Unit-1 ECONOMICS.pptx

Course Objective:
Understand the relative importance of
Managerial Economics
Know how the application of the
principles of managerial economics can
aid in achievement of business
objectives
Understand the modern managerial
decision rules and optimization
techniques

Be equipped with the tools necessary in
analysis of consumer behavior as well
as in forecasting product demand
Understand and be able to apply latest
pricing strategies
Understand and analyse the macro
environment affecting the business
decision making.

UNIT –I
Basic Concepts and principles:
 Definition, Nature and Scope of
Economics
 Micro Economics and Macro Economics
 Managerial Economics and its relevance
in business decisions, Fundamental
Principles of Managerial Economics
Incremental Principle, Marginal
Principle, Opportunity Cost Principle,
Discounting Principle, Concept of Time
Perspective, Equi-Marginal Principle

UNIT –II
Demand and Supply Analysis :
 Theory of Demand, Types of
Demand. Determinants of demand ,
 Demand Function, Demand
Schedule, Demand curve, Law of
Demand, Exceptions to the law of
Demand, Shifts in demand curve
 Elasticity of Demand and its
measurement. Price Elasticity, Income
Elasticity, Arc Elasticity. Cross Elasticity
and Advertising Elasticity. Uses of

UNIT –III
Production and Cost Analysis:
Production concepts & analysis;
Production function, Types of production
function, Laws of production : Law of
diminishing returns , Law of returns to
scale.
Cost concept and analysis: Cost, Types
of costs, Cost output relationship in the
short-run. Cost output relationship in the
Long-run.

UNIT –IV
Perfect and Imperfect Market Structures
, Perfect Competition, features,
determination of price under perfect
competition. Monopoly: Feature, pricing
under monopoly, Price Discrimination.
Monopolistic: Features, pricing under
monopolistic competition, product
differentiation.

UNIT –V
 National Income; Concepts and
various methods of its measurement
 Circular flows in 2 sector, 3 sector, 4
sector economies
 Inflation, types and causes
 Business Cycle & its phases

S. No.
Topics Lectures Comm.
Lectures
1 Introduction about Subject, Books, Authors, Teaching Methodology 1 1
2 Unit ‐ 1 Basic Concepts and Principles: Introduction about Economics, Managerial Economics,
Different Definitions of Economics, its criticism
2 3
3 Nature & Scope of Economics, Art, Science, Positive and Normative Economics, Difference between
Micro and Macro Economics, Concept of Efficiency, Managerial Economics and its relevance in
business decisions
2 5
4 Fundamental Principles of Managerial Economics - Incremental Principle, Marginal Principle,
Opportunity Cost Principle, Discounting Principle, Concept of Time Perspective, Equi-Marginal
Principle, Utility Analysis, Cardinal Utility and Ordinal Utility.
3 8
5 UNIT –II Demand and Supply Analysis: Meaning of Demand, Types of Demand, Determinants of
demand, Demand function, schedule, curve, Law of demand, Assumptions, Reasons, Exceptions,
Shifts in demand curve
2 10
6 Elasticity of Demand and its measurement. Price Elasticity, Income Elasticity, Arc Elasticity, Cross
Elasticity and Advertising Elasticity. Uses of Elasticity of Demand for managerial decision, Degree of
EOD, Measurement, Use of EOD, Numerical on Elasticity of Demand and its types
4 14
7 Demand forecasting meaning, significance and methods, Supply Analysis; Law of Supply, Reasons,
Indifference Curve, Budget Line, Supply Elasticity; Analysis and its uses for managerial decision
making, Price of a Product under demand and supply forces
3 17
8 UNIT –III Production and cost Analysis: Production concepts & analysis; Production function, Types
of production function, Laws of production : Law of diminishing returns , Law of returns to scale
3 20
9 Cost concept and analysis, Types of Costs, Short-run and Long-run cost curves, Market Equilibrium
and Average Revenue, Marginal Revenue, Total Revenue
2 22
10 UNIT – IV Market Structure: Perfect and Imperfect Market Structures Perfect Competition, features,
determination of price under perfect competition
3 25
11 Monopoly: Feature, pricing under monopoly, Price Discrimination under Monopoly, Monopolistic:
Features, pricing under monopolistic competition
3 28
12 Oligopoly: Features, kinked demand curve, cartels, price leadership, Duopoly 2 30
13 UNIT –V: National Income; Concepts and various methods of its measurement 3 33
14 Circular flows in 2 sector, 3 sector, 4 sector economies 1 34
15 Inflation, types and causes 2 36
16 Business Cycle & its phases 2 38
17 Previous year question papers discussion/ Problem solving sessions 2 40

Reference Books:
1. Dwivedi D.N. - Managerial Economics
(Vikas Publication, 7th Edition)
2. Petersen/Jain Managerial economics-
4e (Prentice hall)
3. Raj Kumar- Managerial Economics
(UDH Publishers, 2013 edition)
4. Damodaran Suma – Managerial
Economics (Oxford 2006)
5. Atmanand- Managerial Economics
(Excel Books)
6. Keats- Managerial economics-6e
(Prentice hall)

Teaching Pedagogy
Day -1
Introduction about topic
Dictation
Discussion
Qns-Ans & Problem Solving Sessions
Presentation
Revision/ Summary
Day -2
Revision of previous lecture
Introduction about new topic
Dictation

UNIT –I
Basic Concepts and principles:
 Definition, Nature and Scope of
Economics
 Micro Economics and Macro Economics
 Managerial Economics and its relevance
in business decisions
 Fundamental Principles of Managerial
Economics Incremental Principle,
Marginal Principle, Opportunity Cost
Principle, Discounting Principle, Concept
of Time Perspective, Equi-Marginal

Definition of Economics:
 The term economics comes from the
Ancient Greek word “Oikonomia”, which
means "management of a household,
administration”.

Economics
 There are various definitions given by
different economists can be classified
under four heads:
 Economics as a science of wealth.
 Economics as a science of material welfare.
 Economics as a science of scarcity and choice.
 Economics as a science of growth and efficiency

Economics as a Science of Wealth/Classical View:
(Adam Smith):
(1723 -1790) [Founder of Economics/Father of
Economics]
Adam Smith in his famous book, “An Enquiry into the Nature and
Causes of the Wealth of Nations” emphasized the production and
expansion of wealth as the subject matter of economics.
“The study of nature and causes of generating
of wealth of a nation”.
There are four aspects of wealth in the light of
Adam Smith’s definition of Economics.
1. Production of wealth
2. Exchange of wealth
3. Distribution of wealth
4. Consumption of wealth

Other Definitions given by Classical Economists:
 Ricardo, another British classical
economist shifted the emphasis from
production of wealth to the
distribution of wealth in the study of
economics.
 J.B. Say, a French classical
economist, described economics as:
“The science which treats of
wealth”.

Criticism on the Classical Definition of Economics:
(i) Too much importance to wealth
(ii) Narrow meaning of wealth
(iii) Concept of economic man
(iv) No mention of man’s welfare
(v) It does not study means

Economics as a Science of Material Welfare/Neo-
Classical View:
Marshall’s Definition of Economics: Dr.
Alfred Marshall (1842 - 1924) in his
book, 'Principles of Economics' defined
Economics as:
“Study of mankind in the ordinary
business of life; it examines that part of
individual and social actions which is
closely connected with the attainment
and with the use of material requisites of
well being”.

 This definition clearly states that
Economics is on the one side a study
of wealth and on the other and more
important side a part of the study of
man.
 Marshall’s followers like Pigou,
Cannon and Baveridge (the Neo-
classical writers) have also defined
Economics as: “Study of causes of

Robbins's Criticism:
(i) Narrows down the scope of
economics
(ii) Relation between economics and
welfare
(iii) Welfare is a vague concept
(iv) Impractical

Economics as a Science of
Scarcity and Choice:
 Robbins Definition of Economics:
 Economics is a science which studies
human behavior as a relationship
between ends and scarce means
which have alternative uses”.
 According to Robbins
(a) human wants are unlimited
(b) means at his disposal to satisfy
these wants are not only limited

Criticism on Robbins Definition of
Economics
(i) Reduced economics merely to a theory
of value
(ii) Scope of economic has been widened
(iii) Economics has become a colorless
science
(iv) Study of economic growth

Economics as a Science of Growth and
Efficiency
 The modern economist’s define
economics as: “A science of growth
and efficiency".

 According to Samuelson: "Economics
is the study of how people and society

 In the words of C.R. McConnell: “Economics can be
defined as a science of efficiency in the use of resources
so as to attain the greatest or maximum fulfillment of
society’s unlimited wants”.
 Prof. A.C.Dhas defines economics as “The study of
choice making by individuals, institutions, societies,
nations and globe under conditions of scarcity and surplus
towards maximizing benefits and satisfying the unlimited
present and future needs.”

 In short, the subject Economics is
defined as the “Study of choices by all
in maximizing production and
consumption benefits with the given
resources of scarce and surplus, for
present and future needs.”

 Economics can be defined as:
 “A social science which is concerned with
the proper use and allocation of resources
for the achievement and maintenance of
growth with stability and efficiency”.

Scope of Economics:
 The scope of economics is the area or
boundary of the study of economics.
 In scope of economics, we answer and analyze
the following three main questions:
(i) What is the subject matter of economics?
(ii) What is the nature of economics?
(iii) What is the importance of economics?

(i) Subject Matter of Economics:
 Adam Smith, the father of modern economic
theory, defined economics as a subject, which
is mainly concerned with the study of nature
and causes of generation of wealth of nation.
 Marshall introduced the concept of welfare in
the study of economics. Marshall has shifted
the emphasis from wealth to man. He gives
primary importance to man and secondary
importance to wealth.

 Economics is a science which studies
human behavior as a relationship
between ends and scarce means
which have alternative uses”.
According to Robbins (a) human wants
are unlimited (b) means at his disposal
to satisfy these wants are not only
limited, (c) but have alternative uses.
 Man is always busy in adjusting his
limited resources for the satisfaction of
unlimited ends. The problems that
centre round such activities constitute
the subject-matters of economics.

 Paul and Samuelson, however, includes
the dynamic aspects of economics in the
subject matter. According to them,
"economics is the study of how man and
society choose with or without money, to
employ productive uses to produce various
commodities over time and distribute them
for consumption now and in future among
various people and groups of society”.

(ii) Nature of Economics:
 The economists are also divided regarding
the nature of economics. The following
questions are generally covered in the nature
of economics.
(a) Is economics a science or an art?
(b) Is it a positive science or a normative
science?

 Positive Science: Positive Science
only explains, “What is”.
 It deals with things as they are and
explains causes and effects without
making value judgments whether it is
right or wrong. In other words, positive
science only describes things as they
actually are. These may be called
‘Pure Science’.

 Normative Science: Normative Science is
concerned with “What ought to be”. It is
concerned with the “ideal”. It discusses whether
a thing is good or bad and lays down policies or
rules to achieve what is considered to be good.
Normative science may be called ‘applied
science’. Thus, managerial economics is
normative science.
The nature of managerial economics is as follows:
 M.E. is of micro economic in character
 ME is concerned with normative micro
economics

Difference between Positive Science and Normative
Science

Business Economics
[also called Managerial Economics]
Definitions:
 Business Economics is the application of
economic theory and methodology to
business.
 “Business economic consists of the use of
economic modes of thought to analyze
business situations.”
- Mc Nair and Meriam

The integration of economic theory with business practice for
the purpose of facilitating decision-making and forward
planning by management.”
- Siegel man
“Managerial economics is the application of economic theory
and methodology to business administration practice” -
Brigham and Pappas
We may, therefore, define business economic as that
discipline which deals with the application of economic
theory to business management.

Scope and Subject Matter:
 An aggregate view of scope and subject
matter of managerial economics is
 Demand Analysis
 Demand Forecasting
 Cost Analysis
 Production Analysis
 Pricing Decision
 Profit Management
 Capital Budgeting

Uses of Managerial
Economics:
 Managerial economics taken the aid of other academic
disciplines having a bearing upon the business decisions
of a manager.
 Managerial economics helps in reaching variety of
business decision in a complicated environment such as
 What products and services to be produced
 What inputs and production techniques to be used

 How much to be produced and to be sold
at what price
 What are best sizes of plant and where to
locate the plant
 When equipment should be replaced
 How the capital to be allocated
 Managerial economics makes a manager a
more competent model builder.
 Managerial economics serves as an
integrating agent by coordinating different
functional areas to take effective decision.

Basic Principles of Managerial
Economics
 1. The Incremental Concept
 2. The Concept of Time Perspective
 3. The Opportunity Cost Concept
 4. The Discounting Concept
 5. The Equi-marginal Concept

The Incremental Concept:
 This principle states that a decision is said
to be rational and sound if given the firm’s
objective of profit maximization, it leads to
increase in profit, which is in either of two
scenarios
 If total revenue increases more than total
cost
 If total revenue declines less than total

Concept of Time Perspective:
The time perspective concept
states that the decision maker
must give due consideration both
to the short run and long run
effects of his decisions. He must

 The Opportunity Cost Concept:
 Resources are scarce, we cannot produce
all the commodities. For the production of
one commodity, we have to forego the
production of another commodity. We
cannot have everything we want.
 We are, therefore, forced to make a choice.
Opportunity cost of a decision is the
sacrifice of alternatives required by that
decision. Sacrifice of alternatives is

 Equi-Marginal Concept:
 The law of equi-marginal utility states that
the consumer will distribute his money
income between the goods in such a way
that the utility derived from the last rupee
spend on each good is equal. In other
words, consumer is in equilibrium position
when marginal utility of money expenditure
on each goods is the same.

 The equi-marginal principle states that
consumers will choose a combination of
goods to maximise their total utility. This
will occur where
 The consumer will consider both the
marginal utility MU of goods and the price.

 Discounting Concept:
 Discounting principles is used to
determine the value of something in the
future, compared to its present day value.
 The reasoning behind the discounting
principle is that an amount of money you
have in your hands today is worth more
than money you have the potential for
having at some future time. You would
rather have $100 today than wait until
tomorrow for the same amount of money.

 A simple example would make this point
clear. Suppose a person is offered a
choice to make between a gift of 100$
today or 100$ next year. Naturally he will
choose the 100$ today.
 This is true for two reasons. First, the

 Marginal Principle: Increase the
level of an activity if its marginal
benefit exceeds its marginal cost, but
reduce the level if the marginal cost
exceeds the marginal benefit.

Concept of Utility:
 Jevon (1835 -1882) was the first
economist who introduces the concept of
utility in economics.
 According to him:
 "Utility is the basis on which the demand
of a individual for a commodity depends
upon".

 Utility is defined as: "The power of a
commodity or service to satisfy human

Total Utility (TU):
 "Total utility is the total satisfaction
obtained from all units of a particular
commodity consumed over a period of
time".
 Total utility is the amount of satisfaction
(utility) obtained from consuming a
particular quantity of a good or service
within a given time period. It is the sum of
marginal utilities of each successive unit of
consumption.
 Formula: TUx = ∑MUx

 Marginal Utility (MU):
 "Marginal utility means an additional or
incremental utility. Marginal utility is the
change in the total utility that results from
unit one unit change in consumption of the
commodity within a given period of time".
 Marginal utility, thus, can also be
described as difference between total
utility derived from one level of
consumption and total utility derived from
another level of consumption.

The relationship between total utility and marginal
utility is now explained with the help of following schedule
and a graph.

Law of Diminishing
Marginal Utility:
 The law of diminishing marginal
utility describes a familiar and
fundamental tendency of human
behavior. The law of diminishing
marginal utility states that:
 “As a consumer consumes more and
more units of a specific commodity,
the utility from the successive units
goes on diminishing”.


Law is Based Upon Three
Facts:
 The law of diminishing marginal utility is
based upon three facts.
 First, total wants of a man are unlimited
but each single want can be satisfied. As a
man gets more and more units of a
commodity, the desire of his for that good
goes on falling. A point is reached when
the consumer no longer wants any more
units of that good.
 Secondly, different goods are not perfect
substitutes for each other in the

 In given span of time, the more of a
specific product a consumer obtains, the
less anxious he is to get more units of that
product” or we can say that as more units
of a good are consumed, additional units
will provide less additional satisfaction
than previous units.

 Law of Equi-Marginal Utility
 The law of equi-marginal utility is simply
an extension of law of diminishing
marginal utility to two or more than two
commodities. The law of equilibrium utility
is known, by various names. It is named
as the Law of Substitution, the Law of
Maximum Satisfaction, the Law of
Indifference, the Proportionate Rule and
the Gossen’s Second Law.

 In cardinal utility analysis, this law is
stated by Lipsey in the following
words:
 “The household maximizing the utility
will so allocate the expenditure
between commodities that the utility of
the last penny spent on each item is
equal”.

 The consumer will maximize total
utility from his income when the utility
from the last rupee spent on each
good is the same. Algebraically, this
is:
 MUa / Pa = MUb / Pb = MUc = Pc =
MUn = Pn

Unit-1 ECONOMICS.pptx

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