ME- Unit-1.pptx

 Economics is the study of this allocation
of resources, the choices that are made
by economic agents. An economy is a
system which attempts to solve this
basic economic problem. There are
different types of economies; household
economy, local economy, national
economy and international economy but
all economies face the same problem.
The major economic problems are (i)
what to produce? (ii) How to produce?
(iii) When to produce and (iv) For whom
to produce?

 Economics is the study of how
individuals and societies choose
to use the scarce resources that
nature and the previous
generation have provided. The
world’s resources are limited and
scarce. The resources which are
not scarce are called free goods.
Resources which are scarce are
called economic goods.

 Vital for managerial decision making
 For designing and understanding
public policy
 Appreciate how an economy functions
 Practical tool for decision making

 Microeconomics
 Macroeconomics

 It is a branch of economics that studies the
behaviour of how the individual household and
firms make decisions to allocate limited
resources
 It applies to markets where goods and services
are being bought and sold
 Microeconomics examines how these decisions
and behaviours affect the supply and demand
for goods and services.

 It is a field of economics that studies the
behaviour of the economy as a whole and not
just one specific company, but entire
industries and economies.
 Economy wide phenomena- GDP, NI, Price
levels, etc

BASIS OF
DIFFERENCES
MICRO ECONOMICS MACRO ECONOMICS
Meaning Microeconomics studies
economic relationships or
economic problems of a level of
economic units like specific
individual, specific firm,
specification industry, etc.
Macroeconomics studies
economic relationships or
economic problems of the level of
the economy as a whole like
national income, national
savings, total investments,
employments etc.
Subject Matter Price determination of goods and
services, their allocation for
various functions and
determination of the
remuneration of the resources
are its subject matter.
Whereas, its subject matter
includes level of national income,
its effective factors and results,
income, employment, savings,
investments, etc.
Basic Concern Microeconomics is basically
concerned with determination of
output and price for an individual
firm or industry.
Macroeconomics is basically
concerned with determination of
aggregate output and general
price level in the economy as a
whole.

BASIS OF
DIFFERENCES
Scope Its scope is limited to the laws
based on marginal analysis.
Whereas, its scope is wide up
to the analysis related to the
problems of the whole
economy.
Assumptions Study of microeconomics
assumes that macro variables
remain constant; e.g. it is
assumed that aggregate output is
given while we are studying
determination of output and price
of an individual firm or industry.
Study of macroeconomics
assumes that micro variables
remain constant, e.g. it is
assumed that distribution of
income remains constant when
we are studying the level of
output in the economy.
Helpful Microeconomics is helpful for
individual units, firms and
industries to achieve the optimum
level.
Macroeconomics is helpful for
optimum situation of the whole
economy and bringing
economic stability.
Simple /
complicated
Microeconomics is simple, as
compared to macroeconomics.
Whereas, macroeconomics is
more complicated as compared
to microeconomics.

BASIS OF
DIFFERENCES
Central Issue Macroeconomics is helpful for
optimum situation of the whole
economy and bringing
economic stability.
Level of output (and
employment) is the central
issue in macroeconomics.
Use Microeconomics is used for
determination of various policies
of a firm or industry and talking
decisions about them.
used for solution of national
problems, taking of economic
decisions at the level,
determination of economic
policies and policy decisions at
international level.
Importance The importance of this
economics is getting reduced,
due to increasing complex
problems of the present age.
more useful in solution of these
problems. Hence, importance
of macroeconomics is going on
increasing as compared to
microeconomics.

 ME is the integration of economic theory with
business practice for the purpose of facilitating
decision making and forward planning by
management
 ME is the use of economic modes of thought to
analyse business situation
 Managerial economics is a stream of
management studies that emphasizes primarily
solving business problems and decision-
making by applying the theories and principles
of microeconomics and macroeconomics.

 Business planning and forecasting
 Assists in decision making
 Optimization of resources
 Creates good working environment
 Relationship building
 Coordination building

 Managerial economics focus on management
analysis based on financial and cost accounting
data. Thus, the reliability of this data depends on
the accuracy of the financial accounting
information.
 Such analysis is based on past information. But if a
new scheme is to be introduced, the
circumstances change and the conclusions cannot
be predicted using this past information.
 Managerial economics is subjected to the personal
preferences of the individual manager which can
influence the final decision of the manager to a
certain extent.

 It is an expensive process as a business firm
generally requires a certain number of
managers to ensure proper functioning.
 The manager is required to have extensive
knowledge in a variety of fields in order to
ensure that he completely comprehends the
situation to be dealt with."

 What to produce?- range of goods to be produced-
resources are limited- choose between
alternatives-allocation of resources- types of
goods; consumer, capital goods- this decision is
based on availability of raw materials, market
demand and technology
 How to produce?- having decided on what to
produce- techniques of production- efficiency of
production using ltd resources yields maximum
profits
 For whom to produce?- how national product
should be distributed-depends on ability to pay
principle- according to need principle

 Any system that involves the
mechanism for production,
distribution, and exchange of
goods apart from consumption of
the goods and services within the
different entities can be classified
as an Economic System.

 All these are characterized by the
ownership of the economic
resources and the allocation of the
same.

 Capitalist System
 In a Capitalist Economy, the capital is privately
owned and distributed with governmental
oversight and regulation. This is the predominant
economic system in the world today.
 Capitalism is often thought of as an economic
system in which private actors own and control
property in accord with their interests, and demand
and supply freely set prices in markets in a way
that can serve the best interests of society. The
essential feature of capitalism is the motive to
make a profit.
 Hong kong, UAE, New zealand

 Communist System
 In this kind of economic system, the state takes
upon itself the allocation and production functions
as well as distribution of the goods and services. In
this system, capital cannot be privately held and
there is communal ownership or what is known as
“Communism”
 most property and economic resources are owned
and controlled by the state (rather than individual
citizens)
 China, North Korea

 Socialist and Mixed Economic Systems
 under socialism, all citizens share equally in
economic resources as allocated by a
democratically-elected government.
 Norway, Sweden, Denmark, Iceland, and
Finland follow socialism strictly. They are
purely socialistic countries.

1. Opportunity cost: decision implies making a
choice from the various alternatives
 It is the sacrifice of the next best alternatives
course of action available
 Defined as the revenue foregone or
opportunity lost by not using the resources
 Also called as imputed cost
 An imputed cost is an invisible cost that is
not incurred directly

2. Marginal principle : Marginal generally refers
to small changes. Marginal revenue is change in
total revenue per unit change in output sold.
Marginal cost refers to change in total costs per
unit change in output produced (While
incremental cost refers to change in total costs
due to change in total output)
Ex: Keeping the bookstore open for one more
hour- equals to additional revenue

3. Incremental principle: refers to change in total-
change in total cost due to specific decision,
similarly incremental revenue is the change in the
total revenue due to specific decision
 Incremental revenue is more than incremental
cost –profit
Ex: increase in sales of a firm by online sales-
additional cost launching the online mechanism

4. Equi- marginal principle
Equi-marginal principle is one of the widely used
concepts in managerial economics. This principle
is also known the principle of maximum
satisfaction - by allocating available resource to
get optimum benefit . This principle provides a
basis for maximum utilization of all the inputs of a
firm so as to maximize the profitability.
Value added by large input is same in all cases
Ex: Firm is involved in 3 activities; A, B,C- all these
activities require services of labour- the firm
should allocate equal labour to all activities

5. Scarcity Principle: maybe defined excess
demand
If demand(requirement) exceeds
supply(availability) that is said to be scarce
Ex: unemployment- scarcity of jobs, Inflation-
scarcity of goods, unsold stock of inventory-
scarcity of buyers

6.Principle of time perspective: ME is
concerned with short run and long run effects
of decisions on revenues as well as costs
Managers should maintain right balance
between long run and short run
Time is important factor in business decision
making
Trade cycles, seasonal fluctuations
Ex: Diwali seasons- fireworks
Raincoats , guide books during exam, flights

7. Discounting principle: present gain is valued
more than future gain
According to this principle, if a decision affects
costs and revenues in long-run, all those costs
and revenues must be discounted to present
values before valid comparison of alternatives
is possible. This is essential because a rupee
worth of money at a future date is not worth a
rupee today

 ME and statistics-used in collecting, processing
and analyzing data- business decisions is based
on probable economic events- probability,
forecasting techniques
 ME and accounting- accounting is one of the
principal source for decision making- P/L
statement of the firm tells how well the firm has
done – whether it should improve or close down
 ME and mathematics- major problem of
businessman is how to minimize cost or maximize
profit or how to optimize sales- logarithms,
exponentials, matrix etc are required in ME

 ME and OR- ME depends on models and tools of
operation research- OR models used in solving
complex problems of planning and allocation of
scarce resources – in defence industries
 ME and theory of decision making – dealing with
problems under uncertainty
 ME and Economics: ME is nothing but economics
applied to decision making- micro and macro

 In free market mechanism economy(prices of
goods and services are self regulated by buyers
and sellers negotiating in an open market without
market coercions), the public sector is responsible
to maintain law and order in a country, make
national defense stronger, and regulate money
supply. On the other hand the public sector of a
mixed economy is involved almost all economic
activities, such as production, distribution, and
consumption.

The government
(1) provides the legal and social framework within
which the economy operates
(2) maintains competition in the marketplace
(3) provides public goods and services
(4) redistributes income
(5) corrects for externalities(cost or benefit caused
by a producer that is not financially incurred; ex:
factory that pollutes the environment creates a cot
to society: but these costs are not priced in final
goods)
(6) takes certain actions to stabilize the economy.

 Private sector contributes about three-forth of the
country's national income. Moreover, this sector
also plays a vital role to increase gross domestic
saving (GDS) and gross domestic capital
formation'(GDCF) within the economy.
 GDS- GDP- final consumption expenditure;
consists of savings of household sector, private
corporate sector and public sector
 GDCF- net increase in the physical asset by the
household, public and government sector

 Industry development
 Employment generation
 Contribution to agriculture – farm to fork-
1990- promoting science based technology
 High potentiality
 Provides resources
 Tax revenue- creates 90% of jobs, 60% of
investments, 80% to the govt revenues
 Variety to consumer- technological
improvement

 Since human wants are unlimited and
the means to satisfy them are limited ,
every society is faced with the
fundamental problem of choosing and
allocating its scarce resources among
alternatives
 The PPF or PPC is an analytical tool
which is used to illustrate and explain
this problem of choice

 It is the graph that shows the different
combinations of the quantities of two goods that
can be produced(or consumed) in an economy at
any point of time, subject to the availability of
resources
 It also depicts the trade off between any two
items produced
 In other words if one wants to have more of one
goods, he must have less of other goods due to
limited availability of resources

 It can be used to demonstrate the point that any
nation's economy reaches its greatest level of
efficiency when it produces only what it is best
qualified to produce and trades with other
nations for the rest of what it needs.

 PPC- if one wants to have more of one
goods, he must have less of other goods due
to limited availability of resources
 This curve not only represents the
opportunity costs concept
 It actually measures OC- OC of increasing
one item’s production in terms of units of the
other foregone(which is nothing but the
slope)
 Another use of PPC is that it highlights the
significance of scarcity of resources and the
need to use them

 It is the curve that illustrates the
production possibilities of an economy
 The alternative combination of two
goods that an economy can produce
with given resources and technology
 PPC represents the boundary of the
economy’s production capabilities

 Lipsey: “PPC is that curve which shows the
possible combinations of two goods that can be
produced by an economy, given available
resources and technology”
 Samuelson: “PPC is that curve which represents
the maximum amount of a pair of goods or
services that can both be produced with an
economy’s given resources and technique
assuming that all resources are fully employed”

 Resources are used to produce one or both of only
two goods
 The quantities of labour, capital, land and
entrepreneurship resources do not change
 The information and knowledge that society has about
the production of goods and services is fixed
 Resources are used in technically efficient way
 Fixed technology
 Short run is the time frame over which resources
cannot be improved or increased

 Let us suppose that the economy can
produce two commodities, cotton and
wheat. We suppose that the productive
resources are being fully utilized and there
is no change in technology. The following
table gives the various production
possibilities

 It all available resources are employed for the
production of wheat, 15,000 quintals of it can be
produced. If, on the other hand, all available resources
are utilized for the production of cotton, 5000 quintals
are produced. These are the two extremes represented
by A and F and in between them are the situations
represented by B, C, D and E. At B, the economy can
produce 14,000 quintals of wheat and 1000 quintals
of cotton.
 At C the production possibilities are 12,000 quintals
of wheat and 200u quintals of cotton, as we move
from A to F, we give up some units of wheat for some
units of cotton For instance, moving from A to B, we
sacrifice 1000 quintals of wheat to produce 1000
quintals of cotton, and so on. As we move from A to F,
we sacrifice increasing amounts of cotton.

 This means that, in a full-employment
economy, more and more of one good can
be obtained only by reducing the
production of another good. This is due to
the basic fact that the economy’s resources
are limited
 The following diagram illustrates the
production possibilities set out in the above
table

 In this diagram AF is the production
possibility curve, also called or the
production possibility frontier, which
shows the various combinations of the two
goods which the economy can produce
with a given amount of resources
 The production possibility curve is also
called transformation curve, because when
we move from one position to another, we
are really transforming one good into
another by shifting resources from one use
to another

 It is to be remembered that all the
points representing the various
reduction possibilities must lie on the
production possibility curve AF and not
inside or outside of it
 This is so because at U the economy will
be under-employing its resources and
H is beyond the resources available

 Point H outside
the production
possibility curve
represents the
unachievable
combination
 Point U inside the
production
possibility curve
represents the
unproductive
combination from
available
resources

 Hypothetical and static
 No practical use
 No analytical device
 Environmental consequences
 Downside effects
 Short run phenomena

 In the end, PPC teaches us that there are
always production limits, meaning in order to
be efficient, the economy must decide what
combination of goods and services should be
produced.

 A managerial economist can play a
very important role by assisting the
management in using the increasingly
specialized skill and sophisticated
techniques which are required to solve
the difficult problems of successful
decision making and forward
planning.

 Analysis of external factors- beyond the
control of management- business
environment- prices, NI, business cycle,
government policies, international trends
These are very important to the firm- ME by
studying these can contribute effectively to the
firm
 Analysis of internal factors- also called as
business operations can well be operated by
the firm- ME can solve problems related to
price determination, use of installed
capacity, investment decisions, expansions
and diversifications,

 Specific functions: sales forecasting,
market research, analysis of
competing firms, advice on foreign
exchange, environmental forecasting,
production and inventory schedule
etc.

 To make reasonable profits on capital
employed
 Successful forecasts
 Knowledge of sources of economic
information
 His status in the firm
 Analysis of external factors
 Analysis of internal factors
 Specific functions

 Cooperation- involves people working
together to reach a goal
Ex: individuals from around the world come
together during crisis
 Competition- involves working toward a goal
while denying access to that goal to others. It
can be between individuals or group
Ex: election
However, co-operation may be coerced (forced)
or voluntary (freely chosen), and consequently
individuals and groups might co-operate even
although they have almost nothing in common
qua interests or goals.

 Examples of that can be found in market trade,
military wars, families, workplaces, schools and
prisons, and more generally any institution or
organization of which individuals are part (out
of own choice, by law, or forced).
 The need or desire to compete with others is a
common impetus that motivates individuals to
organize into a group and cooperate with each
other in order to form a stronger competitive
force.

 Competition- varies from company to company
 Benefits from competition- customer oriented,
productivity, innovation related benefits
 Cooperation- trust, common goals and existence
of cooperation mechanisms
 In india competition- product diversification, price
wars, reducing profit margins, limiting market
growth
 Knowledge based competition
 Cooperation is considered as a better tool for
growth and achievement

 The contemporary concepts of economic
advancement are largely based on the concepts
of collaboration; cooperation and competition for
developed countries include an entire range of
governmental functions, including economic
integration, privatisation, public sector
enhancement, labour market competitiveness,
investment climate enhancement, e-government,
soft infrastructures for developing a knowledge
economy, macroeconomic management and
effective long-range planning

 An externality is a cost or benefit associated with
the production or consumption of a product or
service. Externalities affect third parties who don't
take part in the production of a product and don't
consume the product or service.
 If a product helps society, it's a positive
externality, but if the effect of production or
consumption does more harm than good for
society, it's a negative externality.

 A positive externality is a benefit of producing or
consuming a product. For example, education is a
positive externality of school because people
learn and develop skills for careers and their lives.
 In comparison, negative externalities are a cost of
production or consumption. For example,
pollution is a negative externality that results
from both producing and consuming certain
products.

 When both businesses and consumers receive
a positive benefit as a by-product of the
production and consumption of a product or
service, economists consider this result to be
a positive externality. Here are examples of
how externalities can boast a positive effect
for society and industries:

1. Education: Education provides a personal
and public benefit to people. Individuals
learn new skills and obtain knowledge by
consuming products or services, such as
workshops, college, tutorials and mobile
applications that provide training. This
makes education a positive externality of
consumption.

2. Environment: The decisions businesses and
consumers make in manufacturing and
purchasing goods or services are externalities
that affect the environment. For example, buying
electric cars or recycling plastic, paper and glass
products are actions consumers can take to help
protect the environment, which provides social
benefit. Third parties can enjoy a clean
environment when businesses and customers
create and use products responsibly.

3.Technology: Technology can be a positive
externality of production when product
creation leads to technological innovations. For
example, a company may engineer a new
machine in order to produce a product more
efficiently
The internet is also a good example of a
product that has many positive externalities,
including education, accessibility and social
interaction.

4.Research and development: The work that
research and development teams do can create
benefits for society in ways such as providing
safety, promoting wellness and encouraging
education. For example, when they develop a
vaccine for an illness, even people who aren't
involved in producing or consuming the product
can receive protection from getting sick. The
research and development departments in
businesses create better ways to produce goods
that benefit people as well as the environment.

 When the private gain of a manufacturer
outweighs the social benefits from a product
or service, this result is considered a negative
externality.
 Here are some examples of negative
externalities:

1.Environment: Pollution is the most common
externality of the production and
consumption of goods. Pollution such as
runoff waste into water and smoke from
manufacturing products negatively affects the
environment and third parties. Through the
enforcement of laws and policies, businesses
can regulate and reduce the negative
externalities associated with their products.

2. Social actions: The social behaviors of
consumers as they use a product can negatively
affect others, resulting in a negative externality.
For example, smoking in public places can harm
others who inhale secondhand smoke.
To remedy this, there are restrictions on where
people can smoke, which help reduce the
negative externality of cigarettes. Another
example is traffic when it gets congested
because of driving behaviors, such as failure to
merge properly.

3. Resource allocation: The allocation of
resources means to assign certain materials to
a location. This can make some materials
scarce when not dispersed. Both consumers
and businesses can cause this negative
externality when they use a resource
disproportionally, and it affects others. For
example, when products are priced too high
for some consumers, the product naturally
allocates to wealthier consumers.

 Economic stability enables other macro-economic
objectives to be achieved, such as stable prices and
stable and sustainable growth. It also creates the right
environment for job creation and a balance of
payments. This is largely because stability creates
certainty and confidence and this
encourages investment in technology and human
capital.
 Unfortunately, an unintended consequence of
globalisation is the increased likelihood of economic
shocks, including supply side shocks like oil and
commodity price shocks, and demand side shocks like
the credit crunch(sudden reduction in the availability
of money).

 Fiscal stabilisers: spontaneous changes in
government spending and revenues that help
stabilise the economy after negative and positive
shocks without any discretionary policy -
automatic fiscal stabilisers, which include
progressive taxes and escalating welfare
payments, provide a shock absorber to stabilise
an economy following an economic shock.

 Floating exchange rates: A floating exchange rate
is a regime where the currency price of a nation is
set by the forex market based on supply and
demand relative to other currencies. Floating
exchange rates are also seen as an automatic
stabiliser.
 Flexible labour markets: Labor market flexibility
refers to how quickly a firm responds to changing
conditions in the market by making modifications
to its workforce. A flexible labor market allows
employers to make changes in response to supply
and demand issues, the economic cycle, and other
market conditions.

 Monetary policy: Monetary policy is a set of
tools that a nation's central bank has
available to promote sustainable economic
growth by controlling the overall supply of
money that is available to the nation's banks,
its consumers, and its businesses.

 Government plays four main functions in the
market economy
1. Efficiency: First, the government should attempt
to correct market failures like monopoly and
excessive pollution to ensure efficient functioning
of the economic system. Externalities (or social
costs) occur when firms or people impose costs
or benefits on others outside the marketplace.

2. Infrastructure: Secondly, the government should
provide an integrated infrastructure.
Infrastructure (or social overhead capital) refers
to those activities that enhance, directly or
indirectly, output levels or efficiency in
production. Essential elements are systems of
transportation, power generation,
communication and banking, educational and
health facilities, and a well-ordered government
and political structure.

2. Equity: Government programmes to promote
equity use taxes and spending to
redistribute income toward particular
groups.
3. Economic growth or stability: Fourthly,
governments rely upon taxes, expenditures
and monetary regulation to foster
macroeconomic growth and stability to
reduce unemployment and inflation while
encouraging economic growth.

 Markets are places where buyers and sellers
can meet to sell and purchase goods and
services.
 Markets provide places for firms to sell their
goods and gain revenue.
 Markets provide places for consumers to buy
the goods and services that they need.
 Markets are mostly self-regulated, relying on
the principles of supply and demand to
determine prices.

 Ration scarcity : Suppose a good is becoming
scarce and close to running out, then the
supply of the good will fall. Causing the price
to rise.
 Incentives. Markets create incentives for firms
to respond to shortages and surpluses.
Suppose a good becomes very popular,
market forces will push up prices However,
this higher price acts as a signal for firms to
increase supply

 Invisible hand – determine prices: an invisible
hand of markets setting the price. The
advantage of markets is that they don’t need
any government or outer control to set
prices. Prices are set by market forces. This
means that most businesses can be run
without government bureaucracy which can
be inefficient and prone to corruption.

 Efficiency: When a market is functioning
properly, then consumers will have a choice
about where to buy their goods and services.
If one firm allows costs to rise or provides
sub-standard services, then it will become
unprofitable and go out of business.
Therefore, in a market economy, there is a
strong incentive for firms to be efficient, cut
costs and offer a good service to consumer.

 Consumer choice. Without markets,
consumers would struggle to get the goods
and services they need. Markets enable
consumers to choose the cheapest (or best)
product, leading to a greater range of
choices. New markets can continually spring
up offering consumers choices there were not
aware of.

ME- Unit-1.pptx

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