Unit I of AKTU ME Syllabus

1. UNIT 1:
BASIC CONCEPTS AND
PRINCIPLES
• Contents: (6 Hrs)
• 1.1 Definition
• 1.2 Nature and Scope of Economics-Micro Economics and Macro
Economics.
• 1.3 Managerial Economics and its relevance in business decisions.
• 1.4 Fundamental Principles of Managerial Economics –
a) Incremental Principle,
b) Marginal Principle,
c) Opportunity Cost Principle,
d) Discounting Principle,
e) Concept of Time Perspective.
f) Equi-Marginal Principle.
• 1.5 Utility Analysis. Cardinal Utility and Ordinal Utility.
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2. 1.1 DEFINITION
• Economics
• In General way, economics is a social science which deals
with the production, distribution and consumption of goods
and services. There are a large number of economist give
their different definitions. Some say that there is no
requirement of definition of economics this is because
economics growing continuously. But most of the economists
agree with the view that defining economics is must. On the
basis of these economist, the definition of economics is
divided into four parts such as:
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3. Definition of Economics
Wealth
Definition
Adam Smith
J S Say
L C Mill
Senior
Welfare
Definition
Marshall
Cannon
Beveridge
Penson
Scarcity
Definition
Lord Robbins
Scitovosky
Stonier and
Hague
Harvey
Growth-
oriented
Definition
Prof.
Samuelson
Benhem
C E Fergeuson
Prof. J K Mehta
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4. WEALTH DEFINITION
• Adam Smith says “The self-interested pursuit of wealth may
not be individually satisfying but leads to an aggregate
increase in wealth that is in the best interests of a nation.”
• Adam Smith- Economics is an enquiry into the nature and
causes of wealth of nation.
• J.B. Say- Economics is the science which treats of wealth.
• J.S. Mill-Economics is the practical science of the production
and distribution of wealth.
• Senior- The subject treated by political economics is not
happiness but wealth.
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5. WELFARE DEFINITION
• Alfred Marshall was born in London, on26 July 1842. Professor of
Political Economy at the University of Cambridge from 1885 to 1908,
he was the founder of ·the Cambridge School of Economics which
rose to great eminence in the 1920s and 1930s. Alfred Marshall’s
magnum opus, the Principles of Economics was published in 1890.
Marshall relates the definition of economics with material welfare.
• Marshall-Economics is the study of mankind in the ordinary
business of life; it examines that part of individual and social action
which is most closely connected with the attainment and with the
use of material requited for well being.
• Cannan-The aim of political economy is the explanation of general
causes on which the material welfare of human being depends.
• Beveridge-Economics is the study of the general methods by which
men co-operate to meet their material needs.
• Penson-Economics is the science of material welfare.
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6. SCARCITY DEFINITION
• Lionel Robbins was a peculiar Englishman in the economics world
of the 1920s. His tools were the London School of Economics and a
famous 1932 essay on economic methodology. It was his 1932
Essay on the Nature and Significance of Economic Science where
Robbins made his Continental credentials clear. He redefines the
scope of economics to be “the science which studies human
behavior as a relationship between scarce means which have
alternative uses.”
• Lionel Robbins-Economics is a science which studies human
behaviour as a relationship between ends and scarce means which
have alternative uses.
• Scitovosky-Economics is the science concerned with the
administration of scarce resources.
• Stonier & Hague-Economics is the fundamentally a study of
scarcity and the problem which gives rise.
• Harvey-Economics is the study of how men allocate their resources
to provide for their wants.
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7. GROWTH ORIENTED
DEFINITION
• Paul A. Samuelson has personified mainstream economics in
the second half of the twentieth century. Paul Samuelson has
not been unjustly considered the incarnation of the economics
‘establishment’- and as a result, has been both lauded and
vilified for virtually everything right and wrong about it. Paul
Samuelson’s most famous piece of work, “Foundations of
Economic Analysis” (1947), one of the grand tomes that
helped revive neoclassical economics and launched the era of
the mathematization of economics. Samuelson was one of the
progenitors of microeconomics and the Nee-Keynesian
Synthesis in macroeconomics during the post-war period.
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8. CONTINUED…
• Prof. Samuelson-Economics is the study of how people and society
end up choosing with or without the use of money, to employ scarce
productive resources that could have alternative uses, it produce
various commodities over time and distributes them for
consumption, now or in the future, among various persons and
groups in society. It analyses cost and benefits of improving patterns
of resource allocation.
• Benham-Economics is the study of the factors affecting employment
and standard of living.
• C. E. Ferguson-Economics is the study of the economic allocation
of scarce physical and human means (resources) among competing
ends, an allocation that achieves a stipulated optimizing or
maximizing objectives.
• Porf. J.K. Mehta-Economics is a science which studies human
behaviour as a means to reach in a situation free of wants.
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9. 1.2 NATURE AND SCOPE OF ECONOMICS-MICRO
ECONOMICS AND MACRO ECONOMICS
• Economics as a Science:
• if it is so, is it a positive or a normative science?
• A science is a systematised body of knowledge ascertainable by observation
and experimentation. It is a body of generalisations, principles, theories or laws
which traces out a causal relationship between cause and effect.
• For any discipline to be a science;
• (i) it must be a systematized body of knowledge;
• (ii) have its own laws or theories;
• (iii) which can be tested by observation and experimentation;
• (iv) can make predictions;
• (v) be self-corrective; and
• (vi) have universal validity.
• If these features of a science are applied to economics, it can be said that
economics is a science.
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10. NATURE OF ECONOMICS
• Economics as an Art:
• Art is the practical application of scientific principles. Science
lays down certain principles while art puts these principles into
practical use. To analyze the causes and effects of poverty
falls within the purview of science and to lay down principles
for the removal of poverty is art. Economics is thus both a
science and an art in this sense.
• “Economics should not be considered as a tyrannical oracle
whose word is final. But when the preliminary work has been
truly done, Applied Economics will at certain times on certain
subjects speak with the authority to which it is entitled.”
Economics is thus regarded both a science and an art, though
economists prefer to use the term applied economics in place
of the latter.
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11. SCOPE OF ECONOMICS
• Microeconomics
• Macroeconomics
• International economics
• Public finance
• Development economics
• Health economics
• Environmental economics
• Urban and rural economics
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12. MICRO &
MACROECONOMICS
• Subject- matter of economics can be sub- divided in to
Microeconomics and Macroeconomics.
• These terms were first coined and used by Ragnar Frisch.
• Acc. To K E Boulding:
• “Microeconomics is the study of particular firms, particular
households, individual prices, wages, incomes, individual
industries, particular commodities.”
• “Macroeconomics deals not with individual quantities as such
but with aggregates of these quantities, not with individual
incomes but with national income; not with individual prices but
with general price level; not with individual output but with
national output.”
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14. 1.3 MANAGERIAL ECONOMICS AND
ITS RELEVANCE IN BUSINESS
DECISIONS.
• To quote Mansfield, "Managerial Economics is concerned with the
application of economic concepts and economic analysis to the
problems of formulating rational managerial decisions."
• According to McNair and Meriam, "Managerial economics is the use
of economic modes of thought to analyse business situations."
• "Managerial Economics is concerned with the application of
economic principles and methodologies to the decision making
process within the firm or organisation under the conditions of
uncertainty," says Prof. Evan J Douglas.
• Spencer and Siegelman define it as "The integration of economic
theory with business practice for the purpose of facilitating decision
making and forward planning by management."
• According to Hailstones and Rothwel, "Managerial economics is the
application of economic theory and analysis to practice of business
firms and other institutions."
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15. MANAGERIAL
ECONOMICS
• Coordination
• An activity or an ongoing
process
• A purposive process
• An art of getting things
done by other people.
Management
• Human wants are
virtually unlimited and
insatiable, and
• Economic resources to
satisfy these human
demands are limited.
Economics • Thus managerial
economics is the study
of allocation of
resources available to a
firm or a unit of
management among the
activities of that unit.
Managerial
Economics
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16. SCOPE OF MANAGERIAL
ECONOMICS
There are four groups of problem
in both decision making and
forward planning.
Resource
allocation
Inventory
and
queuing
problem
Pricing
problems
Investment
problems
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17. RELATIONSHIP OF MANAGERIAL
ECONOMICS WITH DECISION
SCIENCES
• Economics is linked with various other fields of
study like:
• Operation Research
• Theory of Decision Making
• Statistics
• Management Theory and Accounting
• Satisficing instead of maximizing
• Managerial Accounting
Economics and other Disciplines
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19. 1.4 FUNDAMENTAL PRINCIPLES
OF MANAGERIAL ECONOMICS
–
a) Incremental Principle,
b) Marginal Principle,
c) Opportunity Cost Principle,
d) Discounting Principle,
e) Concept of Time Perspective.
f) Equi-Marginal Principle.
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20. MARGINAL AND
INCREMENTAL
PRINCIPLE
• Incremental concept is similar to the concept of marginal
value, but with a difference. Marginal principle is theoretical
while incremental concept is practical in nature.
• Marginal concept is used when calculating per unit costs for
bulk purchases, the principle of incrementalism comes in to
play when the inputs are large units like in case of airplane.
• The use of incremental concept in business decision making
is known as incremental reasoning.
• IC is used more often in business decision making than MA.
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21. OPPORTUNITY COST
PRINCIPLE
• The idea is that anything you must give up in order to carry out a
particular decision is a cost of that decision. This concept is applied
again and again throughout modern economics.
• Scarcity: According to modern economics, scarcity exists
whenever there is an opportunity cost, that is, where-ever a
meaningful choice has to be made.
• Production Possibility Frontier: The production possibility frontier
is the diagrammatic representation of scarcity in production.
• Comparative Advantage: A very important principle in itself and a
key to understanding of international trade the principle of
comparative advantage is at the same time an application of the
opportunity cost principle to trade.
• Discounting of Investment Returns: Another application of the
opportunity cost principle that is very important in itself, this one
tells us how to handle opportunities that come at different times.
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22. 1.5 UTILITY ANALYSIS.
CARDINAL UTILITY AND
ORDINAL UTILITY.
•After
Demand
Analysis…!
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23. 1.5 UTILITY ANALYSIS.
CARDINAL UTILITY AND
ORDINAL UTILITY.
• Utility Analysis
• The decision of a consumer depends upon the concept of individual
benefit, also known as utility. If consumer gets more benefit from the
product he will ready to spend more on the product and the vice-
versa.
• Consumers are able to order their preference depending on the
utility they get from the consumption of the particular product. Utility
can be difficult to measure.
• No consumer is able to measure the utility in quantitative terms. But
he can order his preference according to the satisfaction from the
consumption goods. Thus, there are two class of thoughts about the
measurement of utility.
• One states that utility can be measured in numbers or monetary
terms, another says that satisfaction utility derived from the
consumption of goods can only be ordered. These two distinctions
are called cardinal utility and ordinal utility.
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24. CARDINAL UTILITY AND
ORDINAL UTILITY
• Utility is an economic term referring to the total
satisfaction received from consuming a good or
service. For example, satisfaction you get by
consuming a cup of tea is the utility of that cup of
tea. If this measure is given, one may think of
increasing or decreasing utility, and thereby
explain economic behavior in terms of attempts to
increase one’s utility. Changes in utility are
sometimes expressed in fictional units called utils.
There are mainly two kinds of measurement of
utility implemented by economists: cardinal utility
and ordinal utility. 7/7/2017Deepak Srivastava
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25. CARDINAL UTILITY AND
ORDINAL UTILITY
• Utility was originally viewed as a measurable
quantity, so that it would be possible to measure
the utility of each individual in the society with
respect to each good available in the society, and
to add these together to yield the total utility of all
people with respect to all goods in the society.
Society could then aim to maximise the total utility
of all people in society, or equivalently the average
utility per person. This conception of utility as a
measurable quantity that could be aggregated
(summed up) across individuals is called cardinal
utility. 7/7/2017Deepak Srivastava
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26. CARDINAL UTILITY
• Cardinal utility quantitatively measures the preference of
an individual towards a certain commodity. Numbers
assigned to different goods or services can be
compared.
• Example: For a coffee addict, a utility of 100 utils
towards a cup of cappuccino is twice as desirable as a
cup of tea with a utility level of 50 utils.
• The concept of cardinal utility suffers from the absence
of an objective measure of utility.
• For example, the utility gained from consumption of a
particular good by ‘A’ will be different than ‘B’.
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27. ORDINAL UTILITY
• Ordinal utility represents the utility, or
satisfaction derived from the consumption
of goods and services, based on a relative
ranking of the goods and services
consumed. With ordinal utility, goods are
only ranked only in terms of more or less
preferred, there is no attempt to determine
how much more one good is preferred to
another.
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28. ORDINAL UTILITY
• Example: You may prefer to consume or buy more apples than
bananas while your friend may prefer to consume or buy more
bananas than apple.
• The modern economists have discarded the concept of cardinal
utility and have instead employed the concept of ordinal utility for
analysing consumer behaviour. The concept of ordinal utility is
based on the fact that it may not be possible for consumers to
express the utility of a commodity in absolute terms but it is always
possible for a consumer to tell introspectively whether a commodity
is more or less or equally useful as compared to another.
• Example: A consumer may not be able to tell that an ice cream gives
5 utils and a chocolate gives 2 utils. But he or she can always tell
whether chocolate gives more or less utility than ice cream.
• This assumption forms the basis of the ordinal theory of consumer
behaviour. Ordinal utility is the underlying assumption used in the
analysis of indifference curves. 7/7/2017Deepak Srivastava
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29. MARGINAL UTILITY
ANALYSIS
• Marginal utility is the additional amount of satisfaction
obtained from consuming one additional unit of a good.
Total utility is the overall amount of satisfaction obtained
from consuming several units of a good. While the
maximization of total utility represents the ultimate goal
of consumption, the analysis of consumer behaviour
gives greater emphasis on the marginal utility. As
consumer proceeds with his consumption total utility
increases as more of a good is consumed, but the
marginal utility decreases with the consumption of each
additional unit. The decrease in marginal utility with an
increase in the consumption of a good reflects law of
diminishing marginal utility. 7/7/2017Deepak Srivastava
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30. THE LAW OF DIMINISHING
MARGINAL UTILITY:
MARSHILLIAN APPROACH
• Marginal utility refers to the change in satisfaction which
results when a little more or little less of that good is
consumed.
• The law of diminishing marginal utility says that with the
increase in the consumption of a good there is a decrease in
the marginal utility that person derives from consuming each
additional unit of that product.
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33. INDIFFERENCE CURVES
• An indifference curve may be defined as the locus of
points. Each point represents a different combination of
two substitute goods, which yields the same utility or
level of satisfaction to the consumer. Therefore, he/she
is indifferent between any two combinations of goods
when it comes to making a choice between them. Such a
situation arises because he/she consumes a large
number of goods and services and often finds that one
commodity can be substituted for another. This gives
him/her an opportunity to substitute one commodity for
another, if need arises and to make various
combinations of two substitutable goods which give
him/her the same level of satisfaction. If a consumer
faced with such combinations, he/she would be7/7/2017Deepak Srivastava
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35. FIGURE BELOW SHOWS THE INDIFFERENCE CURVE DRAWN
ON THE BASIS OF THE FIGURE GIVE IN TABLE. IT DEPICTS, IN
GENERAL, ALL COMBINATIONS OF TWO GOODS WHICH YIELD
THE SAME LEVEL OF SATISFACTION TO THE CONSUMER. THE
CONSUMER IS INDIFFERENT ABOUT ANY TWO POINTS LYING
ON THIS CURVE.
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36. ASSUMPTIONS
• The following assumptions about the consumer psychology
are implicit in indifference curve analysis:
• Transitivity: If a consumer is indifferent to two combinations
of two goods, then he is unaware of the third combination
also.
• Diminishing marginal rate of substitution: The rarer the
availability of a good, the greater is its substitution value. For
example, water has a high substitution value as it is a scarce
resource.
• Rationality: The consumer aims to maximise his total
satisfaction and has got complete market information.
• Ordinal utility: Utility in this approach is not measurable. A
consumer can only specify his preference for a particular
combination of two goods, he cannot specify how much.
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37. PROPERTIES OF
INDIFFERENCE CURVE
• Indifference curves have the four basic characteristics:
• 1. Indifference curves have a negative slope
• 2. Indifference curves are convex to the origin
• 3. Indifference curves do not intersect nor are they tangent to
one another
• 4. Upper indifference curves indicate a higher level of
satisfaction.
• These characteristics or properties of indifference curves, in
fact, reveal the consumer’s behaviour, his choices and
preferences. They are, therefore, very important in the
modern theory of consumer behaviour. Now, we will observe
their implications.
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38. BUDGET LINE
• THE BUDGET CONSTRAINT Having described
preferences, next we determine the consumer’s
alternatives. The amount of goods he can purchase
depends on his available income and the goods’ prices.
Suppose the consumer sets aside Rs. 200 each week to
spend on the two goods. The price of good X is Rs. 40
per unit, and the price of Y is Rs. 20 per unit. Then he is
able to buy any quantities of the goods (call these
quantities X and Y) as long as he does not exceed his
income. If he spends the entire Rs. 200, his purchases
must satisfy:
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40X + 20Y = 200

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40. CONSUMER
EQUILIBRIUM
• If we superimpose the indifference
map and budget line as in Figure
shown above, we find that a
consumer has to decide to purchase
a particular combination (C) as it falls
on his budget line, though a different
combination (D) would be more
desirable as it will give a higher level
of satisfaction. At his point of
equilibrium C, the price line is
touching the indifference line
tangentially meaning that the slopes
are equal. The slope of indifference
curve indicates the marginal rate of
substitution between X and Y, and the
slope of budget line indicates the ratio
of price of X to that of Y. Thus the
principle of consumer's equilibrium
works out; the marginal rate of
substitution between X and Y must be
proportional to the ratio of price of X
to that of Y. 7/7/2017Deepak Srivastava
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