A Managerial Economics Induction Newnew

7/31/2019 A Managerial Economics Induction Newnew

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Shaila Srivastava

ME Shaila Srivastava SL EC 501


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Society and Scarce Resources: :The management of societys resources is importantbecause resources are scarce. Scarcity implies choice andchoice implies cost.

Scarcity . . . . . . means that society has limited resourcesand therefore cannot produce all the goods and servicespeople wish to have.

Economics is the study of how society manages its scarceresources.



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Introduction : The word Economics is derived from the Greek words

OKIOS NEMEIN meaning household management .Man is bundle of desires.

Goods and services which satisfy these wants are scarce.

To produce goods land, labour, capital and organizationare needed.

Economic problem arises because ofscarcity.

Economics is a study of economic problems.

Wants are motive force for economic activity. Wantsleads to efforts. Efforts secures satisfaction.



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Economics Definitions :

Wealth Definition: Adam Smith

Welfare Definition: Alfred Marshall

Scarcity Definition: Lionel Robbins

Growth Definition: Paul Samuelson



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1.Wealth Definition. : Father of EconomicsAdamSmith in his book Wealth of Nations 1776 definedEconomics is the study of wealth. In this definitionwealth is given first place, man has given second place

2. Welfare definition. :Alfred Marshall in his bookPrinciples of Economic Science-1890 defined

Economics is the study of man kind in the ordinarybusiness of life.Economics is one side a study ofwealth; and on the other side more important side apart of study of man. He made economics is a science

of human welfare. First place to man, second place towealth. It studies man not in isolation but a memberof a social group. Definition considered only materialwelfare, ignored immaterial welfare.



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3. Scarcity Definition. :Lionel Robbins in his book Nature and Significance of

Economic Science-1932 given scarcity definition.Economic is the science which studies human behavioras a relationship between ends and scarce means whichhave alternative uses.

Scarcity Definition-main Points : Unlimited wants, but gradable.

Scarce means, which have alternative uses.

Superiority of scarcity definition : Robbins includedmaterial and non material goods ,widens the scope ofeconomics. He made economics a positive science. Hisdefinition is universal.



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Followings are some of the attributes of Robbins

definition: 1.Multiplicity of Ends - unlimited. Thus it is the unlimitedness of a

person wants that never stops him from working and keeps himengaged in the work of earning money for the satisfaction of his wants.

2. Scarcity of Means - limited resources due to which economicproblems arise.. But it should be noted that the means are scare withrespect to their demand.

3. Selection / Urgency of Wants. Naturally, we go to satisfy our urgentneeds / wants first and then the remaining ones. If all the wants aresame there would be no urgency to fulfill then and hence no economicproblem would arise.

4. Alternative Uses - Scars means are capable of alternative uses i.e.

they can be put to a number of uses e.g water can be used for drinkingas well as for cooking. The main problem arises that where theutilization should be made first.

5. Human Science - Economics is the study of human behavior as awhole both with in and out side the society. It does not restrict the

subject matter within specific limits.ME Shaila Srivastava SL EC 501


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4. Growth definition : Noble prize winner (1970) PaulSamuelson proposes a dynamic definition in his bookEconomics(1948) Economics is the study of how people and

society end up choosingwith or without moneyto employscarce productive resources that could have alternative uses toproduce various commodities and distribute them forconsumption, now or in the future among various persons and

groups in society. Economic analysis the cost and benefits ofimproving patterns of resources use.

Scarcity : Unlimited wants ,scarcity of resources and alternative uses.Dynamism: The importance of time is brought in the definition.

Economic growth: His definition gave importance to economic growth

Wide scope: Economic choice exist not only in a monetary economy butalso in a barter economy.

Problem of choice: Definition explains problem of choice in present andfuture in dynamic conditions.



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Management is the discipline of organizing andallocating a firms scarce resources to achieve itsdesired objectives. Involves the ability to organizeand administer various tasks in pursuit of certainobjectives.

Managerial economics is the use of economicanalysis to make business decisions involving the bestuse (allocation) of an organizations scarce resources.

Economics and Managerial

Decision Making


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Business decision process is becoming more &

more complex due toa.Change in ownership patternb.Change in scale of operationc.Change in business environment

Making appropriate business decisionrequires clear understanding of marketconditions of product, inputs & financialmarkets which require application of economicconcepts, theories & tools.

Why Study Managerial Economics ?


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How Is Managerial Economics Useful? Evaluating Choice Alternatives

Identify ways to efficiently achieve goals.

Specify pricing and production strategies. Spell out production and marketing rules to maximize

profits.

Making the Best Decision

Managerial economics helps meet managementobjectives efficiently.

Managerial economics shows the logic of consumer,and government decisions.


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What is Managerial Douglas - Managerial economics is .. the application

of economic principles and methodologies to thedecision-making process within the firm or

organization.

Pappas & Hirschey- Managerial economics applieseconomic theory and methods to business andadministrative decision-making.

Salvatore - Managerial economics refers to theapplication of economic theory and the tools ofanalysis of decision science to examine how anorganisation can achieve its objectives mosteffectively. ME Shaila Srivastava SL EC 501


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What is Managerial Howard Davies and Pun-Lee Lam -

It is the application of economic analysis to

business problems; it has its origin intheoretical microeconomics.



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How Can Managerial EconomicsAssist Decision-Making?

1. Adopt a general perspective, not asample of one

2. Simple models provide stepping stoneto more complexity and realism

3. Thinking logically has value itself andcan expose sloppy thinking



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Why Managerial Economics?A powerful analytical engine.

A broader perspective on the firm.

what is a firm?what are the firms overall objectives?

what pressures drive the firm towards profit

and away from profit

The basis for some of the more rigorous analysis ofissues in Marketing and Strategic Management.



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Why study Economics . . .

How people make economic decisions.

How people interact with each other.

The forces and trends that affect theeconomy as a whole.


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Choices & Decision

Economics is all about making choices anddecisions i.e. using scarce resources for achievingtargets.

Scarce resources Time, Money, Capital, Land,Labour, Natural Resources etc.

Scarcity is the most important term. It hasgeographical implication and is a relative term.



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Society and Scarce Resources:

What are economic decisions?

Economic decisions refer to decisions involvingtransactions in terms of cash or kind.

The resources are scarce relative to their needs withalternative uses. Therefore, the management of societysresources is important.

Scarcity . . . . means that society has limited resourcesand therefore cannot produce all the goods andservices people wish to have. It is relative toneeds/ends.


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In Economics:

Trade off Choosing one thing to give up other thatgive rise to opportunity cost (Next best alternative useof resources). Example PPC

Efficiency and ProductivityHow well we usescarce resources in order to get maximum output.Productivity - relation of inputs & output.

UtilityPower of economic goods to satisfy humanwants. It is subjective benefit.



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Economics isScience or Arts?

Science systematic body of knowledge that explain therelationship betweens causes and effects.

Arts deals with wants, needs and demand of human

being.

Pure Economics orApplied Economics?

Nature of economics Positive or Normative?

Positive- What is.

Normative How things ought to be.



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Economic Activities :

Consumption: Extracting utility from goods andservices.

Production: Production of goods and services whichposses utility.

Exchange: means buying and selling of goods andservices. It is link between consumer and producer.

Distribution: Sharing of income by the four factors ofproduction.

http://upload.wikimedia.org/wikipedia/commons/9/92/Ballard_Farmers%27_Market_-_vegetables.jpg


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Micro- Macro Economics :

Economics noble prize winner (1969), RagnerFrischwas the first to use the terms micro andmacroin economics in 1933.

The terms micro and macro derived from Greek.Mikros (small) and makros (large). Micro means

individualistic and macro aggregative.



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Where micro economics explain a tree in the

forest, macro economics explains all the trees in

the forest.Micro economics Macro economics

Is the study of particularfirms, households,individual prices and

particular commodity.

Popularized by DavidRicardo, Marshall, J.B Sayand J.S Mill.

Micro economics called as Price Theory.

Assumption - full employment andceteris paribus (other things remainconstant).

Is the study of economicsystem as a whole. studiesaggregates values like

National Income, Nationaloutput, general price level,total consumption, savingand investment of a country.

J.M Keynes popularizedmacro Economics

Macro economics is called Income and Employment

theory.ME Shaila Srivastava SL EC 501


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Economics: Base of Mgt. Studies

Micro Economics

1.Theory ofDemand & SupplyMarket Research Supply chain mgt

2.Theory of Consumer Behaviour

Advertising Consumer behaviour3.Theory of Production

Prod & operation mgt Prod. Planning

4.Theory of Cost

Cost Management5.Theory of Markets, Price & Distribution

Marketing


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Economics: Base of Mgt. Studies

Macro Economics

1. Income & Employment theory2. Theory of Consumption

3. Theory of Savings & Investment

Business Environment1. Theory of D & S of Money

2. Theory of Growth & Development

Money & Capital market; Corporate Finance

1. Theory of Exchange

2. Theory of Public Finance

International Business Mgt


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A household and an economy

face many economic decisions:

Who will work?

What goods and how many of them should beproduced?

What resources should be used in production?

At what price should the goods be sold?

Cond. .


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Basic Qs Pertaning to Economy (Because

Resources are Scarce)

What to produce? How much to produce

How to produce?

For whom to produce? Where to produce

Thus Economics is about how society allocates its scarce

resources, how the economy works, how business and

government make decisions and how these decisionsaffect the individuals. How the prices of labour, capital,

and land are set in the economy, and how these prices

are used to allocate resources.



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Problem of Resource Allocation Which goods and services should be produced with

societys resources? Where on the PPF should economy operate?

How should they be produced? No capital at all

Small amount of capital

More capital

Who should get them? How do we distribute these products among the different

groups and individuals in our society?



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The Concept of Opportunity Cost

Opportunity cost of any choice What we forego when we make that choice, or the best

alternative opportunity which is gone.

Most accurate and complete concept of cost. Direct moneycost of a choice may only be a part of opportunity cost ofthat choice

Opportunity cost of a choice includes both explicit costsand implicit costs

Explicit costdollars actually paid out for a choice Implicit costvalue of something sacrificed when no

direct payment is made



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Opportunity Cost and Society All production carries an opportunity cost

To produce more of one thing, must shift resourcesaway from producing something else

The Principle of Opportunity Cost

The concept of opportunity cost sheds light on virtuallyevery problem that economists study, whether it beexplaining the behavior of consumers or business firmsor understanding important social problems likeproblems like poverty or racial discrimination.

Basic Principle All economic decisions made by individuals or society are costly The correct way to measure the cost of a choice is its opportunity

costthat which is given up to make the choice



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The Production Possibilities Frontier

Number of LivesSaved per Period

Quantity of AllOther Goods

per Period

100,000 200,000 300,000 400,000 500,000

1,000,000

950,000850,000

700,000

500,000

400,000

BA

C

D

E

F

W

At point A, allresources are usedfor "other goods."

Moving from point A to point Brequires shifting resources out ofother goods and into health care.

At point F. allresources are used

for health care.



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Increasing Opportunity Cost

According to law of increasingopportunity cost

The more of something we produce The greater the opportunity cost of

producing even more of it

This principle applies to all of societysproduction choices



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Figure 2: Production and Unemployment

A

B

Civilian Goods per Period

Military Goodsper Period

2. then moved tothe PPFduring the war. Bothmilitary andcivilianproduction increased.

1. Before WWII the United Statesoperated insideits PPF . . .



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Economic Growth If economy is already operating on its PPF

Cannot exploit opportunity to have more of everything by moving to it

But what if the PPF itself were to change? Couldnt we thenproduce more of everything? This happens when an economys productive capacity grows

Many factors contribute to economic growth, but they can bedivided into two categories

Quantities of available resourcesespecially capitalcan increase

An increase in physical capital enables economy to produce more ofeverything that uses these tools More factories, office buildings, tractors, or high-tech medical equipment

Same is true for an increase in human capital Skills of doctors, engineers, construction workers, software writers, etc.

Technological change enables us to produce more from a given

quantity of resourcesME Shaila Srivastava SL EC 501


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Economic Growth Increases in capital and technological change often go

hand in hand For instance, PET body scanners will enable us to save even

more lives than our current set of resources Moving horizontal intercept of PPF rightward, from F to F

Impact of PET scanners stretches PPF outward along horizontal axis

How can a technological change in lifesaving enable us toproduce more goods in other areas of the economy? Society can choose to use some of increased lifesaving potential to

shift other resources out of medical care and into production ofother things Because of technological advance and new capital, we can shift resources

without sacrificing lives



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Economic Growth

If we can produce more of the things that we value,without having to produce less of anything else,have we escaped from paying an opportunity cost? Yes . . . and no Figure 3 tells only part of story

Leaves out steps needed to create this shift in the PPF For example, technological innovation doesnt just happen

resources must be used to create it Mostly by research and development (R&D) departments of large

corporations

In order to produce more goods and services in thefuture, we must shift resources toward R&D andcapital production Away from production of things wed enjoy right now



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Figure 3: The Effect of a New Medical

Technology

Number of Lives Saved per Period

Quantity of AllOther Goods

per Period

300,000 500,000 600,000

1,000,000

700,000

A

J

D

H

F

1. A technological advance insaving lives increases thisPPF's horizontal intercept . . .

4. or more lives saved and greaterproduction of other goods.

3. The economy can endup with more livessaved and un-changedproduction of othergoods . . .

2. But not its verticalintercept.

F'



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Economic problem : Economic problem arises dueto limited means having alternative uses to satisfy

unlimited wants. Scarcity of resources

Economic activity : matching ends to means

Economic (optimal) decision making : Act ofoptimal choice considering constraint &objectives

What is Economic Analysis


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a.Micro vs Macro analysis

b.Partial vs General Equilibrium analysis

c.Positive vs Normative Analysis

ME is primarily micro, partial eqm, and

positive in approach

Types of Economic Analysis :


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Role of Business in SocietyWhy Firms Exist

Businesses help satisfy consumer wants.

Businesses contributes to social welfareSocial Responsibility of Business

Serve customers.

Provide employment opportunities.Obey laws and regulations.


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Business EnvironmentIt consists of two factors

Internal environment firm's resources,business strategy, value system, objectives, mgtstructure

External environment business opportunities& threats to business

Business environment consists of:

economic, legal, social & political environment.


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Economic Environment Core of all external environments. Economic

strengths & weaknesses important for determininglegal, social & political environment

Economic policies, domestic & internationalenvironment. Important to determine business

environment.It includes

a. Nature of economy (rich/poor)

b. Structure of economy(composition of NI)

c. Economic policies(industrial, trade, foreignexchange, investment, fiscal, monetary, etc.

d. Economic conditions(domestic & international


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Political Environment: Politics can often determineeconomic & business policies. It includes

a. Political structure

b. Economic systems

c. Economic roles of Govt.

d. Domestic & international trends

Legal Environment: Political & economic environmentgoverns legal environment. It influences businessenvironment

a. Laws to control investment

b. Laws to regulate the conduct of business- standards,packaging, ethics, etc.

c. Laws to protect consumer interest


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Micro & Macro Environment

Micro env immediate environment which includessuppliers, marketing intermediaries, competitors,customers & the public.

Macro- demographic, economic, technical, political &cultural environment.

Macro environments is more uncontrollable thanmicro.


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Three Basic Economic Questions



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Basic Qs Pertaining to Economy

(Because Resources are Scarce)What to produce?

How to produce?

For whom to produce?Thus Economics is about how society

allocates its scarce resources, how the

economy works, how business & governmentmake decisions and how these decisionsaffect the individuals.



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Economic System

An economic system is a nations plan foranswering the key economic questions.

Governments (democratic, socialist,communist) take differing approaches tohow they allow their economic systems to

operate.However, no systems operate in a pure form.



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Three Methods of Resources Allocation

Command Economy (Centrally-Planned)

Resources are allocated according to explicitinstructions from a central authority

Market Economy

Resources are allocated through individual decision

making

Mixed Economy



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Market Economy

Individuals decide by buying and selling in amarket.

No one tells consumers what to buy and no onetells businesses what to make and sell

Consumers and businesses make their owndecisions based on their interests.

Profit is the motivator

Market forces demand & supply Examples of this economy



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Directed or Command Economy(Centrally-Planned)

Economic questions are answered by theowners of the resources.

Resources are controlled by the government

They decide how much of each item is to beproduced

Use military to enforce these decisions

People have little say in price or supply

Examples of this economy?



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Mixed Economic Systems

Most countries have mixed economies Decisions are based on cost-benefit analysis

Some private ownership and some public ownership ofproperty

Some government intervention in the economy

Redistribution of income high taxes on the rich toprovide lots of government services

Examples of government programs

How is our economy a mixed economy?



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Resource Allocation in the India

Numerous cases of resource allocation outside themarket Such as families

Various levels of government collect about one-

third of our incomes as taxes Enables government to allocate resources by

command

Government uses regulations of various types to

impose constraints on our individual choice The market is the dominant method of resource

allocation in India However, it is not a pure market



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Five Major Features of our Economy

Private Enterprise - Choose what you want to do,May succeed or fail

Private Property- Own, use, and dispose of things

Profit - Money from sales after costs Competition - Rivalry among businesses to sell their

goods and services to buyers, Allows consumers tomake choices, Keeps prices reasonable

Freedom of Choice - You can buy what you want (ifits legal), Enter into a business or career of yourchoice



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A Managerial Economics Induction Newnew

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