Concepts and Techniques Unit 1

7/28/2019 Concepts and Techniques Unit 1

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UNIT I


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Introduction Economics is broadly categorized by:

i) Microeconomics

ii) Macroeconomics

Microeconomics focus on the behavior of individual actors on the

economic stage, that is firms and individuals and their interaction in

market.

Macroeconomics is the study of the economic system as a whole. It

includes techniques for analyzing changes in total output, total

employment, consumer price index, unemployment rate , exports andimports.

Thus, economics is defined as a social science, which studies human

behavior in relation to optimize allocation of available resources to

achieve the given goals.


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Circular flow of economic

activity


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Five sector circular flow of

economy


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Characteristics of managerial

economics It is concerned with decision making of an economic nature. It is micro-economic in character.

It largely uses that body of economic concepts and principles, which is known as

theory of the firm. It is goal oriented and prescriptive

Managerial economics is both conceptual and metrical. It includes theory with

measurement.


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Decision Making

Decision-Problem

TraditionalEconomics

Optimal Solutionto BusinessProblems

Decision Science(Tools &

Techniques ofAnalysis

ManagerialEconomics


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Marginal Analysis Marginal cost and Marginal Profit/Benefit

Marginal cost is the cost which incurred to produce the next or one more unit.

Marginal revenue is the benefit which gets by producing next or one more unit.

Cost will be less and benefit will be more. Marginalism Principle

Marginal Cost (MC)= (TC)n(TC)n-1 where TC = Total Cost and n = unit of

Product, TCn = Total cost of producing n units, TCn-1 = Total Cost of producing n-1

units

Marginal Revenue (MR)= (TR)n(TR)n-1 where TR = Total revenue

Decision Rule:

MR>MC.MR=MC..MR


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Optimization Optimization is the technique of finding the value of independent variables that

maximizes or minimizes the value of the dependent variables.

For example: most of the firms are interested in finding the level of output that

maximizes their total revenue, some firms facing constant price may want to find the

level of output that would minimize the average cost and most important , most

firms may be interested in finding the level of output that maximizes their profit.

Technique of Maximizing Total Revenue

Total Revenue (TR) of firm is defined as:

TR=P.Q

where P= Price and Q = Quantity sold.


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Contd..

Technique of Optimizing Output: Minimizing Average Cost

The optimum size of the firm is one that minimizes the average cost of production.

The level of output that minimizes the average cost of production can be obtained by

dividing Total Cost (TC) by the quantity (Q) produced.

AC=TC/Q

Suppose TC function is given as:

TC=100-30Q+2Q2

AC=100/Q -30+2Q

The Rule of Minimization is same as Rule of Maximization that is first derivative of

AC function with respect to Q must be set equal to zero, as given below:

AC/Q=0

The value of Q can be calculated which indicates the optimum size of output that

minimizes the average cost.


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Contd..

Maximization of Profit

Profit maximization is the most common objective of the business firm. Profit

maximization is thus dependent on Total Revenue (TR) and Total Cost (TC)

Total profit (P) is defined as:

P=TR-TC

Total Profit is maximum when TR-TC is maximum. Therefore, profit maximization

firms tries to maximize TR-TC.

Concepts and Techniques Unit 1

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