economics in btech

1. ECONOMICS
Dr. Rishiraj Sarkar

2. UNIT 1: INTRODUCTION TO ECONOMICS
 Economics is a social science devoted to the study of how people and societies get what they need
and want. Or, in more formal language, economics is the study of how societies divide and use
their resources to produce goods and services and of how those goods and services are then
distributed and consumed.
 Involves both Mathematics and Psychology.
 Needs & Wants:
Needs are based on physiological, personal, or socio-economic requirements necessary for you to
function and live.
e.g.# Transportation is a need for the modern, urban person because work, food, and other
necessities of daily life are too far from where he lives.
Wants, on the other hand, are a means to fulfilling our needs.
e.g.# You may be able to bike to work, use public transportation, or drive your own vehicle. While
any of the choices will work, you want a car to fulfill your need for transportation.
 Brief History of Economics:
The term Economics is derived from Greek words Oikas and Nemien which combined together
means ‘to manage household’.
The origin of modern economics can be traced back to 1776 when Adam smith’s (Father of
Economics) book ‘An enquiry into the nature and causes of wealth of nations’ was published.

3. Since then various economists have given different explanations and definitions of economics.
Overall it can be broadly divided into 4 parts:
 Wealth definition by Adam Smith (Wealth satisfies human needs)
 Welfare definition by Alfred Marshal (Material welfare is a part of human welfare)
 Scarcity definition by Robins (Unlimited wants, limited resources and alternative uses)
 Growth oriented definition by Samuelson (Producer-max. profit whereas Consumer-max.
satisfaction)
 Definition: (Suitable as per modern concept of Economics)
Lord Robins stated “Economics is a science which studies human behavior as a relationship
between ends and scarce means which have alternative uses”
-This definition suggests that economics is about allocation of scarce resources to alternative uses
so as to achieve maximum possible satisfaction to people.
 Few Important concepts:
 Value: Worth of goods and services as determined by the market. It is usually measured in
denominations of currency e.g.# Dollar, Rupee etc. Value is a relative concept based on how much
something is worth which can be based on various factors such as utility, scarcity, transferability
etc.
 Utility: Measure of pleasure or satisfaction gained by any person. Value depends on utility which
is nothing but value in exchange. It is subjective in nature.
 Market: Often defined as a place, system or arrangement where economic agents come into
contact for economic transactions. Market system helps in determination of prices.
 Money: Medium of exchange in a common value system.
 Price: Amount of money for which the good and services are exchanged in a transaction.

4.  Demand: Amount of goods that will be bought at given price.
 Supply: Amount of goods that the sellers are prepared to sell.
 Wealth: All things that have value. It must also characterize utility + scarcity + transferability.
Money is liquid form of wealth. Income is earning from wealth.
 Economic activity: Activities undertaken to earn a living. Includes consumption, production and
distribution.
Note: Managerial Economics is mostly a micro economic concept.
Economics
Micro = Individual Units
(Consumers, Business firm)
e.g.# Demand & Supply
study, per capita income etc.
Macro = Economy as a
whole
e.g.# Aggregate demand,
National Income study etc.

5. MANAGERIAL ECONOMICS
 Managerial Economics:
It can be defined as the discipline which deals with the application of economic theory to business
management.
Business
Decision
Making
(Problem)
Managerial
Economics (Optimal
Solution)
Decision Science
(Optimization
techniques like
Differential calculus,
Statistics, LPs, Game
theory etc.)
Economic Theory
(Micro & Macro)

6.  Characteristics of Managerial Economics:
 Micro-economic in nature
 Theory of firm and resource allocation
 Pragmatic in approach
 Normative economics (Prescriptive rather than descriptive)
 Limited use of macro economics
 Scope of Managerial Economics:
 Demand Analysis and Forecasting
 Cost and Production Analysis
 Pricing decisions, policies and practices
 Profit management
 Capital management

7.  Economic Theories applied in Managerial Economics (Fundamental
Concepts/Principles):
 The Opportunity cost principle: The cost involved in any decision consists of sacrifices of
alternatives required by that decision. If there are no sacrifices there are no costs.
For business decision making opportunity cost are the most relevant costs.
 The incremental principle: In price determination, this principle states that a firm would
maximize its profits if it equates its marginal costs to its marginal revenue. This means that a
business manager should expand his business in each direction only till MC<MR. The moment
MC=MR, the activity is to be limited.
This principle applies to changes in prices, products, procedures, investments or whatever is at
stake for business decision making.
Profit Maximization: MC =MR
 The principle of time perspective: A decision should take into account both the short run
and the long run effects on revenues and costs and maintain a right balance between both short
and long run perspective.
 The discounting principle: A fundamental fact of life is that people consider a rupee
tomorrow to be worth less than a rupee today. Anybody would prefer 100 Rs. today to 100 Rs.
next year. The reasons for this are:

8.  The future is uncertain.
 Even if one is sure to receive 100 Rs. in future, one would do well to receive 100 Rs. now and
invest it for a year and earn a rate of interest.
The discounting principle is used to calculate the present worth of investment obtainable in future.
Lets take an example of what is the present worth (PW) of 100 Rs. (Principle amount ‘P’)
obtainable after 1 year:
PW = P/(1+i)n where i = the rate of interest/discounting rate in % and n = No. of year
So, for this case:
PW = 100/ 1+ 8% = 92.59 (assume rate = 8%)
Similarly, at the same rate the PW of 100 Rs. after 2 years (n) will be 85.73 Rs. and so on for
respective years.
If a decision affects cost and revenues at future dates, it is necessary to discount cost and revenues
to obtain the present worth of both before a valid comparison of alternatives can be made.
 The equi-marginal principle: This principle suggests that available resources (inputs)
should be so allocated between the alternative options in such a way that the marginal
productivity gains/value of marginal product (VMP) from the various activities are equalized.
VMPA = VMPB = VMPC Where, A,B and C indicates the activities A,B and C

9. Example:
Equi-marginal principle is applied in the allocation of the resource in the way of production.
Example a farmer is having different four agricultural farms like
1. Paddy
2. Mangoes
3. Sugar cane
4. Corns.
The above four agricultural farms are in the total 80 acres, each farm in the 20 acres, all together
80 acres. The farmer is having limited 80 employees with him for employing in the four farms for
production. In general, 80 employees are divided and employed for four farms evenly as each
farm will be allotted with 20 employees. However, in reality there is no need to allot 20
employees for each farm, because mango farm need less number of employees, whereas paddy
farm needs more number of employees. Sugarcane and corn farms require average number of
employees. Like shown below:
The above table reveals the allocation of the resources (labour) available with a farmer according
to the production nature and requirement.

10. OBJECTIVES OF A FIRM
 There are several objectives of a business firm for which it exists. Some of the important
objectives of a firm are :
 Profit maximisation
 Value maximization/Wealth maximisation
 Sales Revenue maximisation
 Customer Satisfaction
 Market dominance etc.
Objectives
of a firm
Profit
Maximi
sation Wealth/Value
Maximisation
Market
Share
maximisatio
n/ Market
dominance
Customer
satisfaction
Social/Envir
onmental
concerns
Revenue
Maximisat
ion
Profit
Satisficing

11.  Lets discuss the most important objectives of a
firm. These are:
1. Profit maximisation (Short run)
2. Wealth/Value maximisation (Long run)
3. Sales revenue maximisation (Baumol’s
Theory)
 Profit Maximisation Model:
 An assumption in classical economics is that
firms seek to maximise profits.
 Profit = Total Revenue (TR) – Total Costs
(TC).
 Therefore, profit maximisation occurs at the
biggest gap between total revenue and total
costs.
 A firm can maximise profits if it produces at an
output where marginal revenue (MR) =
marginal cost (MC)
 Firm will increase profits when:
1. TR increase > TC increase
2. TR increase & TC unchanged
3. TR decrease < TC decrease
4. TR unchanged & TC decrease

12.  Limitations:
1. Long run time dimension not properly considered.
2. Firm’s behavior under risk and uncertainty overlooked.
 Value/Wealth Maximisation Model:
 Wealth Maximization Objective is also known as “Value Maximization” or “Net Present Worth
Maximization.” This objective is considered appropriate for decision making.
 Wealth means wealth of shareholders. Wealth of shareholders is determined by market value of
shares. Wealth also signifies Net Present Value(NPV)
 NPV is the difference between present value of cash inflows and present value of cash outflows.
In this way, wealth maximization objective considers time value of money and assign different
values to cash inflows occurring at different point of time.
 According to wealth maximization objective, investments should be made in such a way that it
maximizes Net Present Value.
Value of firm = NPV or simply present value (PV) of expected future profits (PR)
PV = PR1/ (1+ r)1 + PR2/ (1+ r)2 + ….. PRn/ (1+r)n
= ∑n PRt / (1+ r)t where r = rate of interest, PR = Profit and t = time
t = 1
PR = TR – TC or PR = R – C therefore, = ∑ [(R –C)t / (1+ r)t ]

13. PV = ∑ [Pt . Qt – (Vt . Qt + F) / (1 + r)t ]
TR = Pt . Qt and TC = Vt . Qt + F where, Pt = Price in a period, Qt = Quantity of
output sold in a period, Vt = Variable cost, F =
Fixed cost
Value of firm depends on the sale of products (Qt ) and pricing decision (Pt ) by business manager
on one hand and firm’s cost decision including fixed and variable cost on other hand.
Note: Discount rate of interest (r) is determined by risk and uncertainty faced by the firm and
conditions in the financial market.
 Sales Revenue Maximisation Model (Baumol’s Theory):
 According to Prof. Baumol, main aim of a firm is to maximise sales. By sales he meant total
revenue earned by the sale of goods. That is why this goal is also referred to as Sales
Maximisation Goal.
 According to this theory, once profits reach acceptable levels, the goal of the firms become
maximisation of sales revenue rather than maximisation of profits.
 In the words of Baumoul, 'The sales maximisation goal says that managers of firms seek to
maximise their sales revenue subject to the constraint of earning a satisfactory profits. “
 Reasons in favor of this theory:
 More Realistic: Goal of maximisation of sales is a more realistic goal- In fact, firms accord more
importance to the goal of sales maximisation than profit maximisation.
 More Practical: Revenue maximisation thesis of Baumol is more practical. It is so because goal
of revenue (Sales) maximisation leads to more production which, in turn, leads to fall in price.

14.  Strong position in the market: Maximum sales of a firm symbolize its strong position in the
market. Sales of a firm will be large only in that situation when consumers like its production,
firm has more competitive power and has been expanding. All these features are indicative of the
progress of the firm.
 Miscellaneous advantages: More Availability of Loans, More Advantageous to the Managers
etc.

15. Thank You!