MN 3042 - Introduction to Economics -1

7/27/2019 MN 3042 - Introduction to Economics -1

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MN 3042 Business Economics and Financial

Accounting

Objectives of the Lecture

To explain the syllabus and main text books,

assessment, etc.

To give basic introduction to business

economics and its various methods of

analysis and tools.

To explain the nature of market mechanism

in terms of demand, supply and elasticity

concepts.

To explain the importance of business

economics for practicing engineers.


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Learning Objectives

To provide students withknowledge and understanding of

basic micro and macro economic

principles and tools of analysis.

To provide conceptual and

regulatory framework of financial

and cost accounting for

operational level practicing

engineers.


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Learning Outcomes

Understanding the basic micro and

macro economic concepts and

appreciation of links between

economy and technology.Understanding in financial, cost and

management accounting basic

concepts and application of theseinto modern business and

interpretation of main accounting

statements.


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Syllabus

Business Economics (Economics andthe economy, Elementary theory of

Economics, Tools of economic analysis,

Demand supply and the market, Theory of

the firm, Different types of firms,

Motivation of firms, Theory of supply,

Costs and production, Introduction to

macro economics and national incomeaccounting.)


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Syllabus

Financial and Cost Accounting (Basicaccounting concepts, Trial balance, Profits

and loss account, Balance sheet, Cash

flow statement, Interpretation of accounts,Cost concepts and terminology, Analysis

and interpretation of costs, Allocation of

overheads, Marginal costing, CPVanalysis, Standard costs and Stock

control, etc.


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Text Books

Begg.S et.al (2004), Economics, 4th ed.,

McGraw-Hill.

Worthington.I (2004), Economics for

Business: Blending Theory and Practice,

Financial Times/Prentice

Mclanely.E (1999), Accounting, An

introduction, Prentice Hall.

Glautier. E et.al (1997) Accounting Theory

and Practice, 6th Ed.


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Assessment

40% Continuous Assessment.

60% Final written examination.


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What is Economics

Generally economics teach basic rules andprinciples of business: core of the business.

Economics is an approach to decision makingand it helps to draw correct conclusions.

All the business subjects origin fromEconomics and therefore oldest businesssubject is the Economics.

In some markets, highly paid professionals arethe Economists (Ex. USA). Three types ofEconomists: Business Economists, Public

Economists and Academic Economists.


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Ancient and medieval

economic thinking

(Mainly religious economic ideas: private

property, price of a good, price of the

capital).

Mercantalism (Traders: importance of trade and industry

for the development).

Physiocrats(Importance of agriculture to the economic

development).

Classical

Neo-classical

Marxian

(free market, price theory and freedom).

(development of micro economics through

marginal revolution).

(labour exploitation, capital accumulation,

falling of profits ratio, reserve labour army,

end of capitalism and socialist and

communist society).Austrian

Walrasian

German and US basedevolutionary

Institutional

American institutional

Keynesian

Monetary

Rational and adaptive

expectation

(general equilibrium).

(importance of non-

economic factors).

(importance of institutions,property rights and capacitybuilding).(problems in American

economy).

(importance of fiscal policy).

(importance of monetary

policy).(rational behaviour and

accumulated knowledge).

New classical

economics

(revamping of Keynesian

and classical economics to

suit with the contemporary

economic scenes.) NewKeynesian: market never

clear fully and try to explains

why market fails.

Kallskian and

structural economics

(structural features in the

economy).

(methodology and financial economics).

Historical Development of Economics

New Keynesian

economics

(revamping Keynesianeconomics by giving

micro background.)


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Definition for Economics

Wealth related definitions

Welfare related definitions

Scarcity and wants related

definitions

Modern definitions


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Wealth related definitions

Adam Smith An inquiry into nature and causes of thewealth of nations.

David Ricardo To determine the laws which regulates

distribution of the wealth generated.

J.B. Say Economics is a science which treats ofwealth.

F.A. Walker Economics is the name of that part of the

knowledge which relates to wealth.

In overall these classical economists consider the

problems of production, distribution and exchange

of wealth as the main issue in economics.


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Welfare related definitions

A. Marshall Economics is the study of

mankind in the ordinary business of life

and it examines that how he acquires and

spends wealth for material welfare ofwhole nation.

E. Cannon Economics is an explanation of

the general causes on which materialwelfare of human beings depends.


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Scarcity and wants related definitions

L. Robbinson Economics study problems arise due toscarcity of resources.

Scarcity emerge due to limited resources and unlimitedwants. Therefore, economics is the study of how peoplechoose to allocate limited resources to satisfy theirunlimited wants.

Wicksteed Economics is about study of without wastagehow resources should be utilized by community throughproper regulation and administration.

Stiglar.J - Economics study principles of governance ofallocation of scare resources among the competing

ends.Scitovosky Economics is a social science which consider

administration of scare resources.

Enrich Roll Main issue in economics is choice related

ones and it occurs due to limited resources and theiralternative uses.


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Modern definitions

H. Smith Economics is the study of how ina civilized society obtains the share of what

other people have produced (distribution)

and how the total product of society changes(growth) and determined (factors behind

determination of growth).

Jacob Viner Economics is all about what

economists do.


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Main Types of EconomicsPositive Economics (Explain what is actually

happening in a economy)Normative Economics (Explain what should happenin a economy based on value judgments)

Micro Economics (Study of small economic unitssuch as individuals, house holds, firms andindustry)

Macro Economics (Study of board aggregates of theoverall economy)

Sub disciplines and branches (development,history, managerial, business, agricultural, health,financial, transport, technology, education,information.etc)


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Methodology in EconomicsDeductive method

Identify the problem

Define technical terms and relevant variables

Making assumptions

Process of logical deduction to deriveimplications

Formulation of hypothesis

Making predictions and testing them

Check predictions are in agreements/conflictwith facts

Modify assumptions and again follow theprocedure or theory is discarded in favor ofsuperior alternative


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Inductive methodIdentify the problem

Data collection and some preliminary thinking

Data processing to find out how they are related

Develop a theory and refine it through statisticalmethods

Make predictions and test them

Check predictions are in agreements/conflictwith facts

Collect more data and again follow theprocedure or theory is discarded in favor ofsuperior alternative


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Types of Economic Analysis

Partial Economic Analysis (keeping allother factors constant except one factor).

General Economic Analysis (all the factorsare changing together).

Static analysis (analysis based on onepoint in time).

Dynamic analysis (analysis based on

different point in time in continuousmanner).

Comparative static analysis (analysis

based on comparing various static points).


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The Rational Decision-Making Process in

Economics

1. Recognize a decision problem.

2. Define the goals or objectives.

3. Collect all the relevant information.4. Identify a set of feasible decision

alternatives.

5. Select the decision criterion to use.6. Select the best alternative.


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Basic Economic Concepts

Scarcity

o The limitation of resources (relatively fixed in supply, alternative

uses, technology, development stage, etc) and unlimitation of

wants (human behaviour, age, culture, socio-economic situation,

advertisement, openness of the economy, etc) are the main reasons

for this scarcity. Scarcity leads to choice and systems of allocation

(market, government and mixed).

o Scarcity exists when people wants more of an items than isavailable. If there is enough of a good available at a zero price to

satisfy wants, the good is said to be a free good. If there is not

enough of a good available at a non-zero price to satisfy wants, the

good is said to be a economic good.


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1) What to produce: what goods and services and what quantity are to

be produced.2) How to produced: Selection of production

technique capital or labour intensive. 3) For whom to produced:

distribution among the different income groups, regions and socialgroups. Other economics problems (sustainable development,

environmental protection, economic growth and development,

corruption and clean government, democracy .. etc).

Unlimited Wants

Basic Economic Problems

Limited

Resources


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Economic Systems

Economic systems differs according the ways in whichthey answered for these basic economic problems.

1) Free market or capitalist economy (price mechanism).

2) Socialist economy (government and central board).

3) Mixed economy (both government and pricemechanism).

4) Command economy (Military or feudal mechanism).


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Factors of Production (productive resources)

Primary factors (not the result of the economic process)

1) Land (free gifts of nature including space and

natural resources. Rents are the earnings. Features:

fixed in supply, no cost in production for society,earn different rents for different lands).

2) Labour (physical labour and intellectual services,

earn wages/salary).


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Secondary factors (results of economic efforts)

3) Capital (stock of physical wealth of nation, fixed or

variable, earn interests).

4) Entrepreneurship (organize factors of production toproduce final products and risk bearer of business,

and earn profits).

5) Knowledge and technology.

Attitude, political, social and environmental

systems.


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Opportunity Cost

Opportunity cost occurs due to: limited resources and unlimited

wants. This create scarcity which leads to choice. We can nothave everything what we want. Therefore, if we want to have one

more we have to sacrifice something.

A sacrificed best opportunity is called an opportunity cost.

A opportunity cost of a good is the quantity of other goods

sacrificed to obtain another unit of that good.

A opportunity cost of particularaction or activity is the loss of the

opportunity to pursue the most attractive alternative given thesame time and resources

A opportunity cost forfree good is zero.

A opportunity cost foreconomic good is positive.

Production Possibility Frontier Curve (G hi l t ti


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15138

0 8 12 15 Y

XUnattainable

Full employment point Inefficient

This shows maximum combinations of output that the economy can

produce using all the available resources. This shows trade-offs:

more of one commodity less of other. Points above the frontier areunattainable, below in-efficient and on maximum orfull employment

This curve can use to show in technology progress (with various

trends) and economic growth.

Opportunity cost can be explained by using different shape of curves suchas increasing, decreasing and constant.

Production Possibility Frontier Curve (Graphical representationof opportunity cost)

This country can

Produce by using

all the resources X 15Or Y 15.

X = 13, Y = 8, (sacrifice

Y 7 to get X 13)

X = 8, Y = 12

(sacrifice X 7

to get Y 12)


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Marginal Principle

This explains additional benefits derivedfrom a particular decision and compareswith them additional cost incurred.

Widely used in production, revenue, profitsmaximization, investment decisions and soon.

MPl = d(TP)/d(L), MPk = d(TP)/d(K)MR = d(TR)/d(q), MC = d (TC)/d(q)


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Functions of EconomistsAnalysis on production, exchange/distribution,consumption and investment.

Supply, demand and elasticity estimation andforecast.

Preparation of business plans and conduct andanalysis of market surveys.

Analysis of issues related to production, cost,revenues and profits.

Analysis of competition and market structureanalysis.

Analysis of issues related to firm and industry.

Investment appraisal and feasibility studies.Advising on pricing, marketing and distribution.

Economic research and modeling.

Briefing domestic and global economic issues.

Economic Policy advisingetc.


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Tools Used in Economics

Variables and Attributes: Variable is a quantity ornumerical characteristic of data which can be adiscrete or continuous. Attributes are the qualitativecharacteristics of data.

Exogenous and endogenous variables: Exogenous(autonomous) variables are taken from the outsidethe system and Indogenous variables are emergedwithin the system.

Functions: Economic variables are interrelated andinterdependent therefore we are using variousfunctional forms: relationship between independent

and dependent variable is a function.Models (statistical, mathematical, descriptive andeconometrics, etc). These models are based onassumptions: Ceteris Paribus other things beingequal, Rational behavior specific and well defined

motivation, Structural and Institutionalassumptionsetc.


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Tools Used in Economics

Nominal (market price) andReal (deflated) prices.

Data (time series: a sequence of measurement of avariable at different point of time, cross section: ameasurement of a variable at one point of time,

panel: a measurement of same group in differentpoint of time, pooled data: mixture).

Statistics - Data collection, presentation, analysisand interpretation (descriptive - central tendency or

disperse and inference generalization of sampleresults to population).


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What is Business/Managerial Economics

Purpose of studying economics by engineers and managers isto learn how not to be deceived by economists.

Two Definitions on Managerial Economics: Narrow (Micro) andboard (Micro, macro, international and other related subjects).

Generally, managerial economics applies economic theory andmethodology to business and administrative decision making.

It provides a systematic and logical way of analyzing businessdecisions that focuses on the economic forces that shape bothday to day decisions and long-term planning decisions.Especially, it helps managers to understand real-world businessproblems by using simplifying assumptions to abstract complexreality into manageable simplicity.


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Text Books Definitions

Managerial Economics is the use of economic modes of

thought to analyze business situationManagerial Economics is concerned with the application of

econom ic pr inc ip les and methodolog ies to the decis ion

making p rocess w ith in the fi rm o r organizat ion under the

conditions of uncertaintyManagerial Economics is the integration of economic

theory w ith business pract ice for the pu rpose of fac i l i tat ing

decision making and forward planning by management

Managerial Econom ics is the appl icat ion of econom ic

theory and analys is to p ract ices of business f i rms and other

institutions

The Nature of Managerial/Business Economics


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The Nature of Managerial/Business Economics

Business Management Decisions

Product, price and output

Make, buy, sell and investment

Production technique Inventory level/technology

Advertising and financing

Labour decisions/State

regulations

Economics

Micro Economics

Meso Economics

Macro Economics International

Economics

Decision Sciences

Econometrics

Statistics

Mathematics

Game theory

Forecasting Programming

Managerial Economics

Use of economics, business

management and decisionsciences to solve managerial

problems

Solutions to the managerial problems


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Economics

Decision Science

Business Management

Managerial Economics

Managerial/Business Economics


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Case Study Method in Managerial Economics

Lecture and discussion oriented classes are

provided students with information aboutconcepts, practices and theories. It is a listening

and absorbing information.

Cases oriented classes give students an

opportunity to use concepts, practices and

theories learnt in class. It is a participative and

Learning by doing method.

Your responsibility: Active participation,

interaction, critical evaluation and effective

communication.


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What is the Case

A case is a factual description of a situation involving amanagerial problem or issue that requires a solution. It

describes various conditions and circumstances facing an

organization at a particular time.

Case in students Perspective A short or long story or

narrative and some information about an enterprise, the

external environment in which it conducts its business, and

perhaps some details about its internal operations or somepractical economic problem.


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Case analysis is a test of analysis rather test of

comprehension. Therefore, students need a good

training on how to construct good cases, how to

analyze them and how to use them in study, research

and learning process.

A case study is an empirical enquiry that investigates acontemporary phenomenon within its real life context,

especially when the boundaries between phenomena

and context are not clearly evident. Managerial

economics uses and build many cases as a learningand research tools.

Importance of Cases


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Importance of Cases

Helps to improve ability of assessing the situations.Improve the ability of organizing and sorting out key

information. Improve the ability of forming right questions.

Improve the capability of defining opportunities and

problems.

Helps to improve identification and evaluation ofalternative courses of actions.

Improve ability of interpretation of data.

Improve evaluation ability of results of past strategies.

Improve ability of developing and defending new

strategies.

Interaction, training to deals with uncertainty, ability to

respond to criticism and to evaluate others works.


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Case is the best method to study the complex

economics problems in natural setting and has very

long history with academia.Different subjects adopted in different times.

University education adopted this methods as

teaching, research and learning model in late 19th

century. First used in Harvard Law school, and later

Harvard Business School. Today, it is the main

research teaching and learning model in many

business schools.


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Key Steps to Effective Case Analysis (No universal method)

Familiarization (grasp of the study)

Situation Study (Understanding the operational

circumstances of business and its environment)

Arriving at Core Problem (identification of main

problem)

Analysis and Inferences (Synthesis and interpretation)

List of Recommendation (theoretically sound andjustifiable policies)

Presentation of Case Report (Report should be in

professional setting)


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Criticisms about Economics

Economists do not agree each other on

any single economic issue.

Modeling/abstraction, assumptions and

theory building are useless.

Business or economy never behave

according to economics explanations.

Hard to apply micro economics

concepts for business, etc


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Questions for Discussion

Define economics according to your own

understanding.Explain micro economics methodology.

Explain an importance of scarcity concept ineconomics.

Distinguish between opportunity cost andmarginal principle.

Why the land and labor are considered asprimary factors of production.

Explain the main features of a mixed economy.

Extra Readings


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Extra Readings

First and Second Chapters

McGuigan.R, Moyer.C and Harris.B (2002), Managerial Economics, Applications,

Strategy and Tactics.


Worthington.I, Britton.C and Reese. A (2001),Economics forBusiness:Blending

Theory and Practice,ISBN: 0273632450, Publisher: Financial Times/Prentice Hall

First and Second ChaptersBegg. D, Fischer.A and Dornbush.R (1994), Economics,

McGraw-Hill

First Chapter

Nellis.G and Parker.D (1997), The Essence of Business Economics,Prentice Hall


Ferguson.R, Ferguson.J and Rothchild.R (1993), Business

MN 3042 - Introduction to Economics -1

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