that the money a consumer is willing to pay for each unit of the commodity reflects the marginal utility of that product. We can have the marginal utility curve of a commodity in terms of money units as shown in

Marginal Utility

The consumer will continue consuming the commodity and exchanging money income it so long as.


 He will thus attain equilibrium when                          

                                    MU1 = P1 .MUm



Detailed Content in Study Material – 

UNIT –I Basic Concepts and principles:

Definition, Nature, and Scope of Economics-Micro Economics and Macro Economics, Managerial Economics and its relevance in business decisions. Fundamental Principles of Managerial Economics – Incremental Principle, Marginal Principle, Opportunity Cost Principle, Discounting Principle, Concept of Time Perspective, Equi-Marginal Principle, Utility Analysis, Cardinal Utility, and Ordinal Utility.

UNIT –II Demand and Supply Analysis :

Theory of Demand, Types of Demand. Determinants of demand, Demand Function, Demand Schedule, Demand curve, Law of Demand, Exceptions to the law of Demand, Shifts in the demand curve, Elasticity of Demand and its measurement. Price Elasticity, Income Elasticity, Arc Elasticity. Cross Elasticity and Advertising Elasticity. Uses of Elasticity of Demand for managerial decision making, Demand forecasting meaning, significance, and methods. ( numerical Exercises) Supply Analysis; Law of Supply, Supply Elasticity; Analysis and its uses for managerial decision making. Price of a Product under demand and supply forces

UNIT –III  Production and cost Analysis:

Production concepts & analysis; Production function, Types of the production function, Laws of production: Law of diminishing returns, Law of returns to scale.

Cost concept and analysis: Cost, Types of costs, Cost output relationship in the short-run. Cost output relationship in the Long-run. Estimation of Revenue. Average Revenue, Marginal Revenue

UNIT –IV Market structures:

Perfect and Imperfect Market Structures, Perfect Competition, features, determination of price under competition. Monopoly: Feature, pricing under monopoly, Price Discrimination.

Monopolistic: Features, pricing under monopolistic competition, product differentiation.

Oligopoly: Features, kinked demand curve, cartels, price leadership.


National Income; Concepts and various methods of its measurement, Circular flows in 2 sectors, 3 sector, 4 sector economies, Inflation, types and causes, Business Cycle & its phases.


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