Meaning of economics


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Meaning of economics

  1. 1. Meaning of Economics:Economics can be called as social science dealingwith economics problem and man’s economic behavior. Itdeals with economic behavior of man in society in respectof consumption, production; distribution etc. economicscan be called as an unending science.ME deals with the integration of economic theory withbusiness practices for the purpose of facilitatingdecision making and forward planning bymanagement.In other words it is concerned with using oflogic of economics, mathematics, and statistics toprovide effective ways of thinking about businessdecision problems.Economics can be studied under two heads:1) Micro Economics2)Macro EconomicsMicro Economics: It has been defined as that branch where theunit of study is an individual, firm or household. It studieshow individual make their choices about what to produce,how to produce, and for whom to produce, and what priceto charge. It is also known as the price theory is themain source of concepts and analytical tools for
  2. 2. managerial decision making.Various micro-economic concepts such as demand,supply, elasticity of demand and supply, marginal cost,various market forms, etc. are of great significance tomanagerial economics.Macro Economics: It studies the economics as a whole. It isaggregative in character and takes the entire economicas a unit of study. Macro economics helps in the areaof forecasting. It includes National Income,aggregate consumption ,investments, employment etc.Meaning of managerial economics: Managerial economic is concerned with decisionmaking at the level of firm. It has been described as aneconomics applied to decision making. It is viewed asa special branch of economics bridging the gapbetween pure economic theory and managerial practices. It is defined as application of economic theoryand methodology to decision making process by themanagement of the businessDefinitions of managerial economics:In the words of Mc Nair and Merriam,” ME consistsof use of economic modes of thought to analyze businesssituation”.
  3. 3. According to Spencer and Seigelman— “it is definedas the integration of economic theory with businesspractice for the purpose of facilitating decision makingand forward planning by the management”.Economic provides optimum utilization of scarceresource to achieve the desired result. ME’s purpose is toshow how economic analysis can be used formulatingbusiness planning. CONCEPTS OF ECONOMICS IN DECISION MAKINGWhat do you mean by decision making?Meaning of decision making: Decision making is the mostimportant function of business managers.Decision making is the central objective ofManagerial Economics.Decision making may be defined as theprocess of selecting the suitable action fromamong several alternative courses of action.The problem of decision making arises whenevera number of alternatives are available. Such as :What should be the price ofthe product? What shouldbe the size of the plant tobe installed? How many
  4. 4. workers should beemployed? What kind oftraining should be impartedto them?Therefore we can say that the problem ofdecision making arises due to the scarcity ofresources. We have unlimited wants and themeans to satisfy those wants are limited,
  5. 5. with the satisfaction of one want, another arises,and here arises the problem of decision making.Most of the decisions are taken under thecondition of uncertainty, and involves risks.The main reasons behind uncertainty andrisks are uncertain behavior of the marketforces which are as follows:The demand and supplyChanging business environmentGovernment policiesExternal influence on the domestic marketSocial and political changesDecision making problems faced by businessfirms: • To identify the alternative courses of action of achieving given objectives. • To select the course of action that achieves the objectives in the economically most efficient way. • To implement the selected course of action in a right way to achieve the business objectives.
  6. 6. Nature and Scope of Managerial EconomicsScope of Managerial Economics: Can you tell me what do you meanby the scope of the managerial economics. Well scope issomething which tells us how far a particular subjectwill go. As far as Managerial Economic is concerned it isvery wide in scope. It takes into account almost all theproblems and areas of manager and the firm.ME deals with Demand analysis, Forecasting,Production function, Cost analysis, InventoryManagement, Advertising, Pricing System, Resourceallocation etc.Following aspects are to be taken into account whileknowing the scope of ME: 1. Demand analysis and forecasting: Unless and until knowingthe demand for a product how can we think ofproducing that product. Therefore demand analysis issomething which is necessary for the production function tohappen. Demand analysis helps in analyzing the varioustypes of demand which enables the manager to arrive atreasonable estimates of demand for product of hiscompany. Managers not only assess the current demandbut he has to take into account the future demand also. 2. Production function:
  7. 7. Conversion of inputs into outputs isknown as production function. With limited resourceswe have to make the alternative uses of this limitedresource. Factor of production called as inputs is combinedin a particular way to get the maximum output. When theprice of input rises the firm is forced to work out acombination of inputs to ensure the least cost combination. 3. Cost analysis: Cost analysis is helpful in understanding the cost of a particular product. It takes into account all the costs incurred while producing a particular product. Under cost analysis we will take into account determinants of costs, method of estimating costs, the relationship between cost and output, the forecast of the cost, profit, these terms are very vital to any firm or business. 4. Inventory Management: What do you mean by the term inventory? Well the actual meaning of the term inventory is stock. It refers to stock of raw materials which a firm keeps. Now here the question arises how much of the inventory is ideal
  8. 8. stock. Both the high inventory and low inventory is not good for the firm. Managerial economics will use such methods as ABC Analysis, simple simulation exercises, and some mathematical models, to minimize inventory cost. It also helps in inventory controlling. 5. Advertising: Advertising is a promotional activity. In advertising while the copy, illustrations, etc., are the responsibility of those who get it ready for the press, the problem of cost, the methods of determining the total advertisement costs and budget, the measuring of the economic effects of advertising --- - are the problems of the manager. There’s a vast difference between producing a product and marketing it. It is through advertising only that the message about the product should reach the consumer before he thinks to buy it. Advertising forms the integral part of decision making and forward planning. 6. Pricing system: Here pricing refers to the pricing of aproduct. As you all know that pricing system as a conceptwas developed by economics and it is widely used inmanagerial economics. Pricing is also one of the centralfunctions of an enterprise. While pricing commodity thecost of production has to be taken into account, but acomplete knowledge of the price system is quiteessential to determine the price. It is also important tounderstand how product has to be priced under
  9. 9. different kinds of competition, for different markets. Pricing = cost plus pricing and the policies of the enterpriseNow it is clear that the price system touches the severalaspects of managerial economics and helps managers totake valid and profitable decisions. 7. Resource allocation: Resources are allocated according tothe needs only to achieve the level of optimization.As we all know that we have scarce resources, andunlimited needs. We have to make the alternate use ofthe available resources. For the allocation of theresources various advanced tools such as linearprogramming are used to arrive at the best course of action. NATURE OF MANAGERIAL ECONOMICS 2) Managerial economics aims at providing help in decision making by firms. It is heavily dependent on microeconomic theory. The various concepts of micro economics used frequently in managerial economics Elasticity of demand Marginal cost
  10. 10. Marginal revenue Market structures and their significance in pricing policies. • Macro economy is used to identify the level of demand at some future point in time, based on the relationship between the level of national income and the demand for a particular product. It is the level of national income only that the level of various products depends. In managerial economicsmacro economics indicates the relationship between (a)the magnitude of investment and the level of nationalincome, (b) the level of national income and the level ofemployment, (c) the level of consumption and the level ofnational income. • In managerial economics emphasis is laid on those prepositions which are likely to be useful to management.DEMANDTYPES OF DEMANDTill now we have that may specify demand in theform of a function. Much of this specification and itsform depends on the nature of demand itself – its type
  11. 11. and determinants. From this standpoint, we cantalk about a few other distinct concepts ofdemand:i) Direct and Derived DemandsDirect demand refers to demand for goods meant forfinal consumption; it is the demand for consumers’goods like food items, readymade garments andhouses.By contrast, derived demand refers to demand forgoods which are needed for further production; it isthe demand for producers’ goods like industrialraw
  12. 12. materials, machine tools and equipments. Thus thedemand for an input or what is called a factor ofproduction is a derived demand; its demand dependson the demand for output where the input enters. Infact, the quantity of demand for the final output aswell as the degree ofsubstituability/complementarty between inputs woulddetermine the derived demand for a given input. For example, the demand for gas in a fertilizer plantdepends on the amount of fertilizer to be producedand substitutability between gas and coal as thebasis for fertilizer production. However, thedirect demand for a product is not contingentupon the demand for other products.ii) Domestic and Industrial DemandsThe example of the refrigerator can be restatedto distinguish between the demand for domesticconsumption and the demand for industrial use. Incase of certain industrial raw materials which arealso used for domestic purpose, this distinction isvery meaningful. For example, coal has both domestic and industrialdemand, and the distinction is important from thestandpoint of pricing and distribution of coal.iii)Autonomous and Induced DemandWhen the demand for a product is tied to thepurchase of some parent product, its demand iscalled induced or derived. For example, the demand for cement is induced by
  13. 13. (derived from) the demand for housing. As statedabove, the demand for all producers’ goods is derivedor induced. In addition, even in the realm ofconsumers’ goods, we may think of induceddemand. Consider the complementary items liketea and sugar, bread and butter etc. The demandfor butter (sugar) may be induced by the purchase ofbread (tea). Autonomous demand, on the other hand,is not derived or induced. Unless a product is totallyindependent of the use of other products, it is difficultto talk about autonomous demand. In the presentworld of dependence, there is hardly anyautonomous demand. Nobody today consumersjust a single commodity; everybody consumes abundle of commodities. Even then, all direct demandmay be loosely called autonomous.iv)Perishable and Durable Goods’ DemandsBoth consumers’ goods and producers’ goodsare further classified into perishable/non-durable/single-use goods and durable/non-perishable/repeated- use goods. The former refersto final output like bread or raw material likecement which can be used only once. The latterrefers to items like shirt, car or a machine which canbe used repeatedly. In other words, we canclassify goods into several categories: single-useconsumer goods, single-use producer goods,durable-use consumer goods and durable-useproducer’s goods.
  14. 14. This distinction is useful because durableproducts present more complicated problems ofdemand analysis than perishable products. Non-durable items are
  15. 15. meant for meeting immediate (current) demand, butdurable items are designed to meet current as wellas future demand as they are used over a period oftime. So, when durable items are purchased, theyare considered to be an addition to stock of assets orwealth. Because of continuous use, such assets likefurniture or washing machine, suffer depreciationand thus call for replacement. Thus durablegoods demand has two varieties – replacementof old products and expansion of total stock.Such demands fluctuate with business conditions,speculation and price expectations. Real wealtheffect influences demand for consumer durables.v) New and Replacement DemandsThis distinction follows readily from theprevious one. If the purchase or acquisition ofan item is meant as an addition to stock, it is a newdemand. If the purchase of an item is meant formaintaining the old stock of capital/asset, it isreplacement demand. Such replacementexpenditure is to overcome depreciation in theexisting stock.Producers’ goods like machines. The demand for spareparts of a machine is replacement demand, but the demandfor the latest model of a particular machine (say, the latestgeneration computer) is anew demand. In course ofpreventive maintenance and breakdown maintenance, theengineer and his crew often express their replacementdemand, but when a new process or a new technique oranew product is to be introduced, there is always a new
  16. 16. demand.You may now argue that replacement demand is inducedby the quantity and quality of the existing stock, whereasthe new demand is of an autonomous type. However, sucha distinction is more of degree than of kind. For example,when demonstration effect operates, a new demand mayalso be an induced demand. You may buy a new VCR,because your neighbor has recently bought one. Yours is anew purchase, yet it is induced by your neighbor’ Final and Intermediate DemandsThis distinction is again based on the type of goods- finalor intermediate. The demand for semi-finished products,industrial raw materials and similar intermediate goods areall derived demands, i.e., induced by the demand for finalgoods. In the context of input- output models, suchdistinction is often employed.vii) Individual and Market DemandsThis distinction is often employed by the economist tostudy the size of the buyers’ demand, individual as well ascollective. A market is visited by different consumers,consumer differences depending on factors like income,age, sex etc. They all react differently to the prevailingmarket price of a commodity. For example, when the priceis very high, a low-income buyer may not buy anything,though a high income buyer may buy something. In sucha case, we may distinguish between the demand of an
  17. 17. individual buyer and that of the market which is themarket which is the aggregate of individuals. You maynote that both individual and market demand schedules(and hence curves, when plotted) obey the law of demand.But the purchasing capacity varies between individuals.For example, A is a high income consumer, B is a middle-income consumer and C is in the low-income group. Thisinformation is useful for personalized service or target-group-planning as a part of sales strategy formulation.viii) Total Market and Segmented Market DemandsThis distinction is made mostly on the same lines as above.Different individual buyers together may represent a givenmarket segment; and several market segments togethermay represent the total market. For example, theHindustan Machine Tools may compute the demand for itswatches in the home and foreign markets separately; andthen aggregate them together to estimate the total marketdemand for its HMT watches. This distinction takes careof different patterns of buying behavior and consumers’preferences in different segments of the market. Suchmarket segments may be defined in terms of criteria likelocation, age, sex, income, nationality, and so onx) Company and Industry DemandsAn industry is the aggregate of firms (companies).Thus the Company’s demand is similar to anindividual demand, whereas the industry’s demandis similar to aggregated total demand. You mayexamine this distinction from the standpoint of bothoutput and input.