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  • 1. INTRODUCTION TO ECONOMICS Some economic terms 1. Wealth 2. Production of Wealth 3. Distribution of Wealth 4. End 5. Means 6. Material requisites 7. Wellbeing 8. Human behaviour 9. Ends & Scarce Means 10. Alternative uses 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”. What is Managerial Economics Managerial economics pertains to the overlapping area of economics along with the tools of decision sciences such as mathematical economics, statistics and econometrics as applied to business management problems.
  • 2. “Managerial economics is a science which studies the economic aspects of behaviour of the firm as an enterprise, and helps to allocate scarce resources to their alternative uses in such a manner as to optimize the firm’s ultimate objective, as an organization and a social institution, under conditions of the imperfect knowledge, risk and uncertainty. It provides principles, methods, and techniques of analysis of economic behaviour and at the same time prescribes ways and means to optimize economic efficiency” Is ME a Positive or Normative Science? ► Positive Economics explains the economic phonomenon as What is, what was and what will be. ► Normative Ecnomics prescribes what it ought to be. 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. 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. Distinction between Micro and Macroeconomics ► 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. ► 2. Difference in methodology: Microeconomics is individualistic; whereas macroeconomics is aggregative in its approach. ► 3. Difference in economic variables: Microeconomics is concerned with the behaviour of microvariables or microquantities.. Macroeconomics is concerned with the behaviour of macrovariables and macroquantities. In short, microeconomics deals with the individual incomes and output, whereas macroeconomics deals with the national income and national output. ► 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. ► 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.
  • 3. ► 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. THREE MAJOR FIELDS OF ECONOMICS Microeconomics Pricing Distribution Welfare (Theory of Value) (Factor Pricing) ( Welfare Economics) Theory Theory Theory General Theories of of of Theory of of Demand Production Pricing Distribution Rent Wages Interest Profit PRICING ► Quantity of resources in an economy is given. ► Allocation of resources is dependent on relative price & profitability of diff. Goods ► To explain allocation, microeconomics brings in price theory. Theory of Pricing (Value) Price Theory consists of ► Theory of demand or the analysis of consumer behaviour. ► Theory of production and cost or the analysis of producer behaviour. ► Theory of product pricing or price determination under different market structures.
  • 4. Theory of Distribution ► This theory is concerned with pricing of various factors of production ► -Land, Labour, Capital & Enterprise. Rewards of ► Land – Rent ► Labour – Wages ► Capital – Interest ► Enterprise – Profits ► Thus, Theory of Distribution deals with General Theory of Distribution as well as those dealing with factors of production. Welfare Economics Along with individual economic welfare, welfare economics is also concerned with social welfare, which is based on overall economic efficiency of the system. When maximum individual wants are satisfied at the best possible optimum level by a production pattern through efficient allocation of resources, overall economic efficiency or ‘Pareto optimality’ condition is reached. Such a situation can raise the standard of living of the population and maximize social welfare. Important Uses of Microeconomics ► 1. It explains price determination and the allocation of resources. ► 2. It has direct relevance in business decision-making. ► 3. It serves as a guide for business’ production planning. ► 4. It serves as a basis for prediction. ► 5. It teaches the art of economizing. ► 6. It is useful in determination of economic policies of the Government. ► 7. It serves as the basis for welfare economics. ► 8. It explains the phenomena of International Trade. Limitations of Microeconomics ► 1. Most of the micro-economic theories are abstract. ► 2. Most of the microeconomic theories are static – based on ceteris paribus, i.e. “other things being equal”. ► 3. Microeconomics unrealistically assumes ‘laissez-faire’ policy and pure capitalism. ► 4. Microeconomics studies only parts and not the whole of the economic system. It cannot explain the functioning of the economy at large. ► 5. By assuming independence of wants and production in the system, microeconomics has failed to consider their ‘dependent effect’ on economic welfare. ► 6. Microeconomics misleads when one tries to generalize from the individual behaviour. ► 7. Microeconomics in dealing with macroeconomic system unrealistically assumes full employment.
  • 5. Importance of Macroeconomics 1. It explains the working of the economic system as a whole. 2. It examines the aggregate behaviour of the macroeconomic entities like firms, households and the government. 3. Its knowedge is indispensable for the policy-makers for formulating macro- economic policies such as monetary policy, fiscal policy, industrial policy, exchange control, income policy, etc. 4. It is very useful to the planner for preparing economic plans for the country’s development. 5. It is helpful in international comparison. For example, microeconomic data like national income, consumption, saving-income ratio, etc. are required for a comparative study of diferent countries. Limitations of Macroeconomics 1. It ignores, individual behaviour altogether. 2. It has a tendency to excessive generalisation. Thus, analysing in aggregate terms, it pays least atttention to the differences involved in the constituents 3. It is not easy to get correct and complete mesures of economic aggregates. Thus, macroeconomic analysis lacks precision in actual practice. 4. Macroeconomic predictions are not fully reliable when they are based on incomplete information or inaccurate measures. National income, price index number etc. are only rough indicators. 5. Often macro level policies may not produce the same results at macro levels. How does Managerial Economists help the Manager in decision making and forward planning? ► A Managerial economist in a business firm may carry on a wide range of duties, such as: ► Demand estimation and forecasting. ► Preparation of business forecasts; to provide forecasts of changes in costs and business conditions based on market research and policy analysis. ► Analysis of the market survey to determine the nature and extent of competition. ► Analysing the issues and problems of the concerned industry. ► Assisting the business planning process of the firm. ► Discovering new and possible fields of business endeavour and its cost-benefit analysis as well as feasibility studies. ► Advising on pricing, investment and capital budgeting policies. ► Evaluation of capital budgets. ► Building micro and macro economic models of particular aspects of the firm’s activities that are useful in solving specific business problems. Most models may be prediction oriented. ► Directing economic research activity. ► Briefing the management on current domestic and global economic issues and challenges.
  • 6. BASIC FUNCTIONS USED IN COMMERCE AND ECONOMICS • 1. Cost Function • 2. Demand Function • 3. Revenue Function • 4. Profit Function • 5. Break-even Analysis • 6. Average amd Marginal Functions • 7. Average and Marginal Cost • 8. Average and Marginal Revenues • 9. Maximisation of Total Revenues • 10.Maximisation of Total Profit • 11. Minimization of Average Cost • 12. Determination of Cost Function & Average Cost Function • 13. Determination of Revenue Function and • Demand Function from Marginal Revenue Function. CONSTANT AND VARIABLE A quantity which does not change is called a constant and a quantity which changes is called a variable. Variable & Constant • A variable is something that can take on different values. • Endogenous variables - originating from within. • Exogenous variables - originating from without. • A constant is a magnitude that does not change (opposite of a variable).(Givens) e.g. a in ax. Integers • Positive Integers – • Whole numbers 1, 2, 3, 4, 5… • Negative Integers -1, -2, -3, -4, -5 …. • Together with number (0) which is neither – nor + , make up set of all integers. Fractions That which is not completyely whole. • The values which fall between the integers are called fractions. • e.g. ⅓, ⅔, ½, ⅝, ⅞ …. and -⅝, -⅜, -⅔, -½ ….make up set of all fractions.
  • 7. Rational numbers & Irrational numbers Those numbers which can be expressed as a ratio. (ratio-nal) Set of all integers and set of all fractions make up set of all ratio-nal numbers. Irrational numbers are those which fall between rational numbers and integers. REAL NUMBERS • Thus Integers, Fractions, Irrational and rational numbers all put together form a set of “real numbers”. Imaginary numbers There are also imaginary numbers such as square-root of negative numbers. Function • Function (f) – is the action of associating one thing with another. In y = f(x), the functional notation “f” means a rule by which the set ‘x’ is converted or transformed into set ‘y’. • The function converts x into y. f : x → y • In y = f(x), • The domain of f = all permissible values x can take. • all the y values into which x values are mapped is called the range of f. • or set of all values which the ‘y’ variable will take is called the range of ‘f’. Constant function y= f(x) = 7 OR y = 7 or f(x) = 7. • Regardless of value of x, value of y remains static or the same. This is a constant function. Polynomial function • Polynomial means “multiterm”. • Polynomial function of a single variable x has the general form (formula) Y = a x2 + b x + c Linear & Quadratic Equations • An equation is called a linear equation, if only a single variable occurs in the equation. Example: x + 2 = 3x – 9 (Linear equation)
  • 8. When the degree of the variable is ‘2’ i.e. x2 As in ax2 + bx + c = 0, it is a quadratic equation • Rates of change in the equilibrium values of the variables: • Consider the rate of change of any variable ‘y’ in response to a change in another variable x, where the two variables are related to each other by the function • Y = f(x) • Y represents the equilibrium value of an endogenous variable • X will be some parameter. • Presently we restrict to the simple case where there is only one parameter. Equilibrium & Parameter • Equilibrium = a state of balance. • Parameter = limit of a variable quantity. The Difference Quotient: • The symbol ∆ (the Greek Capital delta for “difference”) is used to denote “change” in value. • EXPONENTIAL LAWS OR BASIC LAWS OF INDICES • If ‘m’ and ‘n’ are positive integers and ‘a’ is a non-zero real number then, • Ist Law : am. an = am+n • If ‘m’ and ‘n’ are positive integers and ‘a’ is a non-zero real number then, 2nd Law: am = 1 if m > n = 1 if n > m an am-n an-m • If ‘m’ and ‘n’ are positive integers and ‘a’ is a non-zero real number then, • 3rd Law : (am)n = amn • If ‘m’ and ‘n’ are positive integers and ‘a’ is a non-zero real number then, • 4th Law : (ab)m = ambm where ‘b’ is a non-zero real number. • If ‘m’ and ‘n’ are positive integers and ‘a’ is a non-zero real number then, • 5th Law: a m = am b bm