Intorduction to economics

299 views

Published on

Published in: Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
299
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
13
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Intorduction to economics

  1. 1. Introduction to economics• Classification of Economics – – Micro (Buyer,serller, manufacturere) – Macro (Economy, government policies, global demand)• Markets & Governments – Socialist (Run by the government) – Capitalist (Run by the market)• Classification of Firms – – Based on Type • Private Ex: Infosys • Government firms Ex Indian Railways • Public sector Ex BHEL, Govt. has > 50% stake in the company. • Non-profit firms Ex NGO – Based on Number of Owners • Proprietorship • Partnership Min 2 to Max 20 • Corporation – • Less understood – Universities, cooperatives, museums, voluntary organizations etc
  2. 2. Firms objectives• Profit Maximization• Value Maximization• Sales Maximization• Long-run survival• Utility Maximization• Satisfying
  3. 3. Profit Maximization• Theories of profit making by firms. – Innovative Theory (retain their profits byapplying for patents) – Risk-bearing Theory (Invest heavily on production and expect results) – Monopoly Theory (have monopoly with huge funds, socio-political power) – Friction theory (Ex: Woolens in summer) – Managerial Efficiency Theory (exceptional management)
  4. 4. Value, Sales & Size Maximization• Firms (Economic) Value Maximization – Expected constant Growth Rate – Value of the Firm V = ∑∏/(1 + i)^t where t = 1 to n, ∏=profit• Sales Maximization subject to pre-determined profit – Firms seek maximum sales subject to a profit constraint that satisfies the shareholders.• Size Maximization – Growth in terms of size.
  5. 5. Firms Constraints• Resource Constraints (Capital, Land, Labor)• Output Quantity or/and Quality Constraints (nutritional requirements for feed mixtures)• Legal Constrains (Laws on wages, pollution standards)• Environmental Constraints (economic, social and political env)
  6. 6. Decision Process• Steps to make the right decision – – Establish objectives – Specify the decision problem – Identify alternatives – Evaluate alternatives – Select the best alternative – Implement the decision – Monitor the performance
  7. 7. Principles of managerial Economics• Opportunity Cost- Cost of making A is cost of not making B. Nett gain should be there• Discounting and Compounding -(investment – yields should be profitable)• Marginal or Incremental -(decision is sound only if it leads to profit. Cost of producing each is calculated and then sold at the asking price)• Equi-Marginal - (reshuffle the offering based on marginal utility)• Time Perspective – (Begin with lower than CP to get market penetration and then increase)
  8. 8. FOP• Factors of Production – – Human • Labor • Entrepreneur – Capital • Natural (Land) • Man-Made (Plant & Machinery)
  9. 9. Demand & Revenue Analysis• Demand is to have the desire and the willingness & ability to pay for it.• Types of Demand – Consumer(soap) & producer(machinery) goods – Perishable(milk) & durable(wheat) goods – Normal/superior(car) and inferior(bicycle) goods – Necessary, comforts and luxury goods (relative based on income) – Related goods – substitutes (tea or coffee)& complementary (tea and sugar)goods – Autonomous/direct (consumer goods) and derived/indirect (producers’ goods)demand – Individual and all buyers demand (aggregate/market) • Exceptions – bandwagon and snob/ego effect Ex car purchase – Firm(demand for maruti cars alone by maruti udyog) and industry(All cars by people) demand – Demand by market segments (zonal demand for maruti)and the total market(country demand for the car)
  10. 10. Determinants of Demand• Demand analysis is needed for - – To provide basis for analyzing market influences – Guidance for manipulating demand – Guide in production planning through forecasting• Classification of Demand – Consumers’ Income & Demand – Own Price & Demand – Price of Related Goods & Demand – Consumers’ Tastes & Preferences – Consumers’ Expectations – Number of Consumers, their distribution & demand
  11. 11. Law of Demand• Law of Demand – Price goes up, demand goes down. Citeris Paribus• Demand function for a good X; Dₓ = f(Y, Pₓ,P c.T;Ep, Ey;N,D,u) s, P• Elasticity – Measure of the sensitiveness of one variable to changes in some other variable. – Measure Elasticity on a line : ∆x/x ∆y/y – Measure Elasticity on an arc : ∆x/(x1 + x2)/2 ∆y/(y1 + y2)/2• List of Major Demand Elasticities– – Price elasticity on demand – Income Elasticity on Demand – Cross Elasticity on Demand(Ex Maruthi & Tata cars) – Promotional (Advertisement) Elasticity on Demand
  12. 12. Demand Revenue Relationship• Total Revenue TR = Q.P• Average Revenue AR = TR/Q = Q.P/Q = P• Marginal Revenue MR = ∂(TR)/ ∂Q = P(1 + 1/e) – If |e| = -1, MR = 0 & TR is constant as P & Q change – If |e| > 1, MR > 0 & as P falls, TR & Q increase – If |e| < 1, MR < 0 & as P falls, TR decreases & Q increases
  13. 13. Demand Estimation• Methods – – Consumer Interview – Market Experiments (Provide cash and do a virtual buying) – Regression Analysis; 4 steps – 1. Identification of variables which influence the demand 2. Collection of historical data for all variables. 3. Choosing alternative functional forms 4. Estimation of the function. • Generalize the Regression Formula to Y = a + bX + u or – Mean Demand D = ∑Demand/Total Samples = ∑Dg/n = 76 – Mean Income Y = ∑Income/Total Samples = 280 – Constant b = ∑(Yi - Y) (Dg - D)/ ∑(Yi - Y)2 = 0.36 – Constant a = Dg – b.Y = -25 – Thus Dgi = -25 + 0.36 Yi
  14. 14. Analysis of Estimated Demand Function• Get estimated demand from previous slide. In the Least Squares Equation : Dg = -20 +0.24Y -.67Po+1.18Pv+.5Pg-.66Pe• Elasticity of demand wrt income eD,Y = ∂D/Dg / ∂Y/Dy
  15. 15. Demand Forecasting• Get estimated demand from previous slide. In the Least Squares Equation : Dg = -20 +0.24Y -.67Po+1.18Pv+.5Pg-.66Pe• Elasticity of demand wrt income eD,Y = ∂D/Dg / ∂Y/Dy
  16. 16. Cost & Supply analysis• Cost Types – – Economic Cost – Explicit & Implicit Costs – Opportunity Cost – Normal Profit (Opportunity cost of entrepreneurs time) – Historical & replacement Cost – Incremental(incurred when increasing output) & Sunk(assets) cost – Expenditure(assets,labor,inventory) & Cost (depreciation. Interest paid) – Fixed(salary of permanent employees) & Variable(temporary employees) – Separable(department specific) & Common(facilities) Costs – Private(firm alone) & social(pollution) costs – Total, Average & Marginal Cost (TC = implicit + explicit cost)
  17. 17. Cost analysis• Cost Function: C = f(Q, Ei, Pi, L, S, Z) • C: Total Production Cost • Q= Output; • Ei = Efficiencies of inputs • Pi = Prices of inputs • L = Learnings/Experience curve effect • S = Scope economies effect • Z = Other determinants

×