WHAT IS ECONOMICS?• Economics is the study of allocation of scarceresources among alternate uses.• Economics is the study of how individuals andgroups make decisions with limited resources asto best satisfy their wants, needs and desires.• Economics is on one side the study of wealthand on the other and more important side, a partof the study of man.
Macro Economics Micro Economics• Studies the economic • Studies the behavior of system in aggregate an individual decision making unit like an• Looks at the total individual/household/ output of a nation and firm the way the nation allocates its resources of land, labour, capital, etc. to promote trade and growth
MACRO ECONOMICS RELATES TO ISSUES SUCH AS• NATIONAL INCOME • GOVERNMENT• SAVINGS EXPENDITURE - To• INVESTMENT curtail Fiscal Deficit – Raise taxes• EMPLOYEMENT – Cut spending• TAX COLLECTIONS – Borrow• FOREIGN TRADE – Print• MONEY SUPPLY • Easiest politically • Results in inflation• PRICE LEVEL • It is a tax on those holding money
Managerial EconomicsAnalyses the processThrough which a manager uses economic theoriesto address the complex problems of business worldand then, take ‘rational’ decisionsin such a way thatthe perceived objectives of the firm may be attained
THE MANAGER OF A FIRM FACES THE FOLLOWING BASIC ISSUES– Choice of product– Choice of inputs– Distribution of the firm’s revenues– Rationing– Maintenance and expansion
OBJECTIVES OF A FIRM Maximization of Profit Maximization of sales revenue Maximization of growth rate Maximization of managers utility function Making satisfactory rate of profit
GOALS OF A FIRMMarket shareCustomer satisfactionROITechnological advancementLong run survivalEntry prevention & risk avoidanceSocial/Environmental concerns
BASIC ECONOMIC CONCEPTS1. CHOICES AND DECISIONS – RESOURCES • MONEY • MACHINE • MATERIALS • LABOUR • TIME • SKILL • TECHNOLOGY – CHOICES – ALTERNATE USES • WHETHER TO STUDY FULL TIME MBA OR MCA OR LAW • WHETHER TO KEEP MONEY IN SB OR TD OR INVEST IN BUSINESS OR SHARES – OPPORTUNISTIC COST
BASIC ECONOMIC CONCEPTS2. HUMAN ACTION – PURPOSEFUL BEHAVIOUR3. SCARCITY – If anything is scarce, it is a subject of economics. Otherwise, it is not a subject matter of economics.4. TRADE OFF – Economics is about trade off – If you get one thing, you cannot get another thing. You have to give up one for the other.
BASIC ECONOMIC CONCEPTS5. INCREMENTAL CONCEPT – While adding a new business/buying new input/adopting new process6. DISCOUNTING CONCEPT – If a decision affects costs and revenues in the long run, they should be discounted. A rupee in future is less in value7. TIME PERSPECTIVE – Short term and long term impact due to decisions say pricing decision8. MARGINAL CONCEPT – Marginal utility of the product. Marginal utility is derived from the additional unit consumed.
BASIC ECONOMIC CONCEPTS9. EFFCIENCY AND PRODUCTIVITY• How well resources are used in order to get maximum output.• Productivity means with one of input, how much output you get. – Productivity per worker – Productivity per machine10. MEANS = RESOURCES = INPUTTIME, MONEY, LAND, LABOUR, CAPITAL, NATURAL RESOURCES11. UTILITYSubjective benefit a particular person gets by using a particular goods12. GOOD (ECONOMIC GOOD)• BRINGS UTILITY• DOES NOT MEAN THAT IT BRINGS THE SAME BENEFIT TO EVERY BODY
BASIC ECONOMIC CONCEPTS13. MODEL• Theoretical abstract representation over relationship between two or more economic variables.• Out put depends on in put (capital, labour, etc)• Every model has four fundamentals – Theory – Variables – Assumptions – CausationExample: Inflation• Causation: Increasing money supply (Value of money falls, prices increase)
BASIC ECONOMIC CONCEPTS14. ECONOMIC PROFIT Vs. ACCOUNTING PROFIT• Accounting profit ignores opportunity cost• Economic profit is arrived at after taking into account opportunity cost.EXAMPLEAn individual sets up a shop in a building owned by him and puts in work by himself. The business makes a profit of Rs. 2 lacs. No rent for his premises and no salary for his work were paid.ACCOUNTING PROFIT Rs.2,00,000LESS NOTIONAL RENT Rs.1,44,000 NOTIONAL SALARY Rs. 96,000 Rs.2,40,000 --------------ECONOMIC PROFIT/LOSS (-) Rs. 40,000 --------------• POSITIVE ECONOMIC PROFIT = Revenue exceeds all costs including opportunity cost. – For economic purposes, economic profit and not accounting profit has to be used. – Opportunity cost is subjective. Accountants want documents to account.
BASIC ECONOMIC CONCEPTS15. NORMAL PROFIT• Suppose one has invested capital. How much interest he will get on his investment under competitive condition.• Interest on the capital + risk premium16. EXCESS PROFIT -- GETTING MORE THAN NORMAL PROFIT• You cannot get excess profit in the long run because competition will emerge.• Govt. also steps in to prevent excess profit being made by various measures ,EXAMPLE: Micro Finance, Financing against gold jewellery.
INCREMENTAL CONCEPT EXAMPLE• You want to purchase a machine costing Rs.10,00,000/-. When you approached a nationalised bank, they offered to lend to the extent of 80% of the cost of machine at an interest rate of 10%. You do not have margin money of Rs.2,00,000/-. When you approached a private sector bank, they agreed to lend 90% of the cost of the machine but @ 12%. What is the incremental cost in terms of % of interest on the incremental amount of Rs.1,00,000 borrowed for one year
Working for incremental financing cost• Financing cost = Loan amount x Interest rate• First case = 8,00,000 x 0.10 = 80,000• Second case = 9,00,000 x 0.12 = 1,08,000• Incremental Financing Cost = 1,08,000 – 80,000 = 28,000 Incremental amt. borrowed= 1,00,000Incremental Financing cost % = Incremental cost/ Incremental borrowing28,000/1,00,000 = 0.28 = 28%
DISCOUNTING CONCEPT EXAMPLE• You are in a position to invest Rs.1 crore in a project. You have choice of two projects and have to choose the most profitable project. Discounting rate/Cost of funds is 15%. Cash inflow over a 5 year period is as follows:• Year Project A Project B• I 10,00,000 0• II 10,00,000 5,00,000• III 10,00,000 5,00,000• IV 10,00,000 10,00,000• V 10,00,000 32,50,000• Which project you will choose?
Working for discounting concept example CASH FLOW PRESENT VALUE YEAR CASH FLOW PRESENT VALUE PROJECT ‘A’ PROJECT ‘B’10,00,000 8,69,565 I 0 010,00,000 7,56,144 II 5,00,000 3,78,07210,00,000 6,57,516 III 5,00,000 3,28,75810,00,000 5,71,753 IV 10,00,000 5,71,75310,00,000 4,97,176 V 32,50,000 16,15,82450,00,000 33,52,154 TOTAL 52,50,000 28,94,507Present Value = Cash flow/r to the power of n
CIRCULAR FLOW OF ACTIVITY• HOUSEHOLDS OWN AND CONTROL RESOURCES AND SELL THEM TO BUSINESSES• BUSINESSES USE THE RESOURCES TO MAKE FINISHED PRODUCTS• BUSINESSES TAKE FINISHED PRODUCTS AND SELL THEM TO HOUSEHOLDS GOODS AND SERVICES HOUSEHOLDS BUSINESSES RESOURCES
CIRCULAR FLOW OF ACTIVITY Continued• HOUSEHOLDS PURCHASE GOODS AND AVAIL SERVICES RESULTING IN EXPENDITURE – FLOW OF PAYMENTS TO BUSINESSES FROM HOUSEHOLDS.• HOUSEHOLDS/INDIVIDUALS WORK FOR BUSINESSES, RENT THEIR PREMISES TO BUSINESSES AND INVEST IN BUSINESSES. ALL THESE ACTIVITIES GENERATE INCOME – FLOW OF PAYMENTS TO HOUSEHOLDS FROM BUSINESSES.• THE FLOW OF PAYMENTS IN AN ECONOMY IS A CIRCULAR FLOW
DEMAND ANALYSIS• DETERMINANTS OF DEMAND• PRICE• INCOME• PRICES OF RELATED GOODS i.e. SUBSTITUTE AND COMPLEMENTARY GOODS• ADVERTISING AND SALES PROMOTION
DETERMINANTS OF DEMAND Contd….• POPULATION• AVAILABILITY OF CREDIT• SEASON OF THE YEAR• WEATHER• ONE’S STATUS• GEOGRAPHIC LOCATION OF THE BUYERS• EXPECTED FUTURE TREND IN PRICES• CHANGES IN CONSUMER TASTES• NEEDS AND PREFERENCES• CHANGES IN CONSUMER CREDIT FACILITIES
MEANING OF DEMAND• Demand in economics means desire to buy backed by adequate purchasing power.• Mere desire or wish cannot buy goods. The demand for goods, therefore, denotes that someone is able and willing to buy the goods.• Example: Car
THE LAW OF DEMAND• The relation of price to sales is known in economics as the ‘Law of Demand’.• The Law of Demand states that “higher the price, lower the demand and vice versa, other things remaining the same”.• Law of Demand states, ceteris paribus (keeping other factors constant), there is an inverse relationship between price and quantity demanded.• In simple terms it means, an increase in price will tend to reduce the quantity demanded and a fall in price will lead to an increase in the quantity demanded.
DEMAND CURVE• The Law of Demand or the Price-Quantity Relationship is also portrayed graphically in the form of a chart which is called the ‘Demand Curve’.• It is a convention among economists to portray price-quantity relationship by representing physical quantity on the horizontal (X) axis and the price on the vertical (Y) axis.• The Demand Curve slopes downward from left to right indicating that when price rises, less is demanded and when price falls, more is demanded. This kind of a slope is also called as ‘negative slope’.• The demand curve concentrates exclusively on the price-quantity relationship. The relationship between quantity demanded and other variables are not shown by the ‘Demand Curve’.
DEMAND FUNCTION• The price-quantity relation is also expressed algebraically in the form of the following equation: Q = f(P) which means that quantity demanded is a function of price.
CHARACTERISTICS OF LAW OF DEMAND• INVERSE RELATIONSHIP• PRICE IS AN INDEPENDENT VARIABLE AND DEMAND IS A DEPENDANT VARIABLE• OTHER THINGS REMAIN THE SAME• REASONS UNDERLYING THE LAW OF DEMAND• Income Effect• Substitution Effect
EXCEPTIONS TO THE LAW OF DEMAND• GIFFEN GOODS• LUXURY OR VEBLEN GOODS - GOODS PURCHASED FOR THEIR ‘SNOB APPEAL’ or OSTENTATION. Example: Diamonds, art work, BMW car• FEAR OF FUTURE CANGE - SPECULATIVE MARKET
INDIVIDUAL DEMAND AND MARKET DEMAND• INDIVIDUAL DEMAND• The quantity demanded by an individual purchaser at a given price is known as individual demand.• MARKET DEMAND• The total quantity demanded by all the purchasers together is known as market demand.
MARKET DEMAND - EXAMPLEPrice Quantity demanded in dozen by Totalper A B C D EdozeneggsRs.48 1 3 0 0 0 446 2 4 1 0 0 744 3 5 3 1 0 1242 4 6 5 2 1 1840 5 7 6 3 2 2338 6 8 7 4 3 2836 7 9 8 5 4 33
MARKET RESEARCH AND LAW OF DEMAND• Law of demand is not the last word on consumer behavior. Rather, sales executives have often found the Law of demand irrelevant for their purposes. Market research has propounded, on the basis of empirical investigations, certain propositions and hypotheses.• Some of them are as follows:
MARKET RESEARCH AND LAW OF DEMAND Contd….• The more confidence a person has in price information as a predictor of quality, the more likely he will be to choose a high priced rather low priced item.• A person who perceives himself as experienced in purchasing a product will generally choose a low priced item, but an inexperienced person will select a high priced one.• A person who selects a high priced item will (a) believe it is more difficult to judge product quality and (b) feel that he has less ability to make accurate quality judgments than one who chooses a low priced item.
MARKET RESEARCH AND LAW OF DEMAND Contd….• Consumer is not rational always. Consumer behavior is baffling. Sometimes, low price results in low sales and when the price is increased, sales increase. The reason: Higher price was essential if the products real advantages were ever to be noticed.• Consumer’s purchasing behavior is mostly repetitive. This is against the formulation advocated in economic theory that the consumer tries to reach the optimum in every transaction and every time.