MANAGERIAL ECONOMICS

By
DR. JONARDAN KONER
PROFESSOR
Dean - CAREER SERVICES, INTERNATIONAL AFFAIRS & ALUMNI RELATIONS

NICMAR UNIVERSITY, PUNE.

 INTRODUCTION
• Economics is the study of how economic agents or societies
choose to use scarce productive resources that have alternative
uses to satisfy wants which are unlimited and of varying degrees
of importance.
• The main concern of economics is economic problem: its
identification, description, explanation and solution.
• The source of any economic problem is scarcity.
• Scarcity of resources forces economic agents to choose among
alternatives.
• Therefore, economic problem can be said to be a problem of
choice and valuation of alternatives.
• The problem of choice arises because limited resources with
alternative uses are to be utilized to satisfy unlimited wants,
which are of varying degrees of importance.
 INTRODUCTION
• Scarcity is a relative concept.
• It can be define as excess demand, i.e., demand more than the
supply.
• For example, unemployment is essentially the scarcity of jobs.
Inflation is essentially scarcity of goods.
• Economics is essentially the study of logic, tools and techniques
of making optimum use of the available resources to achieve the
ends.
• Economics thus provides analytical tools and techniques that
managers need to achieve the goals of the organization they
manage.
• The job of any efficient manager is of economic one.
 INTRODUCTION
• Decision-making is the main job of management.
• Decision-making involves evaluating various alternatives and
choosing the best among them.
• For example, a marketing manager is to allocate his / her
advertising budget among various media in such a way so as to
maximize the reach.
• Managers are essentially practicing economists.
• In performing his/her functions, a manager has to take a
number of decisions in conformity with the goals of the firm.
• Many business decisions are taken under the condition of
uncertainty and risk.
 INTRODUCTION
• Uncertainty and risk arise mainly due to uncertain behavior of
the market forces, changing business environment, emergence of
complexity of the modern business world, external influence on
the domestic market, social and political changes in the country.
• The complexity of the modern business world adds complexity
to business decision-making.
• However, the degree of uncertainty and risk can be greatly
reduced if market conditions are predicted with a high degree of
reality.
• With the growing complexity of business environment, the
usefulness of economic theory as a tool of analysis and its
contribution to the process of decision-making has been widely
recognized.
 BRANCHES OF ECONOMICS
• MICROECONOMICS
• Adam Smith is the founder of the field of Microeconomics, the
branch of economics which today is considered with the
behavior of individual entities such as markets, firms and
households.
• In ‘The Wealth of Nations’ (1776), Smith considered how
individual prices are set, studied the determination of price of
land, labor, and capital, and enquired into the strengths and
weakness of the market mechanism.
• He identified the most important efficiency properties of
markets and saw that economic benefit comes from the self-
interested actions of individuals. These remain important issues
today also.
 BRANCHES OF ECONOMICS
• MACROECONOMICS
• Macroeconomics started its journey when John Maynard
Keynes published his revolutionary ‘General Theory of
Employment, Interest and Money’ (1936).
• It studies of the overall performance of the economy.
• At the time, England and USA were still stuck in the Great
Depression of the 1930s, with over one-quarter of the American
labor force unemployed.
• In his new theory, Keynes developed an analysis of what causes
business cycles, with alternative spells of high unemployment and
high inflation.
• Now, macroeconomics examines a wide variety of areas, such as
how total investment and consumption are determined, how
central banks manage money and interest rates, what causes
international financial crisis, and why some nations grow rapidly
while others stagnate.
 BASIC CONCEPTS
• Every economy faces three fundamental questions in its
functioning. These are:
• What goods and services are to produce and in what quantity?
• How to produce those goods and services? i.e., how the scarce
resources are optimally allocated?
• How the goods and services so produced are distributed among
the households?
• The nature of an economic system depends on how the above
questions are resolved and who coordinates the decisions of
millions of economic agents.
• At the two extremes are the Market and Command Economies.
• In between lies the widely prevalent Mixed Economy, which is a
mixed of command and Market Economies.
 TYPES OF ECONOMY
• Market Economy:
• In a market economy, demand determines what goods and services
are to be produced and how much of each good and services to be
produced.
• Consumers are assumed to act in a rational manner so as to
maximize their economic welfare.
• They spend their income on various products in such a way so as
to maximize their economic welfare.
• Demand as given condition, the firms decide how to produce the
required goods and services in a most efficient manner so as to
maximize their profits.
• This results in optimum allocation of scarce resources.
• After that, the firms finalized that how the goods and services are
distributed for resolving the ownership pattern of factor inputs and
factor prices.
 TYPES OF ECONOMY
• Command Economy:
• A command mechanism is a method of determining what, how,
when, where and for whom goods and services are produced,
using a hierarchical organization structure in which people carry
out the instructions given to them.
• The best example of a hierarchical organization structure is the
military in India.
• Commanders make decisions requiring actions that are passed
down a chain of command.
• Soldiers and mariners on the front line take the actions they are
ordered.
• The examples of command economies are the former Soviet
Union and the former communist nations of Eastern Europe.
• A command economy differs from a market economy in two
important ways.
 TYPES OF ECONOMY
• Firstly, in a command economy the state owns all the
productive resources, like land, factories, financial institutions,
retail stores, and the bulk of the housing stock.
• Government enterprises and government ownership of resources
are the rule rather than the exception in a command economy.
• Secondly, in a command economy, authoritarian methods are
used to determined resource use and prices.
• A centrally planned economy is one in which politically
appointed committees plan production by setting target outputs
for factory and enterprise managers are manage the economy to
achieve political objectives.
 TYPES OF ECONOMY
• Mixed Economy:
• Most of the real world economies are mixed economy.
• It is an economy that follows both the market and command
mechanism.
• In most of the modern countries, governments control many
resources and criteria other than personal gain and business
profit are used to decide how resources will be employed.
• Most of modern nations have a government firms as well as
private enterprises to provide goods and services for the country.
• In such a country, government provides roads, defense, pensions
and sometimes education.
• In modern mixed economies, governments intervene the markets
to control prices and correct the shortcomings of a system in
which prices and the pursuit of personal gain influence resource
use and incomes.
 BASIC CONCEPTS AND PRINCIPLES
• MARGINALISM
• The root cause of all economic problems is scarcity. So, all
should be careful about the utilization of each and every
additional unit of resources.
• In order to decide whether to use an additional unit of
resource you need to know the additional output expected
there from.
• Economists use the term marginal for such additional
magnitude of output.
• Marginalism concept will help to know the additional output
expected from an additional unit of resource.
• Therefore, marginal output of labor is the output produced by
the last unit of labor.
 BASIC CONCEPTS AND PRINCIPLES
• OPPORTUNITY COST
• Economic decision is choosing the best alternative among
available alternatives.
• Before choosing best alternative you rank them all based on
their priority and probable return.
• This choice implies sacrificing the other alternatives.
• The cost of this choice can be evaluated in terms of the
sacrificed alternatives.
• If the best alternative was not chosen then you could have
chosen the second best alternative.
• So, the cost of this particular best choice is the benefit of the
next best alternative foregone.
• This is called Opportunity Cost.