Managerial Economics ©Oxford University Press, 2006 All rights reserved Chapter 1 Foundations of Managerial Economics

Definitions/scope of economics Science of wealth: Adam smith Science of welfare: Alfred Marshal Science of scarcity: Lionel Robins Managerial Economics ©Oxford University Press, 2006 All rights reserved

Scope of economics Microeconomics Macroeconomics Welfare economics Development/growth economics Mathematical economics Educational economics Health/energy/environment/transport economics………. Managerial Economics ©Oxford University Press, 2006 All rights reserved

Managerial economics Application of microeconomic tools to the special context of managerial decision making Application of macroeconomic tools to the special context of managerial decision making Managerial and Business economics Managerial Economics ©Oxford University Press, 2006 All rights reserved

Managerial Economics ©Oxford University Press, 2006 All rights reserved What is Economics? What to produce How to produce How to distribute

Managerial Economics ©Oxford University Press, 2006 All rights reserved Definition, scope and functions Microeconomics Macroeconomics Decision Sciences Managerial Economics

Managerial Economics ©Oxford University Press, 2006 All rights reserved Objective of the Firm Profit maximization - economic profit: total revenue minus total economic costs - economic costs are “relevant” costs

Managerial Economics ©Oxford University Press, 2006 All rights reserved Invisible Hand Furthering selfish interest Furthers growth of the Nation

Managerial Economics ©Oxford University Press, 2006 All rights reserved Problems in Managerial Economics Classified into two broad categories: Those requiring ‘optimal’ solutions - Total, Average and Marginal magnitudes Those requiring equilibrium solutions - Supply – Demand Analysis

Managerial Economics ©Oxford University Press, 2006 All rights reserved Graphical Solution to Supply- demand Analysis P Q D D S S

Managerial Economics ©Oxford University Press, 2006 All rights reserved Algebraic Solution P = 300 – Q d P = Q s a = 300; b = 1; c = 60; d = – Q = Q Q* = 80 P* = 220

Managerial Economics ©Oxford University Press, 2006 All rights reserved Total, Average, and Marginal magnitudes Q P TR MR (=AR)

Managerial Economics ©Oxford University Press, 2006 All rights reserved Relation between Total, Average and Marginal Magnitudes When Total is rising, Marginal is positive When Total is falling, Marginal is negative When Total is maximum, Marginal is zero When Average falls/rises, Marginal falls/rises at a faster rate

Managerial Economics ©Oxford University Press, 2006 All rights reserved Concept of Margin Rate of Change Derivative- Calculus