Economy

Chapter-1

1) What is an Economy?
A) Economy refers to the conditions under which goods are produced in a country and the manner
in which the people are gainfully employed.

B) The essential processes of an economy are production, Consumption and investment.

C) There are different ways of classifying economies…

1. Rich & Poor Economy

2. Socialistic Economy

3. Capitalistic or Mixed Economy

4. Developed & Underdeveloped Economy

5. Agricultural & Industrial Economy

6. Planned & Unplanned Economy etc…

Economy. . .

. . . The word economy comes from a Greek word for “one who manages a household.”

Society and Scarce Resources:

The management of society’s resources is important because resources are scarce.

Scarcity implies choice and choice implies cost.

Scarcity . . .

. . . Means that society has limited resources and therefore cannot produce all the goods and
services people wish to have.
 Economics
Chapter 2

Introduction to Economics

Basic Terminologies

 Production: conversion of inputs into outputs.

 Consumption: using of goods and services for the satisfaction of wants.
 Investment: using up goods (like tools & machinery) for further production.
 Exchange: refers to the sale and purchase of goods and services.
 Economic Activity: means the activity which is based on or related to the use of scarce resources
for the satisfaction of the human wants.
 Scarcity: Is a situation when demand for a good exceeds supply even at zero price.

Economic problem: a) scarce resources;

b) Alternative uses

Economics is the study of how society manages its scarce resources.

Origin of the term Economics

The term economics lies in the Greek word oikon and nomos, which mean ‘law of households’.

What is Economics?

 Economics is concerned with the allocative, decisions of individuals, Households, business

& other economic agents operating in the society & how the society as a whole allocate its
resources.
 Economics in the science which studies human behaviour as a relationship between ends &
scare means which have alternative uses.
 The Field of economics is divided into 2 broad fields:

 Micro Economics

 Macro Economics

Economists study. . .

How people make decisions.

How people interact with each other.

The forces and trends that affect the economy as a whole.

 Important Early Definitions
1. Wealth Definition

2. Welfare Definition

3. Scarcity Definition

Wealth Definition
(Adam Smith)

 “Economics enquires into the factors that determine wealth of the country and its
growth” --- Adam Smith
 Adam Smith emphasized the expansion and production of wealth

Welfare Definition
(Alfred Marshall)

 “For Economics, wealth is not an end in itself, but it is only a means to an end; the end
being the promotion of human welfare”.
 “Political economy or economics is the study of mankind in the ordinary business of life;
it examines that part of individual and social action which is most closely connected with
the attainment and with the use of the material requisites of well being”

Scarcity Definition
(Lionnel Robbins)

“Economics is the science which studies human behaviour as a relationship between ends and
scarce means which have alternative uses”.
 Chapter 3
We distinguish two types of Economics

Micro & Macro Economics

Micro economics can be defined as the study of how household and firm makes decisions and
how they are interact in specific markets.

Macro economics is the study of economy wide phenomena; It deals with the factors which
determine national output & employment, the general price level, total spending and saving in
the economy, total imports & exports and the demand for and the supply of money and other
financial assets.

Micro-economics and Macro-economics

 Broadly speaking, microeconomic analysis is individualistic, whereas macroeconomic

analysis is aggregative. Microeconomics deals with the part (individual) units while
macroeconomics deals with the whole (all units taken together) of the economy.

Definitions of Managerial Economics?

 Mc Nair and Meriam says “Managerial Economics is the use of economic modes of thought
to analyze business situation.”
 Brigham and Pappas says “Economic is the application of economic theory and
methodology to business administration practices.”
 Hague says “Managerial Economics is a fundamental academic subject which seeks to
understand and to analyze the problem of decision making.”

Other definitions

 Managerial economics is concerned with the application of economic concepts and

economics to the problems of formulating rational decision making - Mansfield
 Managerial economics applies the principals and methods of economics to analyze problems
faced by the management of a business, or other types of organizations and to help and to
help find solutions that advance the best interests of such organizations – Davis & Chang

How did it Emerge?

Three factors led to the emergence of Managerial Economics

 Growing complexity of business decision making due to changing market conditions and
business environment
  Consequent upon, the increasing use of economic logic, concepts, theories and tools of
economic analyses in the process of business decision making
 Rapid increase in demand for professionally trained managerial manpower

Why do manager need to know economics?

Business decisions taken under uncertainty and risk which arises due to

1. Behavior of market forces

2. Changing business environment

3. Emergence of competitors with highly competitive products

4. Government Policy

5. External influence on domestic on domestic market

6. Social and political changes

Phases of Decision making

1. Determining and defining the objective to be achieved

2. Collections and analysis of information regarding economic, social, political, and technological
environment and foreseeing the necessity and occasion for decision

3. Inventing, developing and analyzing possible course of action

4. Selecting a particular course of action from available alternatives

Characteristic features of Managerial Economics

 Concerned with decision making of economic theory.

 Goal oriented
 Normative (what ought to be) rather than positive. (what is, was & will be)
 Micro economic in nature.
 Conceptual & Metrical (help of quantitative techniques)
 Allocation of resources.
 Provide a link between decision science & traditional economics.
 Contents based on mainly theory of the firm.

Nature of managerial economics:

Features of managerial economics:

 Close to microeconomics: Concerned with finding solution for managerial problems.

  Operates against the backdrop of macroeconomics: It has to be aware of the limits set by the
macroeconomic conditions such as the government’s industrial policy.

 Normative Statement: It reflects people’s moral attitude and expressions are of what a team of
people ought to do.

 Perspective Action: Business Economics is Goal Oriented.

 Applied in Nature: Models are built to reflect the real life complex business situation and these
models are of immense help to decision-making.

 Offers scope to evaluate each alternative: Managerial Economics can decide which is the better
alternative to maximize profits of the firm.
 Interdisciplinary: The contents, tools and techniques of managerial economics, are drawn from
different subjects.
 Assumptions and limitation: Every concept is based on assumption and as such their validity is
not valid.

Scope of Managerial Economics

The scope of M.E. is narrower than that of Economic theory, as it includes both micro and macro,
and M.E. includes only a part of Micro Economics.

 M.E. concerned with only those aspects which are connected with the firm, and profit
theory in the distribution part.
 It is a new & developing concept, so it has no defined scope but its scope is increasing
day by day.
 The various aspects describe below represents the major areas in which manager have
to take decisions.
 So the subject matter of M.E. consists of applying economic principles & concepts in the
decision making by the management of the business firm.

M.E. deals with the following subjects:

 Demand & Supply management

 Profit Management

 Cost and Production Analysis

 Capital Management

 Advertising

 Markets

 Pricing decisions, policies & practices

  Resource Allocation

 Production

 Policy, Sales promotion & Market strategy

 Competition etc…..

Is ME a Positive or Normative Science?

 Positive Economics explains the economic phenomenon as what is, what was and what will
be.
 Normative Economics prescribes what it ought to be.
 Positive or Normative Science

Positive sciences simply describe while normative sciences prescribe.

Managerial economics is a blending of pure or positive science with applied or normative science. It is
positive when it is confined to statements about causes and effects and to functional relations of
economic variables. It is normative when it involves norms and standards, mixing them with cause-effect
analysis.

Areas of Managerial Economics

The main areas of managerial economics are:

 Demand Decision: The impact of change in prices, income level and prices of alternative
products/services are assessed and, accordingly, the decisions are taken to maximize profits.

 Input-Output decision: The cost of input in relation to output is studied to optimize profits. The
behaviour of cost at different levels of production is assessed here.

 Price-output Decision: Here production is ready and the task is to determine the price in
different market situations as perfect and imperfect markets ranging from monopoly to
oligopoly.

 Profit-related Decision: Here the techniques such as break-even analysis cost reduction and
control, and ratio analysis, to ascertain the level of profit.

 Investment Decision: This is also called capital budgeting decisions. These involve commitment
to large funds, which determine the fate of the firms.
 Economic forecasting and forward forecasting: It leads to forward planning. The firm operates
in an environment which is dominated by the external and internal factors.
 External Factors such as government policy, competition, etc.

Internal Factors such as policies and procedures relating to finance, people, market and
products.

Distinction between Micro and Macroeconomics

1. Difference in Nature

2. Difference in Methodology

3. Difference in economic variables

4. Difference in field of interest

5. Difference in outlook and scope

6. Demarcation in areas of study

Difference in Nature

1. Difference in nature: Microeconomics is the study of the behaviour of the individual units.
Macroeconomics is the study of the behaviour of the economy as a whole.

Methodology

2. Difference in methodology: Microeconomics is individualistic; whereas macroeconomics is

aggregative in its approach.

Economic variables

3. Difference in economic variables: Microeconomics is concerned with the behaviour of

microvariables or microquantities. Macroeconomics is concerned with the behaviour of
macrovariables or macroquantities. In short, microeconomics deals with the individual incomes
and output, whereas macroeconomics deals with the national income and national output.

Field of Interest

4. Difference in field of interest: Microeconomics primarily deals with the problems of pricing
and income distribution. Macroeconomics pertains to the problems of the size of national
income, economic growth and general price level.

Diff. In Outlook and Scope

5. Difference in outlook and scope: The concept of ‘industry’ in microeconomics is an aggregate

concept but it refers to all firms producing homogenous goods taken together. Macroeconomics
uses aggregates which relate to the entire economy or to a large sector of the economy.
Aggregate demand covers all market demands.
Demarcation in areas of study

6. Demarcation in areas of study: Theories of value and economic welfare are major areas in
microeconomics. Theories of Income and employment are core topics in macroeconomics.