Adam smith (1723-90) defined “economics is the
science of wealth”
He is known as the father of political economy because
he was the first person who put all the economic way. It
is only after Adam smith .
We study economics as a systematic science

 Economics is concerned with the problems arising
from wealth –getting and wealth using activities of
people.
 He was interested mainly in studying the ways by
which the wealth of all nations could be increased.

 Lot of criticism against Adam smith,definition of
economics. It has got a bad name of economics
 he conclude that economics taught men and
women how to make money. So they called it a
selfish science.

 Economics as “a study of mankind in the ordinary
business of life”
 Alfred Marshall agrees that economics studies
about wealth but he does not accept the view that
economics studies about wealth alone.

 The two terms of economics “manager” and
“economics” = managerial economics
 Managerial economics is the study of directing
resources in a way that it most efficiently achieves
the managerial goals.
 Managerial economics is also the application of
the tools of economic analysis in decision making
in actual business situation.

 Economics is a science
A scientific discipline is based on logical
foundations.
 Ends –’ends’ refer to human wants, which are
infinite
 Scarce -human wants may be unlimited, but
means of satisfying them are very much limited
ex: income & resources like coal,electricity,petrol.
 Choice –man has innumerable wants. he has to
make a choice of the most urgent wants.

 Alternative uses – income in the hands of a
person is so much limited when compared to his
wants.
 Scale of preferences –the most urgent wants to
be satisfied, immediately.
 Prefer purchasing one good
 Sacrifice another commodity
 Alternative uses of money income

 Scarcity
 Efficiency
 scarcity – goods are limited and wants are
unlimited
 Scarcity is the fundamental economic problem
facing all societies

 Efficiency denotes the most effective use of a
social resources in satisfying people wants' and
needs

 Productive efficiency
 Allocation efficiency
 Full employment
 Equity

 Microeconomics focuses on how decisions
are made by individuals and firms and the
consequences of those decisions.
Ex.: How much it would cost for a university
or college to offer a new course ─ the cost of
the instructor’s salary, the classroom facilities,
the class materials, and so on.
Having determined the cost, the school can
then decide whether or not to offer the course
by weighing the costs and benefits.
Macroeconomics vs. Microeconomics

 Macroeconomics examines the aggregate
behavior of the economy (i.e. how the actions of all
the individuals and firms in the economy interact to
produce a particular level of economic
performance as a whole).
Ex.: Overall level of prices in the economy
(how high or how low they are relative to prices
last year) rather than the price of a particular
good or service.
Macroeconomics vs. Microeconomics

 It is used to explain and understand almost all
major business problems.
 It plays a vital role in managerial decision
making

 Estimation of product demand
 Analysis of product demand
 Planning of production schedule
 Deciding the input combination
 Estimation of cost of product
 Analysis of cost of product

 Achieving economics of scale
 Determination of price of product
 Analysis of price of product
 Analysis of market structure
 Profit estimation and planning
 Planning and control of capital
expenditure

 What to produce?
 How to produce?
 For whom to produce?
 so as to satisfy the wants of all the people in
society
 The problem of what goods to produce, stems
from the basic problem of scarcity of resources

Allocation of resources
Choice of production methods
Distribution of national product
Problem of economic efficiency
Full employment of resources

 The production technique which ensures
maximum production at minimum cost has
to be chosen from among alternative production
techniques available.
 A decision has taken whether
 labor – intensive or
 capital intensive
techniques should be employed

 The problem of distribution of income in an
economy relates to the distribution of national
output among various individuals and different
sections of the people in the society.
 Ex : In India special care is taken to protect the
weaker sections .
 By providing rations at subsidized prices.

 Resources are scarce and can be put into
alternative uses.
 Efficiency means using these resources in their
most efficient production processes so that
maximum production is attained.
 The most important problem in an economy is to
find out whether all the employable resources are
fully utilized or not.

 The most important problem in any economy is to
fully utilize all the employable resources

 Economics-it is economics applied to a firm’s
decision making
 Various micro economic concepts such as
demand,production,cost,price and profit analysis.
 Statistics-relating to data collection, data analysis,
forecasting techniques.
 Mathematics-cost output relationship
 Operations research-linear programming models,
inventory models, game theory
 Accounting-balance sheet,cash flow etc.,

 Generally, economics can be divided into two
broad categories: microeconomics and
macroeconomics.
 Macroeconomics is the study of the economic
system as a whole. It includes techniques for
analyzing changes in total output, total
employment, the consumer price index, the
unemployment rate, and exports and imports.
Only aggregate levels of these variables are
considered.

 Prof Ragnar Frisch of Oslo university divided the
methods of economic analysis into two.
 Micro Economics
 Macro Economics

In Greek ‘micros’ means small and ‘macros’
means large
Micro economics is the study of economic
actions of individuals and small groups of
individuals.
Study includes particular firm, particular
individual household,wage,income,

 Micro economics is like the study of individual trees and macro
economics is like the study of the forests.
 The scope of micro economics includes:
 Theory of product pricing.
 It includes
 Theory of demand and supply
 Theory of production and cost
 Theory of factor pricing
 It includes
 Theories of rent,wages,interest and profit.
 Theory of economic welfare.

 In micro economics ,we study specific economic
units or a very small segment of the economy.
 They are individual consumers represented by the
households, individual industry and firms. So we
analyze the price of a specific product, the factors
of production employed b a single firm or industry
and also their revenues and costs.

• Macro economics studies the economy as a whole
through its major internal sub divisions.
• An economy is an aggregate structure of total
employment
• Total consumption
• Total production or supply
• General level of prices
• Economics studies the aggregates of
households(consumption),
• Firms and industries(production)
• Government representing economic policies

 To understand the working of the economy –what to produce ?,how to
produce etc.,
 To provide tools for the economic policies
 Helpful in efficient employment of resources
 Helpful in understanding the problem of taxation
 Helpful in international trade
 To examine the conditions of economic welfare

 Theory of employment and income –it includes
theory of consumption function and investment
function
 Theory of general price level
 Macro theory of distribution
 Macro economic policies

MICROECONOMIC
QUESTION
MACROECONOMIC
QUESTION
Go to business school
or take a job?
How many people are
employed in the
economy as a whole?
What determines the
salary offered by
Citibank to Cherie
Camajo, a new
Columbia MBA?
What determines the
overall salary levels
paid to workers in a
given year?

MICRO ECONOMIC QUESTION MACROECONOMIC QUESTION
What determines the cost to a
university or college of offering
a new course?
What determines the overall
level of prices in the economy
as a whole?
What government policies
should be adopted to make it
easier for low-income students
to attend college?
What government policies
should be adopted to promote
full employment and growth in
the economy as a whole?
What determines whether
Citibank opens a new office in
Shanghai?
What determines the overall
trade in goods, services and
financial assets between the US
and the rest of the world?