The Fundamentals Of Managerial Economics
Introduction
People only have a few wants that must be met in order for them to survive as human beings. There
are some that are material, others that are psychological, and others that are emotional. No one would
prefer to live at the level of basic human needs if they desire to enjoy a higher standard of living even
though people's needs are limited. This is due to the fact that human wants, or the drive to consume
goods and services, are limitless. Whether a person is the richest person in the world or a member of
India's middle class, they are continuously striving for more. For instance, a larger home, more friends, a
higher salary, etc. The fundamental economic issue is that resources are scarce but needs are insatiable,
which pushes people to make decisions.
Economics is the study of how resources are distributed and the decisions that economic agents
make. An economy is a system that makes an effort to address this fundamental economic conundrum.
There are many various kinds of economies, including home economies, local economies, national
economies, and global economies, yet they all struggle with the same issue. What to create is the main
economic issue. How do you produce? When should production occur, and for whom should it occur?
The study of economics examines how people and communities decide how to use the limited
resources that nature and past generations have provided. Resources are rare and limited in the globe.
Free goods are defined as resources that are not in short supply. Economic goods are resources that are
in short supply.
Why Study Economics?
A solid understanding of economics is essential for making managerial decisions, creating and
comprehending public policy, and appreciating how an economy works. Students need to learn how
economics can be utilized as a practical tool for decision-making as well as how it can help us
understand what is happening in the world. Without a comprehensive grasp of how market forces
provide both opportunities and limits for business operations, managers and CEOs of major corporate
bodies, managers of small companies, managers of nonprofit organizations, managers of service
centers, etc., cannot succeed in business.
Reasons For Studying Economics:
It is a study of society and as such is extremely important.
It sharpens the thinking and makes it possible to approach issues relating to money and
commerce methodically.
From a study of the subject it is possible to predict economic trends with some precision.
It helps one to choose from various economic alternatives.
Economics is the study of decision-making under conditions of resource scarcity. Anything that is
used to create a good or service in order to accomplish a goal is a resource. Economic decisions include
distributing limited resources to best achieve the managerial objective. Depending on the manager's
objectives, managerial decisions can take many different forms.
A Manager is a person who directs resources to accomplish a given goal. The manager is accountable
for both his or her own actions as well as those of the people, machines, and other inputs under their
control.
Managerial economics is the study of the most effective use of limited resources to accomplish
managerial objectives. It is a useful tool for assessing business circumstances and making wiser
judgments.
According to professor Evan J. Douglas, managerial economics is "involved with applying economic
ideas and methodology to the firm's or organization's decision-making process under the conditions of
uncertainty."
Managerial Economics, in the words of Milton H. Spencer and Louis Siegelman, "is the integration of
economic theory with business operations with the purpose of simplifying management decision-making
and forward planning."
Managerial Economics, according to Mc Nair and Miriam, "involves the application of economic
patterns of thought to the analysis of business issues."
Microeconomics and macroeconomics are the two main divisions of economics. The study of the
entire economic system is known as macroeconomics. Microeconomics focuses on the actions of
people, firms, and how they interact in markets. It is relevant to concerns like determining national
income, savings, investment, employment at aggregate levels, tax collection, government spending,
foreign commerce, money supply, etc. The principles of micro and macroeconomics are applied in
managerial decision-making by means of managerial economics.
All managers have access to a potent collection of tools and insights through the economic approach
to business decision-making that will help them further the objectives of their organizations. The
management economics methodology is one of the most helpful tools for successful managers in
making wise decisions.
Nature Of Managerial Economics:
1. Analysis of optimal solutions to business/firm decision-making problems is the focus of
managerial economics (micro economic in nature).
2. Managerial economics is a practical subject therefore it is pragmatic.
3. Managerial economics outlines the economic phenomena that have been seen (positive
economics) and suggests how they should be (normative economics)
4. Strong economic principles form the foundation of managerial economics. (of a conceptual kind)
5. Managerial economics examines business issues from the standpoint of the economy as a whole
(macro in nature)
6. It helps to find optimal solution to the business problems (problem solving)
Managerial Economics And Other Disciplines
To advance its theories and concepts for managerial decision making, managerial economics
collaborates with other disciplines. In essence, it belongs to the field of economics. Operations research,
accounting, statistics, and mathematics are all closely tied to managerial economics.
Managerial economics aids in forecasting product demand, scheduling production, selecting input
mixtures, calculating production costs, achieving economies of scale, and boosting returns to scale.
Additionally, it entails figuring out the product's price and evaluating the market structure to do so in
order to maximize profits. This aids in successful capital management and planning.
The management economics technique is one of the most helpful strategies used by successful
managers to make wise decisions. The well-known chairman and CEO of Berkshire Hathaway Inc.,
Warren E. Buffett, started with a $100 investment and amassed a personal net worth of $30 billion.
Buffett attributes his accomplishments to having a fundamental grasp of managerial economics. Buffett's
achievement is a potent example of managerial economics' real-world applicability.
By assisting management in making wise decisions and long-term planning, managerial economics
has a crucial role to play. A manager needs to be aware of his obligations and responsibilities in order to
successfully carry out his role. The fact that managers play a vital role in the profitable expansion of the
companies is becoming increasingly clear.
We might draw the conclusion that management economics entails using economic ideas and
concepts to deal with the numerous uncertainties that a business firm encounters.
Circular Flow Of Economic Activity
Resources that are required inputs for the businesses in the production process are owned or under
the control of the individuals. Four categories are used to group these resources (factors of production).
1. Land: All of the earth's natural resources—both above and below the surface—are included.
Once utilized, non-renewable resources like oil, coal, etc., cannot be replenished. Our kids won't
be able to access it. Resources that are renewable can be used, replaced, and do not become
exhausted over time.
2. Labour: is the work force of an economy. The value of the worker is called as human capital.
3. Capital: It falls under the categories of fixed and working capital (not transformed into final
products)
4. Entrepreneurship: It alludes to the people who plan production and take chances.
In order to accomplish the goals of customers (to maximum satisfaction), workers (to maximize
wages), businesses (to maximize the output and profit), and the government, all of these resources are
allocated in an efficient manner (to maximize the welfare of the society).
The figure depicts the basic economic interactions between families and businesses. A clockwise and
counterclockwise flow of goods and services explains the cyclic flows of economic activity. To
understand the flow of economic activity, the four sectors of households, businesses, governments, and
the rest of the world can also be taken into consideration. The circular flow of activity is a chain in which
spending triggers production, which in turn stimulates income generation.
The major four sectors of the economy are engaged in three economic activities of production,
consumption and exchange of goods and services. These sectors are as follows:
Households: Through the purchase of goods and services from the businesses, households are
able to satisfy their needs and wants. As owners and suppliers of inputs into the industrial
process, they are compensated with rents, salaries, and interest.
Firms: In order to manufacture a range of goods and services and pay households, businesses
use input factors.
Government: By making payments, the government acquires goods and services from
businesses as well as production inputs from households.
Foreign sector: Indian households, businesses, and the government all make payments to
import goods and services from other countries. However, all of these industries export their
goods and services to other nations, where they are then paid.
The interaction of households, businesses, governments, and other nations makes up the economy.
Families have their own resources and provide businesses with capital, labor, raw materials, and land in
order to help them manufacture goods and services. Firms in turn compensate households' capital
investments in interest, rent for land, and wages for labor. The household's earnings are utilized to buy
products and services from businesses to satisfy their needs and wants; the remaining amount is saved
and transferred to the capital market where it is converted into investments in different enterprises.
Taxes must be paid to the government in order for citizens and businesses to use the services. On the
other side, businesses and households import goods and services from different nations throughout the
world.
Exporting items allows businesses to make money for themselves as well as provide the nation with
foreign currency. Therefore, it is evident that families provide the input variables that go to businesses.
Businesses produce goods and services that go to homes.
Nature Of The Firm
A firm is a group of people who have joined forces for the purpose of converting inputs into outputs.
The company sets up the production factors to create the goods and services that households demand.
Each company has its own goals, which is essential to the life of a firm.
The major objectives of the firm are:
To achieve the Organizational Goal
To maximize the Output
To maximize the Sales
To maximize the Profit of the Organization
To increase Stakeholder and Customer Satisfaction
To maximize Shareholder’s Return on Investment
To maximize the Growth of the Organization
Businesses are created to be profitable and to satisfy their shareholders. They aim to optimize their
sales in an effort to grow their market share. Businesses today strive to generate goods and services
without endangering the environment. Businesses aren't always able to turn a profit. They can also be
experiencing operating losses. According to economists, businesses should focus on maximizing long-
term profits rather than immediate ones. Therefore, managers must generate enough profit to meet
shareholders' needs and increase their personal wealth through the business.
