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Shaila Srivastava
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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.
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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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