This document provides an overview of economic concepts and analysis for business. It defines key terms like microeconomics, macroeconomics, positive and normative economics, short run and long run analysis, and partial and general equilibrium. It also discusses production possibility frontiers and the basic assumptions of economics. Managerial economics is introduced as the application of economic principles to managerial decision making within an organization. The roles of scarcity, opportunity cost, margins, and discounting in economic analysis are outlined. Finally, the document compares how capitalist, socialist, and mixed economies approach solving economic problems.
2. REFERENCE
• MANAGERIAL ECONOMICS
– AUTHOR – GEETIKA , PIYALI GHOSH, PURBA ROY CHOUDRY
– PUBLICATION – TATA MACRAW HILL
• MANAGERIAL ECONOMICS ANALYSIS, PROBLEMS AND
CASES
– AUTHOR –P.L.MEHTA
– PUBLICATION- SULTAN CHAND AND SONS
• BUSINESS LINE , ECONOMIC TIMES
• GOOGLE NEWS
• ECONOMIC FORUMS AND BLOGS……
6. WHAT IS ECONOMICS?
• Scarcity – a basic human dilemma
– Limited resources vs. unlimited wants
– The human condition requires making choices
• Definitions of Economics
– Mankiw’s definition
• …is the study of how society manages its scarce
resources
– Hedrick’s definition
• …is how society chooses to allocate its scarce resources
among competing demands to improve human welfare
– Alternative definitions
• … what economists do.
• … is the study of choice.
7. DEFINITIONS – BY VARIOUS GURUS
• The term economics comes from the Greek word
oikos (house) nomos (custom or law)
• Adam smith – father of economics
– He saw economic as “ an enquiry into an nature and
causes of the wealth of nations”
• Alfred marshall
– Economic s is the study of mankind in the everyday
business of life
• Lionel robins
– Economics is the science which studies human
behavior as a relation ship between ends and scarce
means which have alternative uses
9. BASIC ASSUMPTIONS
• Economic theories are based on certain
assumptions.
• The assumptions are nothing but tools in the
hands of economists to convert complications to
their own advantages and simplicity.
• The basic assumptions are
– Ceteris paribus – Latin word(things being equal/
constant)
– Rationality(compare the cost and benefits of a
decision before going a head)
• Firms aims at maximize profit and minimize cost
• Consumer aims at maximizing utility and minimizing
sacrifice
10. TYPES OF ECONOMIC ANALYSIS
• Micro and macro.
• Positive and normative.
• Short run and long run.
• Partial and general equilibrium.
11. MICRO AND MACROECONOMICS
• MICRO ECONOMICS
– It looks at the smaller picture of the economy.
– It is the study of behavior of smaller economic units
such as that an individual consumer, producer/seller
or a product.
– It focuses on the basic theory of supply and demand
in individual markets.(Example- automobiles, FMCG,
Telecommunication etc)
– It deals with the how individual businesses decide
how much to produce and what price to sell it and
how individual consumer decide how much to buy.
– It analysis the market behavior of individual
consumers and firm and their decision making.
12. ….CONTD
• MACRO ECONOMICS
– It is the branch of economics that deals with the study
of aggregates.
– Study the industry as a unit and not the firm.
– It talks about aggregate demand and aggregate supply
– It talks about national income, GDP,GNP, inflation,
employment etc.
• Micro and macro economics complement each
other
13. POSITIVE AND NORMATIVE
• POSITIVE STATEMENT
– This are factual by nature, whose truth or
falsehood can be verified by empirical study or
logic.
• NORMATIVE STATEMENTS
– It involve some degree of value judgment and
cannot be verified by empirical study or logic
14. ILLUSTARTION- FOR POSITIVE AND
NORMATIVE ECONOMICS
• The distribution of income in India is
unequal.
• The distribution of income in India should be
equal.
15. ..contd
• POSITIVE ECONOMICS
– It establishes relationship between cause and
effect.
– It analysis problems on the basis of facts.
– It describe the probable effect of cause bit it
would not provide any guidelines/instruction to
avoid those causes.
• NORMATIVE ECONOMICS
– It concerned with the questions involving value
judgment.
– It incorporates the value judgments about what
the economy should be like.
16. SHORT RUN AND LONG RUN
• Marshall gave the contribution of different period
time in market analysis.
• He defined the periods in market as a market
period.
• Short run(less than a year)
– It is a time period not enough for consumers and
producers to adjust completely to any new situation.
– In production decisions short run is a period when it
may not be possible to change all the inputs.
– In this some input are fixed others are variable.
– Manager has to select different levels of variable
input to combine with the fixed input in order to
optimize the level of production
17. …CONTD
• LONG RUN
– It is a time period long enough for consumers
and producers to adjust to any situation.
– All inputs can be varied.
– Managerial economist deals with decisions
whether to expand capacity , change product
lines etc.
– Time period – 5-6 years/ even as high as 20 years
18. PARTIAL AND GENERAL EQULIBRIUM
• EQUILIBRIUM
– It is a state of balance that occur in a model.
• Partial equilibrium analysis
– It studies the internal outcome of any policy
action in a single market only.
– The effects are examined only in the markets
which is directly affected not on other markets.
– We refer to partial equilibrium analysis when a
single firm or a single consumer is in equilibrium
others firms in industry may not be in
equilibrium.
19. ….CONTD
• General equilibrium analysis
– It is the branch of economics that seeks to explain
economic phenomena like production,
consumption and prices in a economy as whole.
– It tries to give an understanding of the whole
economy by looking at the macro perspective.
20. KINDS OF ECONOMIC DECISION
• Fundamental Questions of Economics - Scarcity
requires all societies to answer the following
questions:
– What is to be produced?(consumer goods/capital goods)
– How is to be produced? (efficiency)
– For whom will it be produced?
• Market economy
• Command economy
– Are resources used economically?
– Are resources fully employed?
– Is the economic growing
WHFM Questions
21. MANAGERIAL ECONOMICS-MEANING
“Managerial economics is a means to an end
to managers in any business in terms of
finding the most efficient way of allocating
scarce organizational resources and reaching
stated objectives.”
22. DEFINITION- MANAGERIAL
ECONOMICS
• BY SALVATORE
– Managerial economics refers to the application
of economic theory and the tools of analysis of
decision science to examine how an organization
can achieve its objectives most effectively.
• BY DOUGLAS
– Managerial economics is the application of
economic principles and methodologies to the
decision making process with in the firm or
organization.
23. MANAGERIAL ECONOMICS- MICRO VS
MACRO
• Managerial economics is applied micro
economics to a significant extent though it
draws extensively from macroeconomics
theory.
– Example : it draws demand analysis, cost and
production analysis, pricing and output decision
from micro economics. Where it also derives
market intelligence knowledge from GDP,GNP,
INFLATION etc.
24. MANAGERIAL ECONOMICS-
NORMATIVE BIAS
• Managerial economics has a normative bias
stating what firms should do. In order to
reach certain objectives.
• Economic issues confronting managers would
often involve value judgments.
• In managerial situations one has to take
decisions which will affect organizations future
therefore managers cannot be simply content
with being factual
25. MANAGERIAL ECONOMICS – PARTIAL
EQUILIBRIUM
• Managerial economics deals with partial
equilibrium analysis with focus on equilibrium
of a firm or an industry, not the economy.
• Decision making of managers would relate to
the equilibrium of particular firm.
26. ECONOMIC PRINCIPLES TO
MANAGERIAL DECISIONS
• The key economic concepts and principles that
constitute the broad framework of
managerial economics are
– Concept of scarcity
– Concept of opportunity cost
– PPF – production possibilities curves
– Concept of margin or increment
– Discounting principle
• According to the above economic principles
the decision are taken by managers in their
operating environment.
27. Concept of scarcity
• The starting point of any economic analysis is the
existence of human wants(unlimited).
DEMAND FOR
RESOURCES RESOURCES
• All desirable things(resources) are short in supply
compare to our needs(demand).The decision
should made to optimally utilize them.
28. …contd
• So the economic problems lies in making the
best possible use of resources.
• In order to get maximum satisfaction
(consumer point of view) or maximum output
(producers point of view)
29. Concept of opportunity cost
• The managerial economist has to make
rational choices in all aspects of business
because of scarce resources and unlimited
wants.
• Opportunity cost is the benefit from
alternative that is not selected.
A B C D E F
30. Production Possibility Frontiers-
PPF/PPC/TRANSFORMATION CURVE
• Show the different combinations of goods and
services that can be produced with a given amount
of resources.
• It also depicts the trade off between any two items
produced /consumed.
• This curve measures the opportunity cost by
indicating the opportunity cost of increasing one
items production /consumption in terms of units of
other.(slope of the curve)
• PPC highlights the significance of scarcity of
resources and need to use them judiciously
31. ..CONTD
• The concept of PPC used in both micro and
macro economics.
• PPC for individual firm/consumer-micro
• PPC for entire society – macro.
33. Assumptions and explanation
• What ever is earned by individual is spent.
• At point P on AB shows
– At given income individual can buy Fp units of food
and Cp units of clothing.
• If the individual wants to have any more clothing
at same level of income they needs to sacrifice
some units of food.
• That bring individual to point Q
• Fq < Fp and Cq>Cp
• M – not attainable it represents combination of
commodities beyond income.
• N- not desirable combination of commodity that
would not maximally utilize the individuals
income.
34. Production Possibility Frontiers-society
If the country is at
point A on the PPF It
can produce the
combination of Yo
Capital Goods
capital goods and Xo
consumer goods
Ym
If it devotes all
resources to capital
If it reallocates its A
resources (moving Yo goods it could
round the PPF produce a maximum
from A to B) it can of Ym.
produce more
consumer goods If it devotes all its
but only at the resources to
Y1
B
expense of fewer consumer goods it
capital goods. The could produce a
opportunity cost of maximum of Xm
producing an extra
Xo – X1 consumer
goods is Yo – Y1
capital goods. Xo X1 Xm Consumer Goods
35. Production Possibility Frontiers-
society
Production
Capital Goods inside the PPF
– e.g. point B
means the
C
Y1 country is not
A using all its
.
Yo resources
It can only produce at B
points outside the PPF
if it finds a way of
expanding its
resources or improves
the productivity of
those resources it
already has. This will
push the PPF further
outwards. Xo X1 Consumer Goods
36. …contd
• Assumptions
– Factors of production are fixed in supply
– Technology remains same
• No ‘ideal’ point on the curve
• Any point inside the curve – suggests resources
are not being utilised efficiently
• Any point outside the curve – not attainable with
the current level of resources
• Useful to demonstrate economic growth and
opportunity cost
37. CONCEPT OF MARGIN AND
INCREMENT
• Marginal analysis is one of the cornerstones of
economic theory.
• The concept of marginality deals with a unit
increase in cost or revenue or utility.
• Marginal cost
– It is the change in total cost /total revenue/total
utility due to unit change in output.
– Marginal cost/marginal revenue/marginal utility is the
total cost /total revenue/total utility of the last unit
of output.
38. ….contd
• Marginal cost express in
– MCn =TCn-TCn-1………. Where n is the number of
units of output
– Marginal cost= change in total cost/change in
total output(dtc / dq )
How ever in reality variables may not be
subject to such unit change as explained
above. So for practical purpose we use
incremental concept rather than marginal
concept
39. • Incremental concept is applied usually when
the changes are not necessarily in terms of a
single unit but in bulk.
• In such additional revenue earned as
“incremental revenue”
• Example = increase in sales
– Due to promotional activities
40. DISCOUNTING PRINCIPLE
• Discounting refers to the time value of money.
• The in hand today is more value than a rupee
received tomorrow.
• The value of money depreciates with time.
• PVF=1/(1+r)n
PVF= present value of fund
n=period
r=rate of discount.
41. MANAGERIAL ECONOMICS AND
FUNCTIONS OF MANAGEMENT.
PRODUCTION AND OPERATIONS
M
A
N
A
HUMAN RESOURCE G
E
R
I
A
MARKETING L
E
C
O
FINANCE & ACCOUNTING N
O
M
I
C
SYSTEM AND LEGAL S
APPLICATIONS
42. RELATION OF MANAGERIAL ECONOMICS
WITH DECISION SCIENCES
• Decision sciences provide the tools and
techniques of analysis used in managerial
economics.
• The theory of managerial economics largely
utilizes the tools of mathematics and
econometrics.
• Important aspects of decision sciences that are
used in managerial economics include numeric
and algebraic analysis , optimization , statically
estimation , forecasting and game theory.
43. • Economic theory • Managerial • Quantitative
• Theory of firm economics analysis
• Price theory • All your
• GNP GDP analysis
• Solution to
managerial
decision making
44. HOW DIFFERENT ECONOMICIES SLOVE
THEIR ECONOMIC PROBLEMS?
• Economies are classified into three broad
categories according to their mode of
production , exchange , distribution and the
role which government plays in economic
activity.
– Capitalist economy.
– Socialist economy.
– Mixed economy.
45. CAPITALIST ECONOMY
• An economy is called capitalist or a free market
economy if it has a following characteristics.
– The right of private property
– Freedom of enterprise
– Freedom to choice by the consumer(consumer
sovereignty)
– Profit motive
– Competition
– Inequalities in income.
46. How capitalist economics solve their
problems
• This economy has no central planning
authority to decide what , how , and for whom
to produce.
– Deciding what to produce
– Deciding how to produce
– Deciding for whom to produce
– Deciding about consumption , saving and
investment.
47. THEORY OF FIRM
• FIRM
– Firm is an entity that draws various types of
factors of production in different amounts from
the economy and converts them into desirable
output through a process with the help of suitable
technology.
– There are five factors of production namely land ,
labor , capital , enterprise and organization.
48. Form of
ownership
Private Public
Joint sector
sector sector
Individual collective company corporation department
proprietorship partnership cooperative
49. OBJECTIVES OF FIRM
• Profit maximization
• Baumols theory of sales revenue
maximization.
• Marris hypothesis of maximization of growth
rate.
• williamson’s model of managerial utility
function
• Behavioral theories……
50. How Do Economists Study Human
Behavior?
• Economics as a Science
– The scientific method
• Observation→Theory→Data→Testing
– Rational Behavior
• Weighing benefits and costs and maximizing total net benefits
• Marginal vs. Total Thinking
– Economic Theory and Models
• Simplification by assumption
• Ceteris Paribus – Holding other factors constant
• Prediction vs. realism
– Microeconomic versus Macroeconomics
51. – Bias towards use of natural rather than controlled
experiments
– The specialized language of economics (e.g. “He has lots of
money.”)
• Money – medium of exchange
• Wealth – accumulated financial and non-financial assets
• Income – the purchasing power earned during a given period
52. Why do Economists Study Human
Behavior?
• Scientists versus policy makers
• Positive Economics
– Descriptive - what the world is like.
– Objective- value judgments need not be made
– Positive statements can theoretically be tested by
appealing to the facts
• Normative Economics
– Prescriptive - what the world ought to be like
– Subjective – value judgments must be made
– Normative statements cannot be tested appealing to facts.
53. Categories of Basic Principles of
Economics
• How do people make decisions?
• How do people interact?
• How does the economy work overall?
54. How Do People Make Decisions?
• Principle #1 - People face tradeoffs
– Time allocation – an example of tradeoffs
– Efficiency versus equity
– Production Possibilities Frontier
55. • Principle #2 - The cost of something is what
you have to give up to get it
– Opportunity costs are independent of monetary
units
56. • Principle #3 - Rational people think at the
margin
– Rational or irrational decision-making
– Marginal benefits and costs versus total benefits
and costs
– Weighing marginal costs and benefits leads to
maximizing net benefits (total welfare)
– The boxes example
57. .
• Principle #4 –People respond to incentives
– Reactions to changes in marginal benefits and costs
– Increases (decreases) in marginal benefits mean more
(less) of an activity
– Increases (decreases) in marginal costs mean less (more)
of an activity
58. How Do People Interact?
• Principle #5 - Trade can make everybody
better off
59. • Principle #6 - Markets are usually a good way of
organizing economic activity
– the “failure” of centrally planned economies and the
movement towards markets for the WHFM questions
60. Markets
– Principles 1-5 combine with markets to turn the pursuit
of self-interest into promoting the interests of society
– creativity and productivity are stimulated by the pursuit of
self-interest into improving resource allocations
– in some cases markets fail to allocate resources effectively
so,
61. • Principle #7 Governments can sometimes improve
interaction that occurs in markets
– there are circumstances when market signals fail to
allocate resources efficiently or equitably
– Public Goods, Externalities and Income Distribution
– Some goods or services that people desire will not be
produced by markets.
– Some goods or services will either be underproduced
(vaccines) or overproduced (pollution) because markets
fails to register certain benefits or costs.
62. – markets may also fail to provide an equitable or fair
distribution of resources
– government intervention with its ability to coerce (the
opposite of voluntary) can regulate, tax and subsidize to
change market outcomes
– efficiency and equity: the pie analogy
– if government intervention always the proper solution?
63. How Does the Economy Work as a
Whole?
• Principle # 8 – A country’s standard of living
depends upon its ability to produce goods and
services
– Materialism – more toys mean more welfare
– wealth: a necessary or sufficient condition for happiness
(are rich people happier, children with lots of toys)
64. • Principle #9 – The general level of prices rises when
the government prints and distributes too much
money
