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  1. 1. Introduction of Managerial Economics
  2. 2. Introduction• Managerial economics applies economic theory and methods to business and administrative decision making. Managerial economics prescribes rules for improving managerial decisions. Managerial economics also helps managers recognize how economic forces affect organizations and describes the economic consequences of managerial behavior. It links traditional economics with the decision sciences to develop vital tools for managerial decision making.• Managerial economics identifies ways to efficiently achieve goals. For example, suppose a small business seeks rapid growth to reach a size that permits efficient use of national media advertising. Managerial economics can be used to identify pricing and production strategies to help meet this short-run objective quickly and effectively.
  3. 3. DEFINITION OF ECONOMICS• Robbins has defined economics as, “The science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” This definition seems to emphasis on three basic issues— ends, scarce means, and alternative applications
  4. 4. Cont…• According to Samuelson and Nordhaus (1998);• “Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.”• “Behind this definition are two key ideas in economics: that goods are scarce and that society must use its resources efficiently. Indeed, economics is an important subject because of the fact of scarcity and the desire of scarcity”.
  5. 5. SCOPE OF ECONOMICS• The horizon of economics is gradually expanding. It is no more a branch of knowledge that deals only with the production and consumption. However, the basic thrust still remains on using the available resources efficiently while giving the maximum satisfaction or welfare to the people on a sustainable basis. Given this, we can list some of the major branches of economics as under:• 1. Microeconomics: This is considered to be the basic economics. Microeconomics may be defined as that branch of economic analysis which studies the economic behavior of the individual unit, may be a person, a particular household, or a particular firm. It is a study of one particular unit rather than all the units combined together. The microeconomics is also described as price and value theory, the theory of the household, the firm and the industry. Most production and welfare theories are of the microeconomics variety.
  6. 6. • 2. Macroeconomics: Macroeconomics may be defined as that branch of economic analysis which studies behaviour of not one particular unit, but of all the units combined together. Macroeconomics is a study in aggregates. Hence it is often called Aggregative Economics. It is, indeed, a realistic method of economic analysis, though it is complicated and involves the use of higher mathematics. In this method, we study how the equilibrium in the economy is reached consequent upon changes in the macro-variables and aggregates.
  7. 7. • 3. International economics: As the countries of the modern world are realising the significance of trade with other countries, the role of international economics is getting more and more significant nowadays.• 4. Public finance: The great depression of the 1930s led to the realization of the role of government in stabilizing the economic growth besides other objectives like growth, redistribution of income, etc. Therefore, a full branch of economics known as Public Finance or the fiscal economics has emerged to analyze the role of government in the economy. Earlier the classical economists believed in the laissez faire economy ruling out role of the government in economic issues.
  8. 8. • 5. Development economics: As after the second world war many countries got freedom from the colonial rule, their economics required different treatment for growth and development. This branch developed as development economics.• 6. Health economics: A new realisation has emerged from human development for economic growth. Therefore, branches like health economics are gaining momentum. Similarly, educational economics is also coming up.• 7. Environmental economics: Unchecked emphasis on economic growth without caring for natural resources and ecological balance, now, economic growth is facing a new challenge from the environmental side. Therefore, Environmental Economics has emerged as one of the major branches of economics that is considered significant for sustainable development.
  9. 9. • 8. Urban and rural economics: Role of location is quite important for economic attainments. There is also much debate on urban-rural divide. Therefore, economists have realised that there should be specific focus on urban areas and rural areas. Therefore, there is expansion of branches like urban economics and rural economics. Similarly, regional economics is also being emphasised to meet the• challenge of geographical inequalities. There are many other branches of economics that form the scope of economics. There are welfare economics, monetary economics, energy economics, transport economics, demography, labour economics, agricultural economics, gender economics, economic planning, economics of infrastructure, etc.
  10. 10. MANAGERIAL ECONOMICS AND TRADITIONAL ECNOMICS:• Managerial is usually described as the economics applied in managerial decision making. It is that branch of economics which bridges the gap between pure economics theory and managerial practice. But there are certain differences between managerial economics and traditional economics. The following table gives the differences between managerial economics and traditional economics.
  11. 11. Traditional Economics Managerial EconomicsTraditional economics is both Managerial economics is onlymicroecomics and macroeconomics in microeconomic in naturenatureTraditional economic as a wide scope. It Managerial economics has a limiteddeals with each and every aspect of the scope. It is concerned with decisionfirm. making and economic theories that guide the managerial decision-making.Traditional economics is both normative Managerial economics is a normativeand positive sciences science.Traditional economics is concerned with Managerial economics deals withtheoretical aspects of the firm. practical aspects of the firm.Traditional economics consider only the Managerial economics considers botheconomic aspects of a problem while economic and non economic aspects of adecision making. problem while decision-making.Traditional economics deals with both Managerial economics is concerned withmicro and macro of a firm decision making of a firm.
  12. 12. Positive Economics• Positive economics can be described as “what is, what was, and what probably will be” economics. Statements are based on economic theory rather than raw emotion. Often these statements will be expressed in the form of a hypothesis that can be analysed and evaluated.• Examples:• A rise in interest rates will cause a rise in the exchange rate and an increase in the demand for imported products• Lower taxes may stimulate an increase in the active labour supply• A national minimum wage is likely to cause a contraction in the demand for low-skilled labour• The UK economy now has lower unemployment than Germany• The American stock market has boomed in recent years
  13. 13. Normative EconomicsNormative economics is based on the normative statements. Normative statements are concerned with what are to be? In this case, economics is not concerned with real life experiences rather, it is concerned with, how things should operate. As against the positive economics, the normative economics can not be challenged based upon any fact.• Examples:• The decision to grant independence for the Bank of England is unwise and should be reversed• A national minimum wage is totally undesirable as it does not help the poor and causes higher unemployment and inflation• The national minimum wage should be increased to �5 as a method of reducing poverty• Protectionism is the only proper way to improve the living standards of workers whose jobs are threatened by cheap imports
  14. 14. Opportunity Cost• Scarcity of resources is one of the more basic concepts of economics. Scarcity necessitates trade-offs, and trade-offs result in an opportunity cost. While the cost of a good or service often is thought of in monetary terms, the opportunity cost of a decision is based on what must be given up (the next best alternative) as a result of the decision. Any decision that involves a choice between two or more options has an opportunity cost.• Opportunity cost contrasts to accounting cost in that accounting costs do not consider forgone opportunities. Consider the case of an MBA student who pays $30,000 per year in tuition and fees at a private university. For a two-year MBA program, the cost of tuition and fees would be $60,000. This is the monetary cost of the education. However, when making the decision to go back to school, one should consider the opportunity cost, which includes the income that the student would have earned if the alternative decision of remaining in his or her job had been made. If the student had been earning $50,000 per year and was expecting a 10% salary increase in one year, $105,000 in salary would be foregone as a result of the decision to return to school. Adding this amount to the educational expenses results in a cost of $165,000 for the degree.
  15. 15. Marginal Analysis• An examination of the additional benefits of an activity compared to the additional costs of that activity. Companies use marginal analysis as a decision-making tool to help them maximize their profits. Individuals unconsciously use marginal analysis to make a host of everyday decisions.• Marginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables.
  16. 16. Economic Model• A model is a simple description of a system which used for explaining how something works or calculating what might happen, etc: a mathematical model for determining the safe level of pesticides in food, a realistic model of evolution• An econometric model is a set of equations, representing the behaviour of the economy, that has been estimated using historical data.
  17. 17. Static and Dynamic Econnomics• Dynamic Economics:-• Changes in an economic system over time, particularly those reflected in the behavior of markets, businesses, and the general economy.
  18. 18. Cont…• Static Economics:-• In economic static mean the studies focus only on particular period of time. It is similar to taking a photo when you press the button for a shot then the photo is just at a particular point of time. In economic most paper is a static analysis, for instance, we say the market is in equilibrium when demand and supply equate one another, which is graphically represent by the intersection point of demand and supply curve. This is a static analysis since we just only see the picture at a point of time.