Managerial Economics Lecture 1 Introduction -Notes (19 September, 201 !

"irect #osts A cost that can be completely attributed to the production of a specific good or service. Costs such as material, labor, expenses or any costs that relate to the production of a material are called direct costs. Other costs such as administration costs and depreciation they are more difficult to assign to the production of a specific product therefore we refer to them as indirect costs. EG if you are ma ing meat burgers! costs such as the cost of meat, pac aging materials and preservatives could be directly lin ed to the production of the burger therefore they would be direct costs this could also be considered as a $ariable cost if they are inconsistent and change amounts often. "ndirect costs would be costs such as legal expenses, legal fee, staffing or anything not related to direct costs. Indirect #osts #hese are costs that are not directly attributable $accountable% to a #ost ob%ect (by cost ob&ect in this case we mean production, function, pro&ect or facility%. Costs such as staffing, and legal fee as " have listed above could be referred to as indirect costs. #hey could be fixed or variable. &'at is t'e root cause o( economic problems) 'imited resources $a source that is not unlimited%. A source is something that can be converted into a good or a need. 'imited resources can be put to alternative uses. o (o you can have a x and not only but him to ) &obs, but ), *, A and + &obs as well.

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 #he whole idea of doing so is to optimi,e limited resources by putting them to alternative uses as well. Another problem is unlimited wants and the way to counter this problem is by prioriti,ing them. Therefore in a nutshell the root cause to economic problems and their solutions are as follows. o -roblem 'imited .esources o (olution Alternative use of sources o -roblem /nlimited 0ants o (olution -rioriti,e your wants &'at is economic c'oice) One could define this as the science or reaching a decision that leads us to a sound solution to a given problem. "t gives us an indication of prioriti,ing our needs. "n a nutshell it is deciding between the uses of scarce resources. *+o t,pes o( economics #he sub&ect of economics can be generally be sub!classified into two areas1 o Marco Economics- Can be classified as the study of the economy on the whole li e the growth of a nation. Classify it as the economics of dealing with the performance, structure behavior or decision ma ing of the economy on the whole. Example includes income growth, unemployment levels etc. #his field of economics helps us understand the opportunities of a mar et. Also helps us understand who the other competitors or players are in the mar et. $+road +ased Approach% o Micro Economics- #he area of economics that deals with the specific aspects of an economy. Classify it as the branch of economics that deals with the behavior of individual households and firms in the ma ing of the decisions of the allocation of resources. Examines how economic decisions have effect on the supply and demand principles.

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Classify it as the branch of economics that analy,es the behavior of individual consumers and firms in an attempt to understand the decision ma ing process of firms ad households. Concerned with the interaction between the buyers and sellers. 2elps us to ma e decisions based on history and statistics.

Marco Micro

&'at is managerial economics) #he consolidated aspects of economics that help us reach a decision. #he application of economic aspects and economic analysis to problems of formulating a rational managerial decision. But before going into managerial economics we need to understand how the economics system works or functions. 'ets ta e the example of the "ndian economy3 which is to produce the maximum goods for maximum number of people. o #he idea being maximum goods for maximum demands.

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.ouse'olds and /irms relations'ip 1 +asically helps one understand the circular flow of income in relation to the economic model. 2elps describe how money is flowed between the producers and consumers. #he interdependent entities of a producers and consumers are referred to as firms and households respectively and they provide each other with factors that help understand the factors behind the facilitation of the flow of income.

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 4ow in this part of my notes " shall explain what the diagram above is referring to. +asically what happens is that the household provides the firms with resources such as land, labor, capital and utilities. "n return for providing the firms with the resources, the firm compensates the households in the manner as follows1 o .ent $against land% o 0ages $against labor% o "nterest $against capital% o +ills $against utilities% 4ow ta ing in these resources what the firms does is that it produces goods and services that are sold to the household. After adding all of the factors left above, now what is left from the revenue is your profit. 0nd +', to t'e 'ouse'old) +ecause it is the household that always wants5 demand 5 re6uire goods and services. 0hat the diagram above also helps us understand is the ey to entrepreneurship how7 As follows1 o Every household sells to the firm resources and in return for that the firm pays them #his is intermediated by the resource mar1et2 #he resource mar et in this context refers to the mar et for land, labor, finance and capital. (o in a nutshell firms produce goods and service and sell it to the household who pays them the most. #his also helps one understand the theory of Market System idea of producing maximum goods for a maximum number of people. *'e di((erent 1inds o( economic s,stems o( economic s,stems

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 "n general there are three economic systems namely1 o 8ar et (ystem, o Command and Control (ystem and o 8ixed Economy. 8ar et (ystem mar et focused. 9etermines the cost of goods and the returns that the firms set. o Co!ordinates the activities between the producer and the household leading to mar et pricing. o Can be classified as an economy where the decision regarding the investment, production and distribution are based on supply and demand, which are mainly made through mar ets. o (o price determined solely by the citi,ens of a nation and business firm based on the relationship between them. 4o government intervention. Command and Control (ystem this ind of economic system is also nown as a planned econom,. o +asically a type of economic system where the government controls the economy and decides how to distribute the resources. o #he government may go to the extent of determining the prices and wages or even go to the extent of determining what sort of wor s would individuals do $(talin:s .ussia%. 8ixed Economic (ystem an economic system that includes a mixture of capitalism and socialism. #his type of economic system includes a combination of private economic freedom and centrali,ed economic planning and government regulation. o +oth the state and the private sector direct the economy reflecting the characteristics of economy under mar et system and panned system. o (o basically certain sectors under mar et and certain under the command and control.

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*'e de(inition o( 3Mar1et4 and t'e (actors t'at determine t'e conditions o( mar1et A mar et can be classified as any place where the sellers of a particular good or service can meet with the buyers of a good or service and where there is a potential for a transaction to ta e place. "t is essential for the buyer to have something that is of potential interest to the seller so that an exchange of goods5 service against capital can ta e place leading to a transaction. 0e now tal about factors that determine the condition of the mar et. o (elf "nterest o -rice1 Gives signal to consumer and producer. Also an indicative of the strength of the relationship between a particular household and firm $owner%. A derivative of supply and demand. *'e role o( price in a mar1et s,stem -rice helps us determine how the resources will be allocated produced within a mar et. 0ho will be getting what is produced. 9istribution of resources within the mar et leading to distribution of goods and services. /undamental 5uestions t'at e$er, economist must ans+er (basicall, e$en (rom a business 678! 0hat to produce7 2ow to and when to produce7 ;or whom to produce7 2ow much will out of it will be consumed7 And 2ow much will be saved7 9esources o( an econom, : classi(ication o( resources 'and $basically used as a shorthand for all natural resources in terms of economics%. 'abor. Capital. Entrepreneurship.

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7pportunit, #ost "t is the cost of an alternative that must be foregone in order to pursue a certain action. +asically the benefits that you could have received by ta ing an alternative action. #he difference in return between a chosen investment and one that is necessarily passed up. (ay you invest in a stoc and it returns a paltry <= over the year. "n placing your money in the stoc , you gave up the opportunity of another investment ! say, a ris !free government bond yielding >=. "n this situation, your opportunity costs are ?= $>= ! <=%. #herefore the opportunity cost of a resource is the benefit you will forego from its next best alternative. Sun1 cost "n economics and decision!ma ing, a sun cost is a retrospective $past% cost that has already been incurred that cannot be recovered.

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