introduction to economics

1. Economics and Managerial
Decision Making
• Economics is “the study of the behavior of human beings in
producing, distributing and consuming material goods and services
in a world of scarce resources.”
• Management is the discipline of organizing and allocating a firm’s
scarce resources to achieve its desired objectives. Involves the
ability to organize and administer various tasks in pursuit of certain
objectives.
• How does managerial economics differ from “regular” economics?
• There is no difference in the theory; standard economic theory
provides the basis for managerial economics.
• The difference is in the way the economic theory is applied.

2. Definitions of Managerial
Economics
• Integration of economic theory with business
practice for the purpose of facilitating decision
making and forward planning by management. –
Prof. Spencer Sigelman.
• The purpose of Managerial economics is to show
how economic analysis can be used in formulating
business policies – Prof. Joel Dean
• Managerial economics is the use of economic
analysis to make business decisions involving the
best use (allocation) of an organization’s scarce
resources.

3. Introduction. The nature of managerial economic decision making
The role of managerial economics in managerial decision making
Managerial decision problems
Product price and output
Make or buy
Production technique
Internet strategy
Advertising media and intensity
Investment and financing
Economic concepts
Theory of consumer behaviour
Theory of firm
Theory of market structures and
pricing
Decision making tools
Numerical analysis
Statistical analysis
Forecasting
Game theory
Optimisation
Managerial Economics
Use of economics concepts and
decision making tools to solve
managerial decision problems
Optimal solutions

4. Opportunity Cost
• Definition – the cost expressed in
terms of the next best alternative
sacrificed
• Helps us view the true cost of
decision making
• Implies valuing different choices.

5. Production Possibility Frontier
• Show the different combinations of goods and
services that can be produced with a given
amount of resources
• No ‘ideal’ point on the curve
• Any point inside the curve – suggests
resources are not being utilized efficiently
• Any point outside the curve – not attainable
with the current level of resources
• Useful to demonstrate economic growth and
opportunity cost

6. Production Possibility Frontiers
Capital Goods
Consumer Goods
Yo
Xo
A
B
Y1
X1
Assume a country can
produce two types of
goods with its resources –
capital goods and
consumer goods
If it devotes all resources to capital goods it
could produce a maximum of Ym.
If it devotes all its resources to consumer
goods it could produce a maximum of Xm
Ym
Xm
If the country is at point A on
the PPF It can produce the
combination of Yo capital
goods and Xo consumer
goods
If it reallocates its resources
(moving round the PPF from A
to B) it can produce more
consumer goods but only at
the expense of fewer capital
goods. The opportunity cost of
producing an extra Xo – X1
consumer goods is Yo – Y1
capital goods.

7. Production Possibility
Frontiers
Capital Goods
Consumer Goods
Yo
Xo
A
.B
C
Y1
X1
Production
inside the PPF
– e.g. point B
means the
country is not
using all its
resources
It can only produce at
points outside the PPF
if it finds a way of
expanding its
resources or improves
the productivity of
those resources it
already has. This will
push the PPF further
outwards.

8. Positive and Normative Economics
• Health care can be
improved with more tax
funding
• Pollution control is
effective through a system
of fines
• Society ought to provide
homes for all
• Any strategy aimed at
reducing factory closures
in deprived areas would
be helpful
• Positive Statements:
 Capable of being verified
or refuted by resorting to
fact or further investigation
• Normative Statements:
 Contains a value
judgement which cannot
be verified by resort to
investigation or research

9. Micro and Macroeconomics
•2 major branches of
economics
•Micro – derived for Greek
word micros meaning small
•Macro – derived form Greek
word macros means
aggregative – whole – large

10. Microeconomics
• Branch of economics which is concerned with
analysis of behavior of the individual economic
units or variables such as an individual
consumer or a producer or the price of a
particular product.
• Basically deals with individual decision making
and the problem of resource allocation.
• Examines in particular as to how individual
consumers and producers behave and how
their behaviors interact

11. Importance and uses of microeconomics
• Explains price determination and allocation of
resources
• Direct relevance in business decision making
• Serves as a guide for business/ production planning
• Serves as a basis for prediction
• Useful in determination of economic policies of the
government
• Serves as the basis for welfare economics
• Explain the phenomena of international trade

12. Macroeconomics
• Branch of economics which deals with the
aggregate behavior of the economy as a whole
• Macroeconomics is essentially aggregate
economics
• Study of economic system in general
• Study of very large, economy – wide
aggregate variables like national income, total
savings, total consumption, total investment,
money supply, unemployment, price levels,
economic growth rate etc.

13. Importance of macroeconomics
• Explains the working of the economy
as a whole
• Knowledge is indispensable for policy
makers
• Useful for the planner for preparing
economic plans for the country’s
development
• Helpful in international comparison

14. Distinction between micro and
macroeconomics
MICRO-
• Study of individual
• Individualistic
approach
• Variables –
individual demand,
supply, price etc.
MACRO -
• Study of aggregate
• Aggregate approach
• Variables – aggregate
demand, aggregate
supply, price level etc.

15. Review of Economic Terms
• Microeconomics is the study of
individual consumers and producers
in specific markets.
 Supply and demand
 Pricing of output
 Production processes
 Cost structure
 Distribution of income and output

16. Review of Economic Terms
• Macroeconomics is the study of the
aggregate economy.
 National Income Analysis (GDP)
 Unemployment
 Inflation
 Fiscal and Monetary policy
 Trade and Financial relationships among
nations

17. Review of Economic Terms
• Scarcity is the condition in which resources are not
available to satisfy all the needs and wants of a
specified group of people.
• Resources are factors of production or inputs.
• Examples:
• Land – All Natural Resources
• Labor – All Human Resources
• Capital – All Manmade Productive Assets
• Entrepreneurship – All Enterprising Skills

18. Economics and Managerial
Decision Making
• Relationship to other business disciplines
 Marketing: Demand, Price Elasticity
 Finance: Capital Budgeting, Break-Even
Analysis, Opportunity Cost, Economic Value
Added
 Management Science: Linear Programming,
Regression Analysis, Forecasting
 Strategy: Types of Competition, Structure-
Conduct-Performance Analysis
 Managerial Accounting: Relevant Cost,
Break-Even Analysis, Incremental Cost
Analysis, Opportunity Cost

19. Economics and Managerial
Decision Making
• Questions that managers must answer:
 What are the risks involved?
• Risk is the chance or possibility that actual future
outcomes will differ from those expected today.
• Types of risks:
• Changes in demand and supply conditions
• Technological changes and the effect of competition
• Changes in interest rates and inflation rates
• Exchange rates for companies engaged in international
trade
• Political risk for companies with foreign operations

20. Nature of Managerial
Economics
• Managerial economics aims at
providing decision making to firms.
• It draws heavily on the prepositions of
micro economic theory that studies
the phenomenon at individual level
i.e. behavior of individual consumers,
households and firms.

21. Nature of Managerial
Economics
• The concepts of economics which ME
frequently uses are :
• Elasticity of demand.
• Marginal cost.
• Marginal revenue.
• Market structures and their significance in
pricing policies.

22. Nature of Managerial
Economics
• ME makes use of both Micro & Macro
economics.
• Micro economics assists the firm in
forecasting & macro economics studies the
aggregate levels. Macro economics
indicates the relationship between, for
example, level of consumption and national
income, level of national income and
employment etc.

23. Nature of Managerial
Economics
• This helps the management in
knowing the level of demand at a
future period of time, based on the
relationship between the national
income and the demand for a
particular product.
• Eg : Demand for cars, televisions,
refrigerators etc can have a impact of
changes in the level of national
income.

24. Nature of Managerial
Economics
• ME is prescriptive in nature. It
recommends how a thing should be
done in alternative conditions.
• Eg: It may be derived from economic
analysis that it is more profitable to
produce 100 units of a particular
product by using 5 machines and 15
workers than using 2 machines and
25 workers.

25. Nature of Managerial
Economics
• ME uses a scientific approach. In
practice some firms may use simple
rules based on past experience.
• However, the quality of decisions
made can be improved by using a
systematic approach.
• This is achieved by the study of ME.

26. Scope of ME
• The scope of ME is so wide that it touches
almost all areas of the manager’s decision
making.
• It deals with demand analysis, forecasting,
production function, cost analysis, inventory
management, resource allocation, capital
budgeting.
• A brief introduction to these areas will give
an idea of the scope of ME.

27. Scope of ME
• Demand Analysis and forecasting :
• A correct analysis of the future demand
for a companies product enables a
manager to take decisions related to the
production scheduling & inventory
management.
• For this he has to consider things such
as income elasticity and cross elasticity.
• This process of accessing the future
demand is called as demand forecasting.

28. Scope of ME
• Production function :
• We know that resources are scarce and
have alternative uses. Inputs play a imp. role
in the economics of production.
• The factors of production should be
combined in a particular way to maximize
output.
• Alternatively, when the prices of some inputs
shoots up, a manager has to work out a
change in the use of inputs so as to bring the
total costs of production as low as possible.
• Thus, production function helps ME.

29. Scope of ME
• Cost analysis :
• Cost analysis talks of determinants of costs, relationship
between costs and output, forecast of cost and profit etc.
which is essential for managerial decision making.
• Inventory management :
• Large capital of companies is blocked in inventory. If this
capital can be saved, it can be used for alternative
production priorities.
• Tools like ABC analysis etc. help the managers in deciding
the levels of inventory.

30. Scope of ME
• Pricing :
• The price of the product often
determines how much of what product
will be purchased.
• Merely knowing the cost of production
is not enough to set the price. Various
other aspects such as the market
conditions, conditions of competition,
various options available for pricing
also have to be considered.