HOW DO YOU DEFINE MANAGEMENT?

• WORKING TOGETHER FOR A COMMON GOAL

• COORDINATION• AN ACTIVITY/ ONGOING PROCESS• AN ART OF GETTING THINGS DONE BY

OTHER PEOPLE

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• THE FOCUS OF MANAGERIAL ECONOMICS IS ON HOW THE FIRM REACTS TO CHANGES IN ECONOMIC ENVIRONMENT IN WHICH IT OPERATES AND HOW IT PREDICTS THESE CHANGES AND DEVISES BEST POSSIBLE STRATEGIES TO ACHIEVE THAT UNDERLIE ITS OBJECTIVES

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• THE FOCUS OF MANAGERIAL ECONOMICS IS ON HOW THE FIRM REACTS TO CHANGES IN ECONOMIC ENVIRONMENT IN WHICH IT OPERATES

• AND HOW IT PREDICTS THESE CHANGES AND DEVISES BEST POSSIBLE STRATEGIES TO ACHIEVE THAT UNDERLIE ITS OBJECTIVES

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Economics is a study of market structures and consumer behaviour

• THE MARKET IS THE SINGLE MOST IMPORTANT AND COMPLEX INSTITUTION IN OUR ECONOMY

• Think of Money Market, Capital Market, Market for FMCG products, Insurance products, Matrimonial Market, Automobile Market, Housing Market,

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Basic economic concepts

1. Invisible hand

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2.Opportunity cost principleThe Next Best Thing That a Person Can

engage in is referred to as the opportunity cost of doing the best thing.

It expresses the basic relationship between scarcity and choice.

It implies the choice between desirables.

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3.Time perspective principle:take in to

account both short run and long run perspectives

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Opportunity Cost• To get one thing that we like, we usually

have to give up another thing that we like. Making decisions require trading off one goal against another.

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4. Discounting principle: if a decision affects cost and revenues at future dates,it is necessary to discount

those costs and revenues to present values before a valid comparision of

alternatives is possible

A RUPEE TOMORROW IS WORTH LESS THAN A RUPEE TODAY

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5.equi-marginal principle:

An input should be so allocated that the value added by the last unit is the same

in all cases

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• Be all and end all of all human efforts is consumption.

• The whole and sole purpose of economy is production of goods/ services for consumption now or in future.

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• Macro economics is the study of the behaviour of the economy as a whole.

• It contrasts with micro eco which studies: A individual priceA individual quantities, markets.

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Basic Economic Problem• “Economics is a science which

studies human behaviour as a relationship between ends and human resources which have alternative uses.”

Prof Robbins

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Wants are unlimitedMeans to satisfy wants are limited but means or resources can be put to alternative uses.

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Basic Problems of an Economy

• What to produce?• How to produce?• For whom to produce?• What provision be made

for economic growth ?

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“He who can not see beyond the dawn will have much good wine to drink at noon, much green wine to cure his headache at dusk and only rain water to drink for the rest of the days.”

• Heaven lies at the feet of mothers. God’s pleasure is in a father’s pleasure; and God’s displeasure is in a father’s displeasure. He who wishes to enter Paradise at the best door must please his father and mother.

- Al-QuranQuoted by : A.P.J. ABDUL KALAMIn his book : The Family and the Nation

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“Economics is the study of how men & society choose, with or without the use of money, to empoy scarce productive resources which could have alternative uses, to produce various commodities over time, and distribute them for consumption now and in the future among various people and groups.”

Prof. Samuelson

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Micro Economies

1. Studies the behaviour of individual units and small groups – individual consumes, producer, firm.

• How much to consume• What to produce• How to produce• Where to produce

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• Where to sell • At what price• Production Structure • Technology Location• How the market functions• Working of a free Market Economy• Role of price mechanism in

allocating productive resources – invisible hand.

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• How a completely planned economy works.

• Scarcity and efficiency: economic benefits comes from self-interested actions of individuals.

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Basic issues of micro economies

Studies the economic actions and behaviour of individual units such as

1. Individual Consumer2. Individual Producer (FIRM)3. Theory of product prices.4. Study of different type of markets5. Distributional theories6. Economic efficiency

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Important and uses of micro Economies

• Explains how a free market economy functions.

• How the goods and services produced are distributed among various people for consumption.

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• How factors of production are paid.

• What are the gains from international trade.

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Free Market Economy or Capitalist Economy

Chief Features• Right of private property • Freedom of Enterprise• Freedom of choice by

consumers (consumer sovereignty)and factors of production

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• Profit Motive• Competition• Role of Price Mechanism

(Impersonal Forces of Market to Solve central problem of Economics). Markets stand for the forces of demand and supply.Each individual knows where his self interest- lies.

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• Deciding what to produce• Deciding how to produce• Deciding what and for whom to

produce• Deciding what about rate of

growth• Solving all problems at the

same time.

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Consumer Sovereignty• In a free market economy

consumer is perceived to be sovereign

• Consumer places the order, decides what should be produced

• Consumers authority arises from his income. His ability to pay is limited.

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• High pressure salesmanship puts a check on consumer sovereignty- radio, television, newspapers, hoardings at railway stations, airports, colonies, market place – all these bombard consumers.

• Consumer sovereignty is indeed a MYTH.

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Problems of free market economy

• Does not ensure maximum social satisfaction.

• Principle of consumer sovereignty not valid.

• Economic instability and unemployment- swings between boom and bust

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• Does not ensure high rate of eco growth.

• Decline of competition and its adverse effects

• Concentration of wealth and income.

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Role of counter vailing power in correcting the weaknesses of a free market economy

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To day powerful corporate sellers often face equally powerful corporate buyers; the giant steel mill to the giant auto firm, the giant producers to the giant super market chain. The large firms no longer bargain with the individual employees, but with large and powerful unions.

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Issues in Macro Economics • Why a country is poor or rich. How

a country can become rich?• Road to economic progress and

high rate of growth• What is inflations; why its takes

place• How can we achieve full

employment• Social Responsibility of Business

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How are Basic Problems Solved

Price MechanismVs

Planning

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Macro Economic Aggregates

Aggregation involves adding apples & Oranges

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Solution• Gross Domestic Product (GDP)-

A measure of Economic Activity.

• Aggregate consumption- volume of goods and services devoted to current consumption during a period.

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• Aggregate investment- Volume of goods and services devoted to capital formation during a period.

• Whole sale price index• Consumer price index• Total money supply, bank

credit, foreign exchange reserve etc.

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Government in Macro Economy

Classical View• Leave the economy to

markets• Economy is always in full

employment • Supply creates its own

demand

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• Over production & unemployment are short run phenomenon

• Price & wage flexibility bring about full employment

• No govt interference or least interference

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Key Nesian View• Investment is highly volatile • Govt to actively participate in

economic life to correct the fluctuations in investment, consumption , savings, output, employment, incomes, through pro-active monetary and fiscal policy.

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Part - II

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Business Economics – Nature, Scope and ImportanceBusiness economics in general sense refers to the integration of economic theory with business practices.

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• Business economics applies economic tools and concepts to the management of business. In this sense business economics is called managerial economics or applied economics.

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Managerial Economics is concerned with exploring real world business application of the logical structure of micro-economics. The development of the discipline of Econometrics over last two decades has important implications for the pursuit of such real world applications of micro-economic concepts and precepts. We are now capable of estimating demand equations, cost functions, production functions and other relations of micro-economic theory into quantifiable form such that we can provide useful information to management for scientific decision- making.

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An OverviewBusiness Economics is both conceptual and metrical. As such the knowledge of a few fundamental concepts and a few measurement techniques, relevant in the process of applying economic analysis in examining business decisions, is basic to the subject of Business Economics.

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• Business economics involves allocation of the resources available to a firm among its activities in a manner that the firm maximizes the profits sales and market share. It’s concerned with the application of economics in decision making.

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Business EconomicsWhat is Business Economics

• You should know compl exitiesof decision making problems of a business entity.

• You should know principles of economics and how they can be usefully employed is solving business problems and decision making

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MICRO ECONOMICS

MACRO ECONOMICS

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Central Problems of Economics

• Resources are scarce • Wants/ Desires are unlimited• Resources can be put to

alternative uses• Economics is the science of

choice making and resource allocation.

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Types of Business Decision• What to produce• How to produce• For whom to produce• Where to produce• AT what price to sell• How much investment is to be made• From where to raise resources to

organise production.

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Board classification of Business Decisions

• Price – output decisions• Demand decision• Choice of technique of

production• Long run production decision• Advertising decision• Investment decision

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Managerial Decision Making Process

• Establishing the objective of a firm

• Profit Maximisation• Sales Maximisation

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Alternative Solutions• Expanding the capacity vs

setting up a new plant vs any other alternative.

• Requires data and information• Analyse policy environment

and regulatory framework.• Anticipate problem-areas

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• In nutshell it can be concluded that business economics refers to the application of economic theory and the tools of analysis of decision science to find the optimal solution to business decision problems.

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Features of Business economics

• Business economics is concerned with decision – making of economic nature.

• Business economics is goal oriented and prescriptive

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• Business economics is pragmatic. It is concerned with those analytical tools which are useful in improving decision- making

• Business economics brings forth solutions of problems, provides necessary conceptual tools and helps the decision maker by providing measurement of various economic entities and their relationships.

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Definitions• “Managerial economics is

concerned with the ways in which managers should make decisions in order to maximize effectiveness or performance of the organisations they manage.”

• “Business economics is a fundamental academic subject which helps to understand and to analyse problems of business decision making.”

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• “Business economics is the integration of economic theory with business practices for the purpose of facilitating decision making and forward planning by the management.”

• Management decisions problems can be solved by the application of economic theory and tools of decision sciences.

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Integration of Economic Theory

• With the help of economic theory we can understand the actual behavior of business.

• Business economics attempts to estimate and predict the economic quantities and relationships.

• Decision making and forward planning is done with the help of estimated economic quantities and relationships.

• The managers cannot ignore the environment with which they operate.

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How does Business economics differ from economics?

• Business economics involves application of economic principles to the problems of the firm.

• It is micro- economics in character.

• Economics deals with the body of the principles itself.

• Is both macro-economic and micro economic.

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• In business economics mainly profit theory is used. Other distribution theories are not much used

• Business economics adopts, modifies and reformulate economic models to suit the specific conditions and serves the specific problem solving process.

• All Macro Economic theories like wages, interest and profit are also dealt with in economics.

• It builds hypothesis and economic models.

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• Though micro in character deals only with the firm and has nothing do with an individual’s economic problems.

• Micro economics as a branch of economics deals with both economics of the individual as well as economics of the firm.

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Scope of Business Economics

• Theory of demand analysis and forecasting • Theory of production and production

decisions• Analysis of market structure and pricing

theory • Cost analysis• Profit analysis and profit management• Theory of capital and investment decisions • Investment management.

THE MARGINAL PRINCIPLE : LET BYGONES BE BYGONES• One of the most important lessons of

economics is that you should look at the marginal costs and marginal benefits of decisions and ignore past or sunk costs.

• This is the marginal principle, which means that people will maximize their incomes or profits or satisfaction by counting only the marginal cost and marginal benefits of a decision

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RISK AND REWARD

• People are generally risk-averse, preferring a sure thing to uncertain levels of consumption or profit: people prefer outcomes with less uncertainly and the same average values. For this reason, activities that reduce the uncertainties of consumption lead to improvements in economic welfare.

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RISK AND RETURN ON DIFFERENT ASSETS

• The rate of return is the total rupee gain from a security (measured as percent of the price at the beginning of the period). For saving accounts and short-term bonds, the return would be the interest rate.

• Investment vary in their average returns and riskiness. Bonds tend to be safe, while stocks have much higher returns but face higher risks. 67