ECONOMICS Chapter 1

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ECONOMICS Chapter 1

  1. 1. Chapter – 1 An Introduction to Economic Analysis
  2. 2. Objectives of the Session <ul><li>To understand positive and normative economics </li></ul><ul><li>To know about the interdependence of macroeconomics and microeconomics </li></ul><ul><li>To know about economics analysis typical managerial decisions </li></ul><ul><li>To understand Economists, finance manager and functional areas of management </li></ul>
  3. 3. Introduction <ul><li>Economic analysis evolves from basic propositions about how individual human beings behave, struggle with the problem of scarcity and react to an observed change. </li></ul><ul><li>There are two basic ingredients of economic phenomena: scarcity and choice. </li></ul><ul><li>Opportunity cost is the real cost of making a choice. </li></ul>
  4. 4. Positive and Normative Economics <ul><li>The scientific approach to the analysis of economic events, commonly referred to as positive economics. </li></ul><ul><li>Normative economics involves prescriptions or statements about “what ought to be”, rather than “What is”. </li></ul>
  5. 5. Interdependence of Macroeconomics and Microeconomics <ul><li>In microeconomics, the underlying assumptions is that the total output, total employment and total spending are given. </li></ul><ul><li>What macroeconomics take as given- the distribution of output, employment and total spending which microeconomics seeks to explain. </li></ul><ul><li>Analysis of economy is not done in two watertight compartments. </li></ul><ul><ul><ul><ul><ul><li> Contd………………… </li></ul></ul></ul></ul></ul>
  6. 6. Interdependence of Macroeconomics and Microeconomics <ul><li>When macroeconomic variables are analyzed, one must allow for changes in microeconomic variables that influence the macroeconomic variables and vice versa </li></ul>
  7. 7. Economic Analysis and Typical Managerial Decisions <ul><li>Decisions within a corporate unit are taken at various levels from the junior executive up to the chief executive. </li></ul><ul><ul><li>Decisions at the lowest level pertain to the day to day operations of the unit. </li></ul></ul><ul><ul><li>Decisions at the middle management level pertain to the current and near-future operations of the firm. </li></ul></ul><ul><ul><li>The decisions at the highest levels concern the long-term plans of the company. </li></ul></ul><ul><li>In every practicing manager needs a good understanding of both microeconomics and macroeconomics. </li></ul>
  8. 8. Typical Corporate Decisions <ul><li>Demand Forecasting </li></ul><ul><li>Pricing and other Marketing Decisions </li></ul><ul><li>Cost Analysis </li></ul><ul><li>Investment Appraisal </li></ul><ul><li>Specific Industry Analysis </li></ul><ul><li>Government, Regulation and Policy Impact Analysis. </li></ul>
  9. 9. Economists, Finance Manager and Functional Areas of Management <ul><li>The primary function of the economists are to teach, contribute research and empirical findings and formulate policies. </li></ul><ul><li>In many companies economists act as advisors to functional manager in finance, marketing, production, personnel and in other departments. </li></ul>
  10. 10. Economists, Finance Manager and Functional Areas of Management <ul><li>A knowledge of economics is essential for sound policy making. </li></ul><ul><li>A finance manger may call upon the economist for forecasts relating to the money and capital market, inflation rates, and other trends in the economy. </li></ul>
  11. 11. Production Possibility Curve <ul><li>It helps us to understand the problem of scarcity better. </li></ul><ul><li>It shows what can be produced with the given resources and technology </li></ul><ul><li>Technology is the knowledge of how to produce goods and services. </li></ul>O X Y X-Good Y-Good A E B C D
  12. 12. Shift in Production Possibility Curve <ul><li>Increase in the quantities of economic resources </li></ul><ul><li>Improvement in the quality of resources </li></ul><ul><li>Advances in technology </li></ul>O X Y X-Good Y-Good A A’ F F’

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