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WHAT IS
ECONOMICS?
1CHAPTER
© 2003 Pearson Education Canada Inc. 1-1
Origin of EconomicsOrigin of Economics
 Our activities to generate income are termed as
economic
activities, which are re...
Wealth Concept :Adam Smith, who is
generally regarded as father of
economics, defined economics as “ a
science which enqui...
Welfare Concept :According to A. Marshall “Economics is aAccording to A. Marshall “Economics is a
study of mankind in the ...
Scarcity Concept : According to Lionel Robbins:
“Economics is the science which studies human behavior
as a relationship b...
D. Growth/Development ConceptGrowth/Development Concept : According to Prof.: According to Prof.
Samuelson “Economics is t...
Characteristics of Growth Oriented Definition:
# The definition is not merely concerned with the allocation of given
resou...
4. Economic Theory
Branches of economics:
a. Microeconomics: Concerned with the behavior of individual
entities such as ma...
• Microeconomics is the study of individual units like
individual household, pricing of a firm, wages of a
worker, profit ...
5. Economics as Science
• Science is the relationship between causes and effects.
• Classification of Science :
a. Positiv...
Origin of Managerial Economics
 Like every other individual a manger of a business firm has to take
decisions in the face...
Managerial economics is the discipline that deals with the application
of economic concepts, theories and methodologies to...
Definition
Spencer and Seligman defined Managerial economics as
“The integration of economic theory and business
practice ...
From these ideas it can be concluded managerial economics
is the discipline, which deals with the application of
economic ...
Economics, Business Management
and Managerial Economics
Economics
Theory and
Methodology
Business
Management-
decision Pro...
Distinction between Managerial Economics
and Traditional Economics
 Managerial economics concerns with the application of...
 Traditional economics is a study of both firm and an
individual, whereas managerial economics is a study of
the problem ...
Features of Managerial Economics
 Microeconomics character: - Managerial economics is
microeconomics in character because...
 Goal Oriented: - Managerial economics is goal-oriented
and prescriptive. It deals with how decisions should be
formulate...
 Normative: - Managerial economics belongs to normative
economics rather than positive economics. Positive
economics stud...
Scope of Managerial Economics
a) Demand Analysis and Forecasting: - A major part of
managerial decision making depends on ...
Production and supply analysis - Production theory explains
the relationship between inputs and output. It also
explains u...
Market Structure and Pricing Theory: - Price theory
explains how prices of outputs and inputs are determined
under differe...
Cost Analysis: - Estimates of cost are essential for
planning purposes. The factors determining costs are not
always known...
e) Profit and Capital Management (Investment Decisions):
- Profit provides the index of success of a business
firm. Profit...
Tools of Managerial Economics
1. Opportunity Cost Principle
2. Principle of Time Perspective
3. Discounting Principle
4. I...
• What is the opportunity cost of you attending classes?
• Include all forgone options in your consideration.
OPPORTUNITY COST =
The Value of the Next Best Choice
(Ex: Sleeping is the opportunity cost of studying for a test)
If I buy a pizza… Then I can’t afford the movies
: What is the opportunity cost of buying
pizza?
Incremental Principle – It is closely related to the marginal
costs and marginal revenues.
Profitable decisions
 Revenue ...
Discounting principle
• The time value of money refers to the fact that a rupee
received in the future is not worth a rupe...
Economics is logic of choice
It teaches the art of rational decision making. Economics is
of significant use in modern bus...
Cost of production
5. Price and its distribution in the market
6.Diversification of business
7.Renewal of worn-out equipme...
• Economic Decisions for the Firm
– What: The product decision – begin or stop providing
goods and/or services.
– How: The...
Economics and Managerial
Decision Making
• Relationship to other business disciplines
– Marketing: Demand, Price Elasticit...
Application areas of managerial
economics in business decision
making
Production and
inventory
knowledge
Human Resource
Fi...
 Decisions in which problem is simple and outcome has high degree
of certainty – Routine decisions
 Decisions in which t...
Mohan Automobile Ltd. Is engaging in the business of
repairing of automobiles. They have about 40 workers
working in the w...
Basically because of poor wages and indifferent supervision.
This operation is located in environmentally alert
community ...
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mba b.e.Chapter one

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mba b.e.Chapter one

  1. 1. WHAT IS ECONOMICS? 1CHAPTER © 2003 Pearson Education Canada Inc. 1-1
  2. 2. Origin of EconomicsOrigin of Economics  Our activities to generate income are termed as economic activities, which are responsible for the origin and development of Economics as a subject.  Economy is concerned with the production, consumption, distribution and investment of goods and services Definitions of Economic Wealth Definition(Adam Smith) Welfare Definition ( Alfred Marshall) Scarcity Definition ( L.Robbins) Growth Definition ( Samuelson)
  3. 3. Wealth Concept :Adam Smith, who is generally regarded as father of economics, defined economics as “ a science which enquires into the nature and cause of wealth of nation”. He emphasized the production and growth of wealth as the subject matter of econ
  4. 4. Welfare Concept :According to A. Marshall “Economics is aAccording to A. Marshall “Economics is a study of mankind in the ordinary business of life; itstudy of mankind in the ordinary business of life; it examines that part of individual and social action whichexamines that part of individual and social action which is most closely connected with the attainment and withis most closely connected with the attainment and with the use of material requisites of well being. Thus, it isthe use of material requisites of well being. Thus, it is on one side a study of wealth; and on other; and moreon one side a study of wealth; and on other; and more important side, a part of the study of man.important side, a part of the study of man.
  5. 5. Scarcity Concept : According to Lionel Robbins: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternate uses” Characteristics of Scarcity Oriented Definition: # Economics is a positive science. # Unlimited ends ( wants ). # Scarce means. # Alternative use of means. # Choice – study of human behavior
  6. 6. D. Growth/Development ConceptGrowth/Development Concept : According to Prof.: According to Prof. Samuelson “Economics is the study of how men andSamuelson “Economics is the study of how men and society choose with or without the use of money, tosociety choose with or without the use of money, to employ the scarce productive resources which haveemploy the scarce productive resources which have alternative uses, to produce various commodities overalternative uses, to produce various commodities over time and distribute them for consumption now and intime and distribute them for consumption now and in future among various people and groups of society.future among various people and groups of society.
  7. 7. Characteristics of Growth Oriented Definition: # The definition is not merely concerned with the allocation of given resources but also with the expansion of resources, tries to analyze how the expansion and growth of resources to be used to cope with increasing human wants. # More dynamic approach. # According to him problem of resource allocation is a universal problem #Definition is comprehensive in nature as it is both growth oriented as well as future oriented.
  8. 8. 4. Economic Theory Branches of economics: a. Microeconomics: Concerned with the behavior of individual entities such as markets, firms and households. b. Macroeconomics: Concerned with the overall performance of the economy. This concept came into being after 1935 when General Theory of Employment, Internet and Money was published by John Maynard Keynes. c. Econometrics: Applies the tools of statistics to economic problems.
  9. 9. • Microeconomics is the study of individual units like individual household, pricing of a firm, wages of a worker, profit of an entrepreneur and so on. • Definition: According to K.E. Boulding: “Microeconomics is the study of particular firms, particular households, individual prices, wages, incomes, individual industries, particular commodities”
  10. 10. 5. Economics as Science • Science is the relationship between causes and effects. • Classification of Science : a. Positive Science (What is? What was? What will be?) – actual happenings. Examples of Positive statements : - India is an over-populated country. - Prices in Indian economy are constantly rising. b. Normative Science (What ought to be? What ought to have been?) Examples : - Fundamental principle of economic development should be the development of rural India - Agricultural income should also be taxed.
  11. 11. Origin of Managerial Economics  Like every other individual a manger of a business firm has to take decisions in the face of scarcity and alternative uses of resources. In fact success of a business firm largely depends upon the efficiency in utilization of limited resources remaining in the disposal of the business firm.  managerial economics is evolved as an important tool kits which is useful in the decision making for the manager.  Due to wide recognition of the uses of economic theories in the decision making of the business this subject is rich in literature in these days.
  12. 12. Managerial economics is the discipline that deals with the application of economic concepts, theories and methodologies to the practical problems of businesses/firms in order to formulate rational managerial decisions for solving those problems. It uses the tools and techniques of Economic analysis to solve managerial problems or to achieve the firm’s desired objective. It is that branch of economics, which serves as a link between abstract theories and managerial practices. It is based on economic analysis for identifying problems, organizing information and evaluating alternatives
  13. 13. Definition Spencer and Seligman defined Managerial economics as “The integration of economic theory and business practice for the purpose of facilitating decision-making and forward planning by management.” Managerial economics is concerned with the ways in which managers should make decisions in order to maximize the effectiveness or performance of the organizations they manage.” - Edwin Mansfield • “Managerial economics is the application of economic theory and methodology to business administration practice.” • - Pappas and Brigham
  14. 14. From these ideas it can be concluded managerial economics is the discipline, which deals with the application of economic theory to business management. Thus it lies on the borderline between economics and business management and serves as a bridge between these two disciplines.
  15. 15. Economics, Business Management and Managerial Economics Economics Theory and Methodology Business Management- decision Problems Managerial Economics -application of economics to solving business problems Optimal Solutions to business problems
  16. 16. Distinction between Managerial Economics and Traditional Economics  Managerial economics concerns with the application of economic principles to the problems of the firm but the traditional economics deals with the body of principles itself.  Managerial economics is highly microeconomics in character. It studies the problems of a firm but does not study the macroeconomic phenomenon. But traditional economics consist of both micro and macro economics.
  17. 17.  Traditional economics is a study of both firm and an individual, whereas managerial economics is a study of the problem of a firm only.  Traditional economics studies human behavior on the basis of certain assumptions, but these assumptions may not be true in managerial economics because managerial economics is concerned with practical problems.
  18. 18. Features of Managerial Economics  Microeconomics character: - Managerial economics is microeconomics in character because its unit of study is firm. However, it always takes the help of macroeconomics to understand and adjust to the environment in which the firm operates.  Managerial economics largely uses that body of economic concepts and principles which is known as Theory of the Firm
  19. 19.  Goal Oriented: - Managerial economics is goal-oriented and prescriptive. It deals with how decisions should be formulated by managers to achieve the organizational goals.  Pragmatic: - Managerial economics is more pragmatic than traditional economics. Hence, it is called applied microeconomics. It ignores the complex concepts of the traditional economics
  20. 20.  Normative: - Managerial economics belongs to normative economics rather than positive economics. Positive economics studies economic behavior without making judgments. Normative economics, on the other hand, makes value judgments and prescribes what should be done to solve economic problems.  Macro-economics is also useful to Managerial Economics since it provides an intelligent understanding of the environment in which the business must operate.
  21. 21. Scope of Managerial Economics a) Demand Analysis and Forecasting: - A major part of managerial decision making depends on accurate estimates of demand. Before production schedules can be prepared and resources employed, forecast of future sales is essential. Demand analysis helps identify the various factors influencing the demand for firm’s product.
  22. 22. Production and supply analysis - Production theory explains the relationship between inputs and output. It also explains under what conditions costs increase or decrease; how total output behaves when use of inputs is changed; and how can output be maximized from a given quantity of resources. Thus, it helps the managers in determining the size of the firm, and the amount of capital and labour to be employed keeping in view the objectives of the firm.
  23. 23. Market Structure and Pricing Theory: - Price theory explains how prices of outputs and inputs are determined under different market conditions; when price discrimination is desirable, feasible and profitable; and to what extent advertising can be helpful in expanding sales in a competitive market. Hence, price theory can be helpful in determining the price policy of the firm
  24. 24. Cost Analysis: - Estimates of cost are essential for planning purposes. The factors determining costs are not always known or controllable which gives rise to cost uncertainty. Factors of production are scarce and they have alternative uses. Factors of production may be allocated in a particular way to get maximum output. Thus the analysis of costs and their links to output are also importance in managerial economics.
  25. 25. e) Profit and Capital Management (Investment Decisions): - Profit provides the index of success of a business firm. Profit analysis is difficult, because the uncertainty of expectations makes realization of profit planning and measurement difficult and these areas are covered in the study of managerial economics. • Capital management means planning and control of capital expenditures. Hence, it is very important for a firm to manage required capital through proper investment planning. The main topics covered are: cost of capital, types of investment decisions, and evaluation and selections of investment projects.
  26. 26. Tools of Managerial Economics 1. Opportunity Cost Principle 2. Principle of Time Perspective 3. Discounting Principle 4. Incremental principle 5. Equi-marginal Principle
  27. 27. • What is the opportunity cost of you attending classes? • Include all forgone options in your consideration.
  28. 28. OPPORTUNITY COST = The Value of the Next Best Choice (Ex: Sleeping is the opportunity cost of studying for a test)
  29. 29. If I buy a pizza… Then I can’t afford the movies : What is the opportunity cost of buying pizza?
  30. 30. Incremental Principle – It is closely related to the marginal costs and marginal revenues. Profitable decisions  Revenue more than costs  It decreases some costs to a greater extent than it increases others  It increases some revenues more than it decreases others  It reduces costs more than revenues
  31. 31. Discounting principle • The time value of money refers to the fact that a rupee received in the future is not worth a rupee today. Equi-Marginal Principle This principle states that a rational decision maker would allocate the resources in such a way that it provide equal marginal benefit per unit of cost.
  32. 32. Economics is logic of choice It teaches the art of rational decision making. Economics is of significant use in modern business, as decision – making is the core of business. Type of business decisions 1. Nature of product to be produced 2. The quantity in which it is to be produced 3. Quality of the product
  33. 33. Cost of production 5. Price and its distribution in the market 6.Diversification of business 7.Renewal of worn-out equipment and machinery 8. advertising 9. Investment 10. Demand analysis
  34. 34. • Economic Decisions for the Firm – What: The product decision – begin or stop providing goods and/or services. – How: The hiring, staffing, procurement, and capital budgeting decisions. – For whom: The market segmentation decision – targeting the customers most likely to purchase.
  35. 35. 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
  36. 36. Application areas of managerial economics in business decision making Production and inventory knowledge Human Resource Financial strategic Marketing
  37. 37.  Decisions in which problem is simple and outcome has high degree of certainty – Routine decisions  Decisions in which the problem is simple but the outcome has a low degree of certainty - Judgmental decisions  Decisions in which the problem is complex but the outcome has a high degree of certainty – Analytical  Decisions in which the problem is complex and the outcome has a low degree of certainty – Adaptive
  38. 38. Mohan Automobile Ltd. Is engaging in the business of repairing of automobiles. They have about 40 workers working in the workshop. Current practices have led to an extreme amount of customer dissatisfaction due to high waiting time, discourteous behaviour of workers and high cost of repairing . As a result , the customers have started getting their cars servicing elsewhere. The owner is very keen to improve the situation but finds that his people are not motivated by the spirit of service
  39. 39. Basically because of poor wages and indifferent supervision. This operation is located in environmentally alert community and they have been complaining the local municipal authority about the inconvenience caused in the locality. The owner manager wants your help in raising the level of productivity of the employees and effectiveness of operations You have to look into the operations of the company , analyse the whole situation and make necessary recommendation.

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