Introduction economics

1. INTRODUCTION TOINTRODUCTION TO
ECONOMICSECONOMICS

2. Role and Responsibilities Of aRole and Responsibilities Of a
Managerial Economist InManagerial Economist In
BusinessBusiness
Ref:Ref:
Mithani: page no. 6 to 8Mithani: page no. 6 to 8
P.L. Mehta: page no. 8 to 12P.L. Mehta: page no. 8 to 12

3.  Market researchMarket research
 Preparation of business forecastPreparation of business forecast
 Capital budgeting & choice of investmentCapital budgeting & choice of investment
 Production schedulingProduction scheduling
 Briefing the management on currentBriefing the management on current
domestic & global issuesdomestic & global issues
 Minimize the cost of productionMinimize the cost of production
 Security management analysisSecurity management analysis

4.  Advice on foreign exchange marketAdvice on foreign exchange market
 Analyze environmental factors.Analyze environmental factors.

5. RELATIONSHIP OF MANAGERIALRELATIONSHIP OF MANAGERIAL
ECONOMICS WITH FUNCTIONALECONOMICS WITH FUNCTIONAL
AREAS OF BUSINESSAREAS OF BUSINESS

6. M.E. & ECONOMICSM.E. & ECONOMICS
 M.E. described as economics applied toM.E. described as economics applied to
decision makingdecision making
 Special branch bridging gulf b/w pureSpecial branch bridging gulf b/w pure
economic theory & managerial practiceeconomic theory & managerial practice
 Microeconomics – main source ofMicroeconomics – main source of
concepts & analytical tools for M.E.concepts & analytical tools for M.E.
 Macroeconomics – responsible in the areaMacroeconomics – responsible in the area
of forecasting for M.E.of forecasting for M.E.

7. Contd…Contd…
 Economic concepts useful & frequentlyEconomic concepts useful & frequently
appliedapplied
– Price Elasticity of DemandPrice Elasticity of Demand
– Income Elasticity of DemandIncome Elasticity of Demand
– Opportunity CostOpportunity Cost
– Theory of the FirmTheory of the Firm
– Demand TheoryDemand Theory
– Theory of International TradeTheory of International Trade
– Money & Banking, etc.Money & Banking, etc.

8. M.E. & StatisticsM.E. & Statistics
 M.E. requires collection of quant dataM.E. requires collection of quant data
which can be used to measure certainwhich can be used to measure certain
functional relationships for makingfunctional relationships for making
decisionsdecisions
 For example, pricing decisionsFor example, pricing decisions
 Uncertainty of future events solved byUncertainty of future events solved by
Theory of ProbabilityTheory of Probability

9. M.E. & MathematicsM.E. & Mathematics
 Metric in Character; estimates economicMetric in Character; estimates economic
relationshipsrelationships
 Predicting relevant economic quantities to usePredicting relevant economic quantities to use
them in making decisions and forward planningthem in making decisions and forward planning
 Knowledge of Geometry, Trigonometry &Knowledge of Geometry, Trigonometry &
Algebra with Logarithms, Exponentials, Vectors,Algebra with Logarithms, Exponentials, Vectors,
Determinants & Matrix Algebra, Differential &Determinants & Matrix Algebra, Differential &
Integral Calculus are very essential to M.E.Integral Calculus are very essential to M.E.

10. M.E. & AccountingM.E. & Accounting
 Closely related; concerned with recordingClosely related; concerned with recording
the financial operations of a business firmthe financial operations of a business firm
 Accounting info – one of the principalAccounting info – one of the principal
sources of data required for makingsources of data required for making
decisionsdecisions
 For example, Profit & Loss Statement of aFor example, Profit & Loss Statement of a
firmfirm
 Main task is to provide data; applyingMain task is to provide data; applying
ideas of M.E. to solve problemsideas of M.E. to solve problems

11. M.E. & ORM.E. & OR
 Important problems solved with ORImportant problems solved with OR
techniquestechniques
 Problems –Problems –
– Allocation problemsAllocation problems
– Competitive problemsCompetitive problems
– Waiting Line problemsWaiting Line problems
– Inventory problemsInventory problems

12. FUNDAMENTAL PRINCIPLES OFFUNDAMENTAL PRINCIPLES OF
MANAGERIAL ECONOMICSMANAGERIAL ECONOMICS

13. Opportunity CostOpportunity Cost
 Attributed to alternative uses of scarceAttributed to alternative uses of scarce
resourcesresources
 Natural & Man-made resources are scarce inNatural & Man-made resources are scarce in
relation to demand to satisfy needs, wants; haverelation to demand to satisfy needs, wants; have
alternative usesalternative uses
 For Example, a firm has 100 million & it hasFor Example, a firm has 100 million & it has
three alternativesthree alternatives
– Expand size of firmExpand size of firm
– Set up a new production unitSet up a new production unit
– To buy shares in another firmTo buy shares in another firm

14. Contd…Contd…
 Expected Annual Returns from the alternativesExpected Annual Returns from the alternatives
20 million, 18 million & 16 million20 million, 18 million & 16 million
 Rationally alternative 1 is the bestRationally alternative 1 is the best
 Hence the 2Hence the 2ndnd
alternative has to be sacrificedalternative has to be sacrificed
 The returns of 18 million is called annualThe returns of 18 million is called annual
opportunity cost of an annual income of 20opportunity cost of an annual income of 20
millionmillion
 Opportunity Cost of availing an opportunity is theOpportunity Cost of availing an opportunity is the
expected income foregone from the 2expected income foregone from the 2ndnd
bestbest
opportunity of using the resourcesopportunity of using the resources

15. Incremental CostIncremental Cost
 Applied to business decisions involving aApplied to business decisions involving a
large increase in total cost & revenuelarge increase in total cost & revenue
 Incremental costs are costs arising due toIncremental costs are costs arising due to
business decisionbusiness decision
 For example, setting up a new plant by aFor example, setting up a new plant by a
firm.firm.
 This decision increases the total cost fromThis decision increases the total cost from
100 to 115 million100 to 115 million

16. Contd…Contd…
 3 major components3 major components
– Present explicit costsPresent explicit costs
– Opportunity costsOpportunity costs
– Future costsFuture costs
 Fixed & Variable CostFixed & Variable Cost
 Depreciation & advertising costDepreciation & advertising cost

17. Time PerspectiveTime Perspective
 All decisions taken with a certain time perspectiveAll decisions taken with a certain time perspective
 It refers to duration of time period from the relevant pastIt refers to duration of time period from the relevant past
to the foreseeable future while making a decisionto the foreseeable future while making a decision
 Relevant past – period of past experience & trends forRelevant past – period of past experience & trends for
long run decisionslong run decisions
 All decisions do not have same time perspectiveAll decisions do not have same time perspective
 For example, decision to buy explosive materials forFor example, decision to buy explosive materials for
manufacturing characters – short run time perspectivemanufacturing characters – short run time perspective
 Investment in plants, building, machinery, land, etc. –Investment in plants, building, machinery, land, etc. –
long run repercussionslong run repercussions
 Should assess & determine in advance & makeShould assess & determine in advance & make
decisions accordinglydecisions accordingly

18. Contd…Contd…
 For example, setting up a newFor example, setting up a new
Management Institute, short timeManagement Institute, short time
perspective would be unwise and forperspective would be unwise and for
buying explosive materials a long run onebuying explosive materials a long run one
would be unwisewould be unwise

19. DiscountingDiscounting
 A rupee tomorrow is worth less than aA rupee tomorrow is worth less than a
rupee todayrupee today
 For example, suppose a person is offeredFor example, suppose a person is offered
to make a choice between a gift of Rs. 100to make a choice between a gift of Rs. 100
today or Rs. 100 next yeartoday or Rs. 100 next year
 The question is “How much money todayThe question is “How much money today
is equal to Rs 100 one year hence?”is equal to Rs 100 one year hence?”
 The Rs. 100 would have to be discountedThe Rs. 100 would have to be discounted
at 8 percentat 8 percent

20. Contd…Contd…
 If a decision affects costs and revenues atIf a decision affects costs and revenues at
future dates, it is necessary to discountfuture dates, it is necessary to discount
the costs & revenues to present valuesthe costs & revenues to present values
before a valid comparison of alternativesbefore a valid comparison of alternatives
is possibleis possible

21. Equi-Marginal PrincipleEqui-Marginal Principle
 Originally associated with consumptionOriginally associated with consumption
theorytheory
 It suggests that available resourcesIt suggests that available resources
should be so allocated b/w alternativeshould be so allocated b/w alternative
options that the MPG from the variousoptions that the MPG from the various
activities are equalizedactivities are equalized
 For example, a firm has a total capital ofFor example, a firm has a total capital of
100 million; option of spending on three100 million; option of spending on three
projectsprojects