MANAGERIAL ECONOMICS

INTRODUCTION TO ECONOMICS
Any discussion on a subject must start by explaining what the subject is all about i.e., by
defining the subject. In this subtopic we shall define Economics. The principal fact about
Economics that we must always remember is that it is a social science.

MEANING OF ECONOMICS
The word ‘Economics’ originates from the Greek work ‘Oikonomikos’ which can be divided into
two parts:

(a) ‘Oikos’, which means ‘Home’, and

(b) ‘Nomos’, which means ‘Management’.

Thus, Economics means ‘Home Management’. The head of a family faces the problem of
managing the unlimited wants of the family members within the limited income of the family. If
we consider the whole society as a ‘family’, then the society also faces the problem of tackling
unlimited wants of the members of the society with the limited resources available in that
society. Thus, Economics means the study of the way in which mankind organizes himself to
solve the basic problems of scarcity. All societies have more wants than resources. Hence, a
system must be devised to allocate these resources between competing ends.

DEFINITIONS OF ECONOMICS
Economics is the social science that studies economic activities (meaning production, exchange
and consumption of goods and services), however, this is too broad. It does not specify the
exact manner in which the economic activities are to be studied.

There is no precise definition to what is economics but several attempts have been made on
defining economics depending on different perspectives. These perspectives can be classified
into three groups: Wealth perspective by Adam Smith, Material welfare perspective by Alfred
Marshall and Scarcity perspective by Lionel Robinson

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Adam Smith’s Definition of Economics

Adam Smith is considered to be the founding father of modern Economics; he defined
Economics as the study of the nature and causes of nations’ wealth or simply as the study of
wealth. The central point in Smith’s definition is wealth creation. Thus, it is important to find
out, how a nation can be wealthy.

Adam Smith emphasizes on the importance to the creation of wealth in an economy. For
example, wealth of a nation may be increased through raising the level of production and
export. Also this definition has indicated that the wealth of a nation includes only material
goods (e.g., different manufactured items). Hence, non-material goods like services of teachers,
doctors, engineers, etc., are not considered as ‘wealth’.

Alfred Marshall’s Definition of Economics

Alfred Marshall focused on the importance of material welfare. He wrote: “Economics is a

study of man in the ordinary business of life, It enquires how he gets his income and how he
uses it. Marshall, therefore, stressed the supreme importance of man in the economic system
and the economic activities man has engaged in so as to earn income.

Lionel Robbins’ Definition of Economics

According to Robbins, “Economics is a science which studies human behaviour as a

relationship between ends (wants) and scarce resources which have alternative uses”.

The principal features of scarcity definitions are as follows:

 Human wants are unlimited: If one want is satisfied, another want comes up.
 Limited resources or means to satisfy human wants: Though wants are unlimited, yet the
resources needed to satisfy these wants are limited.
 Alternative uses of scarce resources: Same resource can be used for the satisfaction of
different types of human wants. For example, a piece of land can be used for either
cultivation, or building a dwelling place or building a factory shed, etc.

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 Efficient use of scarce resources: Since wants are unlimited, so these wants are to be
ranked in order of priorities. Scarce resources are to be used in an efficient manner for the
satisfaction of these wants.
 Need for choice: Since human wants are unlimited, so one has to choose between the most
urgent and less urgent wants.

SCARCITY, WANTS AND CHOICES

1) Scarcity:

A resource is scarce if the demand for that resource at a zero price would exceed the
available supply’. Since the concepts of demand and supply have not yet been introduced to
you, we can also define scarcity by stating that the means available to society (its labour force,
its capital stock, its natural resources, its technology) are insufficient to meet all the wants (or
the desired goods and services) of the people making up that society. This implies that for any
one person to have more of something, they or someone else must have less of something else.
How individuals and societies cope with scarcity in relation to wants is central to economics.

2) Scale of Preference:

The arrangement of wants of man or society in the order of importance or relevance is called
scale of preference. It has to do ranking or prioritizing the numerous wants of individuals, firm
and government according their importance. This implies that the most important item comes
first; followed by the less important one while the one of least importance comes last.

3) Opportunity Cost: -

This is the cost of the next best alternative we give up or forgo, when we make a decision or a
choice. It means taking care of one item at the expense of another one. The one taken care of is
the choice while the item left unsatisfied is the Opportunity Cost.

When you decide to go with item A, your choice will be A and your opportunity cost will be B.
Opportunity cost is also known as Alternative forgone or forgone alternative.

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SUBJECT MATTER OF ECONOMICS

The subject matter of economics is presently divided into two major branches or approaches,

i) Micro Economics

Micro economics studies the economic behavior of individual economic units focusing on
individual consumers, households, firms and industries.
- For example, the decision of a firm to purchase a new office chair from company X is a
microeconomic problem not a macroeconomic problem.
Therefore micro economics is concerned with how the individual consumer distributes his
income among various products and services so as to maximize utility.

ii) Macro Economics

• Macroeconomics deals with the functioning of the economy as a whole. It is the study of the
economy as a whole system and focusing on aggregates. An aggregate is a multitude of
economic subjects that share some common features.
• For example, macroeconomics seeks to explain how the economy’s total output of goods and
services and total employment of resources are determined and what explains the fluctuation
in the level of output and employment. It deals with the broad economic issues, such national
income, employment, aggregate consumption, savings and investment, general price level and
economic growth.

THE FUNDAMENTAL ECONOMIC QUESTIONS IN ECONOMICS

Each country faces different central economic problems, for instance Tanzania’s current
economic problems are such as Hunger, unemployment, corruption, extreme poverty e.t.c. Any
economist, decision maker or policy maker ought to answer the following economic questions
as they solve any central economic problems or issues.
 What to produce?
This explains the choice between commodities or the product to be produced.
For example, an economy must decide whether they should produce food materials, kitchen
appliances or weapons, build and fix roads or buy textbooks for schools.

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What courses should be offered by CBE? – Business, Accountancy, Engineering and so forth.
 How to produce?
This explains the choice of technique or technology used in production.
Also shows the combinations of labour and capital to be used in production of goods and
services. For example; should machines be used to make clothing or should workers make it by
hand? Should CBE offer only full time or night college programme? How will the intakes be
enrolled – March intake or September intake?
 For whom to produce?
We produce for consumers, the ones who have willingness and ability to pay.
Example; Once goods and services are produced, who will get to consume them and how will
they be distributed? Will people consume them on a first-come, first-served basis?
 Where to produce the goods and services?
This mainly looks at the location of the economic activities.
Example; should a manufacturing plant be in a residential area or should it be out of the city?
What about a shop should it be located in town or out of town? Same applies to a hospital and
other economic centers.
 When to produce the goods and services?
This mainly looks at the season or suitable time for production to be done.
Example; should classes at CBE be throughout the day i.e 24/7? or should students have some
resting time between their lecture hours?

MANAGERIAL ECONOMICS
Is the study of how scarce resources are directed most efficiently to achieve managerial goals. It
is a valuable tool for analyzing business situations to take better decisions.
Prof. Evan J Douglas defines Managerial Economics as; “Managerial Economics is concerned
with the application of economic principles and methodologies to the decision making process
within the firm or organization under the conditions of uncertainty”

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According to Milton H Spencer and Louis Siegelman “Managerial Economics is the integration
of economic theory with business practices for the purpose of facilitating decision making and
forward planning by management”

According to Mc Nair and Miriam, ‘Managerial Economics consists of the use of economic
modes of thoughts to analyze business situations’.

Managerial economics is an application of the principles of micro and macroeconomics in

managerial decision making. The economic way of thinking about business decision making
provides all managers with a powerful set of tools and insights for furthering the goals of their
organization. Successful managers take good decisions, and one of their most useful tools is the
methodology of managerial economics.

Nature Of Managerial Economics:

1. Managerial economics is concerned with the analysis of finding optimal solutions to decision
making problems of businesses/ firms (micro economic in nature).
2. Managerial economics is a practical subject therefore it is pragmatic.
3. Managerial economics describes, what is the observed economic phenomenon (positive
economics) and prescribes what ought to be (normative economics)
4. Managerial economics is based on strong economic concepts. (conceptual in nature)
5. Managerial economics analyses the problems of the firms in the perspective 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
Managerial economics has its relationship with other disciplines for propounding its theories
and concepts for managerial decision making. Essentially it is a branch of economics.
Managerial economics is closely related to certain subjects like statistics, mathematics,
accounting and operations research. Managerial economics helps in estimating the product
demand, planning of production schedule, deciding the input combinations, estimation of cost

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of production, achieving economies of scale and increasing the returns to scale. It also includes
determining price of the product, analyzing market structure to determine the price of the
product for profit maximization, which helps them to control and plan capital in an effective
manner. Successful mangers make good decisions, and one of their most useful tools is the
methodology of managerial economics.

Theory of The Firm

The theory of the firm consists of a number of economic theories that explain and predict the
nature of the firm, company, or corporation, including its existence, behavior, structure, and
relationship to the market.
A firm is an association of individuals who have organized themselves for the purpose of
turning inputs into output. The firm organizes the factors of production to produce goods and
services to fulfill the needs of the households. Each firm lays down its own objectives which is
fundamental to the existence of a firm.
The major objectives of the firm are:
1. To achieve the Organizational Goal
2. To maximize the Output
3. To maximize the Sales
4. To maximize the Profit of the Organization
5. To maximize the Customer and Stakeholders Satisfaction
6. To maximize Shareholder’s Return on Investment
7. To maximize the Growth of the Organization
Firms are established to earn profit, to keep the shareholders happy. To increase their market
share, they try to maximize their sales. In the present business world firms try to produce goods
and services without harming the environment. Firms are not always able to operate at a profit.
They may be facing the operating loss also. Economists believe that firms maximize their long
run rather than their short run profit. So managers have to make enough profit to satisfy the
demands of their shareholders and to maximize their wealth through the company.

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