Managerial Economics Notes
Subject Overview
Managerial Economics applies economic theory to managerial decision-making — demand analysis and indifference curve theory, production and cost theory with revenue curves, market structure and pricing (perfect competition, monopoly, oligopoly) and factor pricing, and macroeconomic tools (IS-LM analysis, national income, consumption function, inflation and trade cycles) relevant to business decisions. A 4-credit core theory paper.
Subject at a glance
4
Units
37
Topics
4
Credits
4
Infographics
Unit-wise Syllabus
4 units — open any unit for detailed topic-wise notes, diagrams and important exam questions
- Meaning
- scope and role of managerial economics in decision making
- opportunity cost principle
- production possibility curve
- demand function and determinants
- demand elasticity (price, income, cross)
- demand estimation and forecasting
- indifference curve analysis and consumer equilibrium
Price elasticity
Ep = % change in Qd / % change in P
Income elasticity
Ey = % change in Qd / % change in Y
Negative for inferior goods
Cross elasticity
Exy = % change in Qx / % change in Py
Positive for substitutes
Arc elasticity
(ΔQ / ΔP) × (P1 + P2) / (Q1 + Q2)
Study guide
This unit covers the role of managerial economics, opportunity cost, the production possibility curve, the demand function and determinants, price, income and cross elasticity, estimation and forecasting and indifference analysis. Practise elasticity calculations of all three types.
- Production function
- productivity and technology
- short-run and long-run production
- isoquants and least-cost input combination
- producer's equilibrium
- returns to scale
- cost concepts and determinants
- short-run and long-run and modern cost theory
- revenue curves — total/average/marginal revenue and their relationships
Average revenue
AR = TR / Q = price
Marginal revenue
MR = ΔTR / ΔQ
MR and elasticity
MR = AR (1 − 1/e)
Producer's equilibrium
MPL / w = MPK / r
Profit maximisation
MR = MC and MC rising
Study guide
You study the production function and returns to scale, isoquants and least-cost inputs, producer's equilibrium, cost concepts and theories (short, long and modern) and revenue curves. Be able to derive the relationship between AR, MR and elasticity.
- Perfect competition
- monopoly
- monopolistic competition and oligopoly (collusive and non-collusive) equilibrium
- price leadership model
- supply curves
- commodity pricing practices and types
- factor pricing — collective bargaining
- rent
- profit and interest rate theory
Perfect competition
Very many, identical product
None: price taker
Monopolistic competition
Many, differentiated product
Some
Oligopoly
Few, interdependent
Kinked demand or price leadership
Monopoly
One, no close substitute
Price maker
Study guide
You study equilibrium under perfect competition, monopoly, monopolistic competition and oligopoly, the price leadership model, supply curves, commodity pricing and factor pricing theories. Compare the equilibrium conditions of each market structure.
- Saving and investment function
- consumption function
- aggregate supply and demand
- investment and foreign trade/budget multipliers
- money market and liquidity preference
- IS-LM analysis
- national income measurement and limitations
- Keynes's psychological law of consumption
- inflation types/causes/effects/control
- unemployment trade-off
- trade cycle theories
National income identity
Y = C + I + G + (X − M)
Investment multiplier
k = 1 / (1 − MPC) = 1 / MPS
IS curve
Goods market equilibrium: I = S
LM curve
Money market equilibrium: L = M
Okun's law
Higher unemployment means output below potential
Study guide
You study macroeconomics for managers: saving, investment and consumption functions, aggregate demand and supply, multipliers, the money market and liquidity preference, IS-LM, national income, Keynes's psychological law, inflation, the unemployment trade-off and trade cycles. Learn to draw and shift the IS-LM curves.
Why Managerial Economics Matters
Economic reasoning improves pricing, investment and policy decisions, and economics is a major section of UGC-NET Commerce and other postgraduate and civil-service exams.
How to Prepare for Managerial Economics
- Practise drawing and shifting demand, cost, revenue and IS-LM curves.
- Solve elasticity and multiplier numericals.
- Relate theories to current inflation and interest rate news.
Managerial Economics: Frequently Asked Questions
What does IS-LM show?
The IS-LM model shows the combinations of interest rates and output at which both the goods market (IS) and money market (LM) are in equilibrium.
What is cross elasticity of demand?
It measures how the demand for one good changes when the price of another good changes.