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Page 1: Managerial Economics   Module I

WELCOMEWELCOMEDEARDEAR

BUDDING MANAGERSBUDDING MANAGERS

Page 2: Managerial Economics   Module I

INTRODUCTION TO ECONOMICS INTRODUCTION TO ECONOMICS

-- AN OVERVIEW ---- AN OVERVIEW --

Page 3: Managerial Economics   Module I

Some economic termsSome economic terms1.1. WealthWealth2.2. Production of WealthProduction of Wealth3.3. Distribution of WealthDistribution of Wealth4.4. EndEnd5.5. MeansMeans6.6. Material requisitesMaterial requisites7.7. WellbeingWellbeing8.8. Human behaviourHuman behaviour9.9. Ends & Scarce MeansEnds & Scarce Means10.10. Alternative usesAlternative uses

Page 4: Managerial Economics   Module I

Important Early DefinitionsImportant Early Definitions►1. Wealth Definition1. Wealth Definition

► 2. Welfare Definition2. Welfare Definition

► 3. Scarcity Definition 3. Scarcity Definition

Page 5: Managerial Economics   Module I

Wealth DefinitionWealth Definition(Adam Smith)(Adam Smith)

►““Economics enquires into the factors Economics enquires into the factors that determine wealth of the country that determine wealth of the country and its growth” --- and its growth” --- Adam SmithAdam Smith

►Adam Smith emphasized the Adam Smith emphasized the expansion and production of wealthexpansion and production of wealth

Page 6: Managerial Economics   Module I

Welfare DefinitionWelfare Definition(Alfred Marshall)(Alfred Marshall)

► “ “For Economics, wealth is not an end in For Economics, wealth is not an end in itself, but it is only a means to an end; the itself, but it is only a means to an end; the end being the promotion of human welfare”.end being the promotion of human welfare”.

► ““Political economy or economics is the Political economy or economics is the study of mankind in the ordinary business of study of mankind in the ordinary business of life; it examines that part of individual and life; it examines that part of individual and social action which is most closely social action which is most closely connected with the attainment and with the connected with the attainment and with the use of the material requisites of well being”use of the material requisites of well being”

Page 7: Managerial Economics   Module I

Scarcity DefinitionScarcity Definition(Lionnel Robbins)(Lionnel Robbins)

““Economics is the science which Economics is the science which studies human behaviour as a studies human behaviour as a relationship between ends and scarce relationship between ends and scarce means which have alternative uses”.means which have alternative uses”.

Page 8: Managerial Economics   Module I

►What is Managerial Economics?What is Managerial Economics?

► Is it a Positive Science or a Normative Is it a Positive Science or a Normative Science?Science?

►Micro-Economics and Macro Economics Micro-Economics and Macro Economics ––What is the difference?What is the difference?

Page 9: Managerial Economics   Module I

What is Managerial What is Managerial EconomicsEconomics

Managerial economics pertains to the Managerial economics pertains to the overlapping area of overlapping area of economics along economics along withwith the toolsthe tools of decision sciences of decision sciences such as mathematical economics, such as mathematical economics, statistics and econometrics statistics and econometrics as applied as applied to business management problems.to business management problems.

Page 10: Managerial Economics   Module I

Managerial EconomicsManagerial Economics““Managerial economics is a science which Managerial economics is a science which

studies the economic aspects of behaviour of studies the economic aspects of behaviour of the firm as an enterprise, and helps to the firm as an enterprise, and helps to allocate scarce resources to their alternative allocate scarce resources to their alternative uses in such a manner as to optimize the uses in such a manner as to optimize the firm’s ultimate objective, as an organization firm’s ultimate objective, as an organization and a social institution, under conditions of and a social institution, under conditions of the imperfect knowledge, risk and the imperfect knowledge, risk and uncertainty. It provides principles, methods, uncertainty. It provides principles, methods, and techniques of analysis of economic and techniques of analysis of economic behaviour and at the same time prescribes behaviour and at the same time prescribes ways and means to optimize economic ways and means to optimize economic efficiency”efficiency”

Page 11: Managerial Economics   Module I

Is ME a Positive or Normative Science?Is ME a Positive or Normative Science?

►Positive Economics explains the Positive Economics explains the economic phonomenon as What is, economic phonomenon as What is, what was and what will be.what was and what will be.

►Normative Ecnomics prescribes what it Normative Ecnomics prescribes what it ought to be.ought to be.

Page 12: Managerial Economics   Module I

Positive or Normative Positive or Normative ScienceScience

Positive sciences simply describe while Positive sciences simply describe while Normative sciences prescribe.Normative sciences prescribe.

Managerial economics is a blending of pure or Managerial economics is a blending of pure or positive science with applied or normative positive science with applied or normative science. It is positive when it is confined to science. It is positive when it is confined to statements about causes and effects and to statements about causes and effects and to functional relations of economic variables. It functional relations of economic variables. It is normative when it involves norms and is normative when it involves norms and standards, mixing them with cause-effect standards, mixing them with cause-effect analysis.analysis.

Page 13: Managerial Economics   Module I

Micro-economics and Macro-economicsMicro-economics and Macro-economics

►Broadly speaking, microeconomic Broadly speaking, microeconomic analysis is individualistic, whereas analysis is individualistic, whereas macroeconomic analysis is macroeconomic analysis is aggregative. Microeconomics deals aggregative. Microeconomics deals with the part (individual) units while with the part (individual) units while macroeconomics deals with the whole macroeconomics deals with the whole (all units taken together) of the (all units taken together) of the economy.economy.

Page 14: Managerial Economics   Module I

Distinction between Distinction between Micro and MacroeconomicsMicro and Macroeconomics

1.1. Difference in NatureDifference in Nature2.2. Difference in MethodologyDifference in Methodology3.3. Difference in economic Difference in economic

variablesvariables4.4. Difference in field of interestDifference in field of interest5.5. Difference in outlook and scopeDifference in outlook and scope6.6. Demarcation in areas of studyDemarcation in areas of study

Page 15: Managerial Economics   Module I

Difference in NatureDifference in Nature

►1. Difference in nature: 1. Difference in nature: Microeconomics is the study of the Microeconomics is the study of the behaviour of the behaviour of the individual units.individual units. Macroeconomics is the study of the Macroeconomics is the study of the behaviour of the behaviour of the economy as a wholeeconomy as a whole..

Page 16: Managerial Economics   Module I

MethodologyMethodology

►2. Difference in methodology: 2. Difference in methodology: Microeconomics is individualistic; Microeconomics is individualistic; whereas macroeconomics is whereas macroeconomics is aggregative in its approach.aggregative in its approach.

Page 17: Managerial Economics   Module I

Economic variablesEconomic variables►3. Difference in economic variables: 3. Difference in economic variables:

Microeconomics is concerned with the Microeconomics is concerned with the behaviour of microvariables or behaviour of microvariables or microquantities.. Macroeconomics is microquantities.. Macroeconomics is concerned with the behaviour of concerned with the behaviour of macrovariables and macroquantities. In macrovariables and macroquantities. In short, microeconomics deals with the short, microeconomics deals with the individual incomes and output, whereas individual incomes and output, whereas macroeconomics deals with the macroeconomics deals with the national income and national output.national income and national output.

Page 18: Managerial Economics   Module I

Field of InterestField of Interest►4. Difference in field of interest: 4. Difference in field of interest:

Microeconomics primarily deals with Microeconomics primarily deals with the problems of pricing and income the problems of pricing and income distribution. Macroeconomics pertains distribution. Macroeconomics pertains to the problems of the size of national to the problems of the size of national income, economic growth and general income, economic growth and general price level.price level.

Page 19: Managerial Economics   Module I

Diff. In Outlook and ScopeDiff. In Outlook and Scope►5. Difference in outlook and scope: The 5. Difference in outlook and scope: The

concept of ‘industry’ in microeconomics concept of ‘industry’ in microeconomics is an aggregate concept but it refers to is an aggregate concept but it refers to all firms producing homogenous goods all firms producing homogenous goods taken together. Macroeconomics uses taken together. Macroeconomics uses aggregates which relate to the entire aggregates which relate to the entire economy or to a large sector of the economy or to a large sector of the economy. Aggregate demand covers all economy. Aggregate demand covers all market demands.market demands.

Page 20: Managerial Economics   Module I

Demarcation in areas of Demarcation in areas of studystudy

►6. Demarcation in areas of study: 6. Demarcation in areas of study: Theories of value and economic Theories of value and economic welfare are major areas in welfare are major areas in microeconomics. Theories of Income microeconomics. Theories of Income and employment are core topics in and employment are core topics in macroeconomics.macroeconomics.

Page 21: Managerial Economics   Module I

THREE MAJOR FIELDS OF ECONOMICS Microeconomics

Pricing Distribution Welfare(Theory of Value) (Factor Pricing)

( Welfare Economics)

Theory Theory Theory General Theories of of of Theory of ofDemand Production Pricing Distribution

Rent Wages Interest Profit

Page 22: Managerial Economics   Module I

PRICINGPRICING►Quantity of resources in an economy is Quantity of resources in an economy is

given.given.

►Allocation of resources is dependent onAllocation of resources is dependent on relative price & profitability of diff. Goodsrelative price & profitability of diff. Goods

►To explain allocation, microeconomics To explain allocation, microeconomics brings in price theory.brings in price theory.

Page 23: Managerial Economics   Module I

Theory of Pricing (Value)Theory of Pricing (Value) Price Theory consists ofPrice Theory consists of►Theory of demand or Theory of demand or

the analysis of consumer behaviour.the analysis of consumer behaviour.►Theory of production and cost or Theory of production and cost or

the analysis of producer behaviour.the analysis of producer behaviour.►Theory of product pricing or Theory of product pricing or

price determination under different price determination under different market structures.market structures.

Page 24: Managerial Economics   Module I

Theory of DistributionTheory of Distribution► This theory is concerned with pricing of This theory is concerned with pricing of

various factors of production various factors of production ► -Land, Labour, Capital & Enterprise.-Land, Labour, Capital & Enterprise.

Rewards ofRewards of► Land – Rent Land – Rent ► Labour – WagesLabour – Wages► Capital – InterestCapital – Interest► Enterprise – ProfitsEnterprise – Profits► Thus, Theory of Distribution deals with Thus, Theory of Distribution deals with

General Theory of Distribution as well as General Theory of Distribution as well as those dealing with factors of production.those dealing with factors of production.

Page 25: Managerial Economics   Module I

Welfare EconomicsWelfare EconomicsAlong with Along with individual economic welfareindividual economic welfare, welfare , welfare economics is also concerned with economics is also concerned with social welfare,social welfare, which is based on overall economic efficiency of which is based on overall economic efficiency of the system. When maximum individual wants the system. When maximum individual wants are satisfied at the best possible optimum level are satisfied at the best possible optimum level by a production pattern through efficient by a production pattern through efficient allocation of resources, allocation of resources, overall economic overall economic efficiency or ‘Pareto optimality’efficiency or ‘Pareto optimality’ condition is condition is reached. Such a situation can reached. Such a situation can raise the standard raise the standard of livingof living of the population and of the population and maximize social maximize social welfare.welfare.

Page 26: Managerial Economics   Module I

Important Uses of Important Uses of MicroeconomicsMicroeconomics

► 1. It explains price determination and the allocation 1. It explains price determination and the allocation of resources.of resources.

► 2. It has direct relevance in business decision-2. It has direct relevance in business decision-making.making.

► 3. It serves as a guide for business’ production 3. It serves as a guide for business’ production planning.planning.

► 4. It serves as a basis for prediction.4. It serves as a basis for prediction.► 5. It teaches the art of economizing.5. It teaches the art of economizing.► 6. It is useful in determination of economic policies of 6. It is useful in determination of economic policies of

the Government.the Government.► 7. It serves as the basis for welfare economics.7. It serves as the basis for welfare economics.► 8. It explains the phenomena of International Trade.8. It explains the phenomena of International Trade.

Page 27: Managerial Economics   Module I

Limitations of Limitations of MicroeconomicsMicroeconomics► 1. Most of the micro-economic theories are abstract.1. Most of the micro-economic theories are abstract.

► 2. Most of the microeconomic theories are static – 2. Most of the microeconomic theories are static – based on ceteris paribus, i.e. “other things being based on ceteris paribus, i.e. “other things being equal”.equal”.

► 3. Microeconomics unrealistically assumes ‘laissez-3. Microeconomics unrealistically assumes ‘laissez-faire’ policy and pure capitalism.faire’ policy and pure capitalism.

► 4. Microeconomics studies only parts and not the whole 4. Microeconomics studies only parts and not the whole of the economic system. It cannot explain the of the economic system. It cannot explain the functioning of the economy at large.functioning of the economy at large.

► 5. By assuming independence of wants and production 5. By assuming independence of wants and production in the system, microeconomics has failed to consider in the system, microeconomics has failed to consider their ‘dependent effect’ on economic welfare.their ‘dependent effect’ on economic welfare.

► 6. Microeconomics misleads when one tries to 6. Microeconomics misleads when one tries to generalize from the individual behaviour.generalize from the individual behaviour.

► 7. Microeconomics in dealing with macroeconomic 7. Microeconomics in dealing with macroeconomic system unrealistically assumes full employment.system unrealistically assumes full employment.

Page 28: Managerial Economics   Module I

Importance of Importance of MacroeconomicsMacroeconomics

1.1. It explains the working of the economic system as a It explains the working of the economic system as a whole.whole.

2.2. It examines the aggregate behaviour of the It examines the aggregate behaviour of the macroeconomic entities like firms, households and macroeconomic entities like firms, households and the government.the government.

3.3. Its knowedge is indispensable for the policy-makers Its knowedge is indispensable for the policy-makers for formulating macro-economic policies such as for formulating macro-economic policies such as monetary policy, fiscal policy, industrial policy, monetary policy, fiscal policy, industrial policy, exchange control, income policy, etc.exchange control, income policy, etc.

4.4. It is very useful to the planner for preparing It is very useful to the planner for preparing economic plans for the country’s development.economic plans for the country’s development.

5.5. It is helpful in international comparison. For It is helpful in international comparison. For example, microeconomic data like national income, example, microeconomic data like national income, consumption, saving-income ratio, etc. are required consumption, saving-income ratio, etc. are required for a comparative study of diferent countries.for a comparative study of diferent countries.

Page 29: Managerial Economics   Module I

Limitations of Limitations of MacroeconomicsMacroeconomics

1.1. It ignores, individual behaviour altogether.It ignores, individual behaviour altogether.2.2. It has a tendency to excessive generalisation. It has a tendency to excessive generalisation.

Thus, analysing in aggregate terms, it pays least Thus, analysing in aggregate terms, it pays least atttention to the differences involved in the atttention to the differences involved in the constituentsconstituents

3.3. It is not easy to get correct and complete mesures It is not easy to get correct and complete mesures of economic aggregates. Thus, macroeconomic of economic aggregates. Thus, macroeconomic analysis lacks precision in actual practice.analysis lacks precision in actual practice.

4.4. Macroeconomic predictions are not fully reliable Macroeconomic predictions are not fully reliable when they are based on incomplete information when they are based on incomplete information or inaccurate measures. National income, price or inaccurate measures. National income, price index number etc. are only rough indicators.index number etc. are only rough indicators.

5.5. Often macro level policies may not produce the Often macro level policies may not produce the same results at macro levels.same results at macro levels.

Page 30: Managerial Economics   Module I

How does Managerial Economists help the How does Managerial Economists help the Manager Manager

in decision making and forward planning?in decision making and forward planning?► A Managerial economist in a business firm may carry on a wide A Managerial economist in a business firm may carry on a wide

range of duties, such as:range of duties, such as:► Demand estimation and forecasting.Demand estimation and forecasting.► Preparation of business forecasts; to provide forecasts of changes in Preparation of business forecasts; to provide forecasts of changes in

costs and business conditions based on market research and policy costs and business conditions based on market research and policy analysis.analysis.

► Analysis of the market survey to determine the nature and extent of Analysis of the market survey to determine the nature and extent of competition.competition.

► Analysing the issues and problems of the concerned industry.Analysing the issues and problems of the concerned industry.► Assisting the business planning process of the firm.Assisting the business planning process of the firm.► Discovering new and possible fields of business endeavour and its Discovering new and possible fields of business endeavour and its

cost-benefit analysis as well as feasibility studies.cost-benefit analysis as well as feasibility studies.► Advising on pricing, investment and capital budgeting policies.Advising on pricing, investment and capital budgeting policies.► Evaluation of capital budgets.Evaluation of capital budgets.► Building micro and macro economic models of particular aspects of Building micro and macro economic models of particular aspects of

the firm’s activities that are useful in solving specific business the firm’s activities that are useful in solving specific business problems. Most models may be prediction oriented.problems. Most models may be prediction oriented.

► Directing economic research activity.Directing economic research activity.► Briefing the management on current domestic and global economic Briefing the management on current domestic and global economic

issues and challenges. issues and challenges.