Managerial economics, used synonymously with business economics.

It is a branch of
economics that deals with the application of microeconomic analysis to decision-making
techniques of businesses and management units. It acts as the via media between economic
theory and pragmatic economics. Managerial economics bridges the gap between "theory
and practice". Managerial economics can be defines as:

According to Spencer and Siegelman:

“The integration of economic theory with business practice for the purpose of facilitating
decision-making and forward planning by management”.

According to McGutgan and Moyer:

“Managerial economics is the application of economic theory and methodology to decision-

making problems faced by both public and private institutions”.

Managerial economics studies the application of the principles, techniques and concepts of
economics to managerial problems of business and industrial enterprises. The
term is used interchangeably with micro economics, macro economics, monetary
economics.

Scope of Managerial Economics:

The scope of managerial economics includes following subjects:

(i) Theory of Demand

(ii) Theory of Production

(iii) Theory of Exchange or Price Theory

(iv) Theory of Profit

(v) Theory of Capital and Investment

Nature of Managerial Economics

Managers study managerial economics because it gives them insight to reign the
functioning of the organization. If manager uses the principles applicable to economic
behaviour in a reasonably, then it will result in smooth functioning of the organisation.

Managerial Economics is a Science

Managerial Economics is an essential scholastic field. It can be compared to science in a

sense that it fulfils the criteria of being a science in following sense:


 Science is a Systematic body of Knowledge. It is based on the methodical
observation. Managerial economics is also a science of making decisions with regard to
scarce resources with alternative applications. It is a body of knowledge that determines
or observes the internal and external environment for decision making.
 In science any conclusion is arrived at after continuous experimentation. In
Managerial economics also policies are made after persistent testing and trailing.
Though economic environment consists of human variable, which is unpredictable, thus
the policies made are not rigid. Managerial economist takes decisions by utilizing his
valuable past experience and observations.
 Science principles are universally applicable. Similarly policies of Managerial
economics are also universally applicable partially if not fully. The policies need to be
changed from time to time depending on the situation and attitude of individuals to
those particular situations. Policies are applicable universally but modifications are
required periodically.

Managerial Economics requires Art

Managerial economist is required to have an art of utilising his capability, knowledge and
understanding to achieve the organizational objective. Managerial economist should have
an art to put in practice his theoretical knowledge regarding elements of economic
environment.

Managerial Economics for administration of organization

Managerial economics helps the management in decision making. These decisions are based
on the economic rationale and are valid in the existing economic environment.

Managerial economics is helpful in optimum resource allocation

The resources are scarce with alternative uses. Managers need to use these limited resources
optimally. Each resource has several uses. It is manager who decides with his knowledge of
economics that which one is the preeminent use of the resource.

Managerial Economics has components of micro economics

Managers study and manage the internal environment of the organization and work for the
profitable and long-term functioning of the organization. This aspect refers to the micro
economics study. The managerial economics deals with the problems faced by the
individual organization such as main objective of the organization, demand for its product,
price and output determination of the organization, available substitute and complimentary
goods, supply of inputs and raw material, target or prospective consumers of its products
etc.

Managerial Economics has components of macro economics

None of the organization works in isolation. They are affected by the external environment
of the economy in which it operates such as government policies, general price level,
income and employment levels in the economy, stage of business cycle in which economy
is operating, exchange rate, balance of payment, general expenditure, saving and investment
patterns of the consumers, market conditions etc. These aspects are related to macro
economics.

Managerial Economics is dynamic in nature

Managerial Economics deals with human-beings (i.e. human resource, consumers,

producers etc.). The nature and attitude differs from person to person. Thus to cope up with
dynamism and vitality managerial economics also changes itself over a period of time.
Nature of Managerial Economics

Managers study managerial economics because it gives them insight to reign the
functioning of the organization. If manager uses the principles applicable to economic
behaviour in a reasonably, then it will result in smooth functioning of the organisation.

Managerial Economics is a Science

Managerial Economics is an essential scholastic field. It can be compared to science in a

sense that it fulfils the criteria of being a science in following sense:


 Science is a Systematic body of Knowledge. It is based on the methodical
observation. Managerial economics is also a science of making decisions with regard to
scarce resources with alternative applications. It is a body of knowledge that determines
or observes the internal and external environment for decision making.
 In science any conclusion is arrived at after continuous experimentation. In
Managerial economics also policies are made after persistent testing and trailing.
Though economic environment consists of human variable, which is unpredictable, thus
the policies made are not rigid. Managerial economist takes decisions by utilizing his
valuable past experience and observations.
 Science principles are universally applicable. Similarly policies of Managerial
economics are also universally applicable partially if not fully. The policies need to be
changed from time to time depending on the situation and attitude of individuals to
those particular situations. Policies are applicable universally but modifications are
required periodically.

Managerial Economics requires Art

Managerial economist is required to have an art of utilising his capability, knowledge and
understanding to achieve the organizational objective. Managerial economist should have
an art to put in practice his theoretical knowledge regarding elements of economic
environment.

Managerial Economics for administration of organization

Managerial economics helps the management in decision making. These decisions are based
on the economic rationale and are valid in the existing economic environment.
Managerial economics is helpful in optimum resource allocation

The resources are scarce with alternative uses. Managers need to use these limited resources
optimally. Each resource has several uses. It is manager who decides with his knowledge of
economics that which one is the preeminent use of the resource.

Managerial Economics has components of micro economics

Managers study and manage the internal environment of the organization and work for the
profitable and long-term functioning of the organization. This aspect refers to the micro
economics study. The managerial economics deals with the problems faced by the
individual organization such as main objective of the organization, demand for its product,
price and output determination of the organization, available substitute and complimentary
goods, supply of inputs and raw material, target or prospective consumers of its products
etc.

Managerial Economics has components of macro economics

None of the organization works in isolation. They are affected by the external environment
of the economy in which it operates such as government policies, general price level,
income and employment levels in the economy, stage of business cycle in which economy
is operating, exchange rate, balance of payment, general expenditure, saving and investment
patterns of the consumers, market conditions etc. These aspects are related to macro
economics.

Managerial Economics is dynamic in nature

Managerial Economics deals with human-beings (i.e. human resource, consumers,

producers etc.). The nature and attitude differs from person to person. Thus to cope up with
dynamism and vitality managerial economics also changes itself over a period of time.

Principles of Managerial Economics

Economic principles assist in rational reasoning and defined thinking. They develop logical
ability and strength of a manager. Some important principles of managerial economics are:

Marginal and Incremental Principle

This principle states that a decision is said to be rational and sound if given the firm’s
objective of profit maximization, it leads to increase in profit, which is in either of two
scenarios-

 If total revenue increases more than total cost.

 If total revenue declines less than total cost.

Marginal analysis implies judging the impact of a unit change in one variable on the other.
Marginal generally refers to small changes. Marginal revenue is change in total revenue per
unit change in output sold. Marginal cost refers to change in total costs per unit change in
output produced (While incremental cost refers to change in total costs due to change in
total output). The decision of a firm to change the price would depend upon the resulting
impact/change in marginal revenue and marginal cost. If the marginal revenue is greater
than the marginal cost, then the firm should bring about the change in price.

Incremental analysis differs from marginal analysis only in that it analysis the change in the
firm's performance for a given managerial decision, whereas marginal analysis often is
generated by a change in outputs or inputs. Incremental analysis is generalization of
marginal concept. It refers to changes in cost and revenue due to a policy change. For
example - adding a new business, buying new inputs, processing products, etc. Change in
output due to change in process, product or investment is considered as incremental change.
Incremental principle states that a decision is profitable if revenue increases more than
costs; if costs reduce more than revenues; if increase in some revenues is more than
decrease in others; and if decrease in some costs is greater than increase in others.

Equi-marginal Principle

Marginal Utility is the utility derived from the additional unit of a commodity consumed.
The laws of equi-marginal utility states that a consumer will reach the stage of equilibrium
when the marginal utilities of various commodities he consumes are equal. According to the
modern economists, this law has been formulated in form of law of proportional marginal
utility. It states that the consumer will spend his money-income on different goods in such a
way that the marginal utility of each good is proportional to its price, i.e.,

MUx / Px = MUy / Py = MUz / Pz

Where, MU represents marginal utility and P is the price of good.

Similarly, a producer who wants to maximize profit (or reach equilibrium) will use the
technique of production which satisfies the following condition:

MRP1 / MC1 = MRP2 / MC2 = MRP3 / MC3

Where, MRP is marginal revenue product of inputs and MC represents marginal cost.

Thus, a manger can make rational decision by allocating/hiring resources in a manner which
equalizes the ratio of marginal returns and marginal costs of various use of resources in a
specific use.

Opportunity Cost Principle

By opportunity cost of a decision is meant the sacrifice of alternativesrequired by that

decision. If there are no sacrifices, there is no cost. According to Opportunity cost principle,
a firm can hire a factor of production if and only if that factor earns a reward in that
occupation/job equal or greater than it’s opportunity cost. Opportunity cost is the minimum
price that would be necessary to retain a factor-service in it’s given use. It is also defined as
the cost of sacrificed alternatives. For instance, a person chooses to forgo his present
lucrative job which offers him Rs.50000 per month, and organizes his own business. The
opportunity lost (earning Rs. 50,000) will be the opportunity cost of running his own
business.

Time Perspective Principle

According to this principle, a manger/decision maker should give due emphasis, both to
short-term and long-term impact of his decisions, giving apt significance to the different
time periods before reaching any decision. Short-run refers to a time period in which some
factors are fixed while others are variable. The production can be increased by increasing
the quantity of variable factors. While long-run is a time period in which all factors of
production can become variable. Entry and exit of seller firms can take place easily. From
consumers point of view, short-run refers to a period in which they respond to the changes
in price, given the taste and preferences of the consumers, while long-run is a time period in
which the consumers have enough time to respond to price changes by varying their tastes
and preferences.

Discounting Principle

According to this principle, if a decision affects costs and revenues in long-run, all those
costs and revenues must be discounted to present values before valid comparison of
alternatives is possible. This is essential because a rupee worth of money at a future date is
not worth a rupee today. Money actually has time value. Discounting can be defined as a
process used to transform future dollars into an equivalent number of present dollars. For
instance, $1 invested today at 10% interest is equivalent to $1.10 next year.

FV = PV*(1+r)t

Where, FV is the future value (time at some future time), PV is the present value (value at
t0, r is the discount (interest) rate, and t is the time between the future value and present
value.

Role of a Managerial Economist

A managerial economist helps the management by using his analytical skills and highly
developed techniques in solving complex issues of successful decision-making and future
advanced planning.

The role of managerial economist can be summarized as follows:


 He studies the economic patterns at macro-level and analysis it’s significance to the
specific firm he is working in.
 He has to consistently examine the probabilities of transforming an ever-changing
economic environment into profitable business avenues.
 He assists the business planning process of a firm.
 He also carries cost-benefit analysis.
 He assists the management in the decisions pertaining to internal functioning of a
firm such as changes in price, investment plans, type of goods /services to be produced,
inputs to be used, techniques of production to be employed, expansion/ contraction of
firm, allocation of capital, location of new plants, quantity of output to be produced,
replacement of plant equipment, sales forecasting, inventory forecasting, etc.
 In addition, a managerial economist has to analyze changes in macro- economic
indicators such as national income, population, business cycles, and their possible effect
on the firm’s functioning.
 He is also involved in advicing the management on public relations, foreign
exchange, and trade. He guides the firm on the likely impact of changes in monetary and
fiscal policy on the firm’s functioning.
 He also makes an economic analysis of the firms in competition. He has to collect
economic data and examine all crucial information about the environment in which the
firm operates.
 The most significant function of a managerial economist is to conduct a detailed
 research on industrial market.
 In order to perform all these roles, a managerial economist has to conduct an
elaborate statistical analysis.
 He must be vigilant and must have ability to cope up with the pressures.
 He also provides management with economic information such as tax rates,
competitor’s price and product, etc. They give their valuable advice to government
authorities as well.
 At times, a managerial economist has to prepare speeches for top management.

INTERMEDIATE ACCOUNTING 1
CASH
Money and any other negotiable instrument that is payable in money and acceptable by
the bank for deposit and immediate credit.

CASH EQUIVALENT
A short-term and highly liquid investment that are readily converted into cash and so
near their maturity that they present insignificant risk of changes in value because of
changes in interest rates.

FINANCIAL STATEMENT PRESENTATION OF CASH AND CASH EQUIVALENT

PAS 7 - STATEMENT OF CASH FLOW

This standard prescribe the information about of an entity is useful in providing users
with a basis to asses the abilityof an entity to generate cash and cash equivalents and the
needs of the entity to utilize those cash flows.
It requires a provision og information about the historical changes in cash and cash
equivalents of an entity by means of a statement of cash flows which classifies cash flow
during the period from, operationg, investing and financing activities.

CLASSIFICATION OF CASH FUND

COMPENSATING BALANCE
A minimum bank account balance that a borrower agrees to maintain with a lender .
The pupose of this balance is to reduce the lending cost for the lender, since the lender
can invest the cash located in the compensating bank account and keep some or all of
the proceeds.

POSTDATED CHECK
A postdated checkor draft will display a future date on it. A check user will often write
this in to specify that s/he does not want to withdraw the amount of the check until the date
specified.

STALE CHECK
A check not encashed by the payee within a relatively long period of time.

WINDOW DRESSING
Window dressing is actions taken to improve the appearance of a company's financial
statements. Window dressing is particularly common when a business has a large number of
shareholders, so that management can give the appearance of a well-run company to
investors who probably do not have much day-to-day contact with the business. It may also
be used when a company wants to impress a lender in order to qualify for a loan.

LAPPING
A fraudulent practice that involves altering accounts receivables to hide a stolen
receivables payment. The method involves taking a subsequent receivables payment and
using that to cover the cover the theft. The next receivable is then applied to the previous
unpaid receivable, and others.
KITTING
Kiting, also called check kiting, is a fraudulent scheme that uses checks to embezzle
money from a business. Kiting is usually committed by a bookkeeper or someone else with
access to company checks and the ability to forge checks, but it can also be used by the
company.

IMPREST SYSTEM
The imprest system is an accounting systemfor paying out and subsequently
replenishing petty cash. Petty cash is a small reserve of cash kept on-site at a business
location for incidental cash needs. The imprest system is designed to provide a
rudimentary manual method for tracking petty cash balances and how cash is being
used.
FLUCTUATING SYSTEM

INTERMEDIATE ACCOUNTING 2
DEFINITION OF LIABILITIES\
CURRENT & NON CURRENT LIABILITIES
MEASUREMENT OF LIABILITIES