ECONOMICS FOR MANAGERS

Objectives

• To introduce the economic concepts

• To familiarize with the students the importance of economic
approaches in managerial decision making
• To understand the applications of economic theories in business
decisions
ECONOMICS FOR MANAGERS
Unit – I
General Foundations of Managerial Economics - Economic Approach
- Circular Flow of Activity - Nature of the Firm - Objectives of Firms
-
Demand Analysis and Estimation - Individual, Market and Firm demand
- Determinants of demand - Elasticity measures and Business Decision
Making - Demand Forecasting.
INTRODUCTION
 BASIC ECONOMIC

PROBLEMS LAW OF SCARCITY

Reason: None of us can have all that we want

• Limited amount of human and non-human resources
• Its not possible for any economy to produce every type of good in an
unlimited quantity.
• Hence, every economy has to take the basic decision of making best
use of its available resources in producing goods and services.
BASIC ECONOMIC
PROBLEMS
What to Produce
Involves selection of goods and services to be produced and the quantity
to be produced for each selected commodity.

a) What possible commodities to produce - (Which of the consumer

goods and which of the capital goods), (Civil goods and war goods)
b) How much to produce – Economy has to decide the quantity of
each commodity that is selected
Guiding principle - Maximum aggregate satisfaction
How to Produce

Selection of technique to be used for production of goods and services.

Labour Intensive Techniques (LIT)
Capital Intensive Techniques (CIT)
Availability of factors and their relative prices helps in determining the
techniques to be used.
Eg: India – LIT, USA – CIT
Maximum output is produced at minimum cost, using least possible
scarce resources
For Whom to Produce

Selection of category of people who will ultimately consume the goods;

More poor and less rich or vise versa.
Scarce resources – Choice

Goods are produced for those who have the paying capacity – depends
on their level of income -
BASIC ECONOMIC PROBLEMS

Economics is the study of how individuals and societies choose

to use the scarce resources that nature and the previous generation
have provided.

The resources which are not scarce are called free goods.
Resources which are scarce are called economic goods.

Why Study Economics?

⮚It is a study of society and as such is extremely important. ⮚It

trains the mind and enables one to think systematically about the
problems of business and wealth.
⮚From a study of the subject it is possible to predict economic
trends with some precision.
⮚It helps one to choose from various economic alternatives.
 Economics

Economics is the science of making decisions in the presence

of scarce resources.

Resources are simply anything used to produce a good or

service to achieve a goal.

Economics Studies how man utilizes his limited resources for

the satisfaction of his unlimited wants
Economics
Economics is divided into

1. Consumption
2. Production
3. Exchange
4. Distribution
5. Public Finance
6. Economic Planning
Economics
Consumption refers to the satisfaction of human wants
by using goods and services.
Production refers to the creation of goods and services
by using the different factors of production Exchange
refers to the transfer of goods and services for
consumption
Economics

Distribution refers to rewarding the factors of

 production.

It is the study of distribution of national income among

factors in the form of rent, wages, interest and profit.
Economics

Public Finance refers to the financial activities of the

government and local bodies

Economic Planning refers to the coordination of

 economic activities usually by the central
authority
MICRO ECONOMICS & MACRO ECONOMICS

The term Microeconomics coined by Prof.

Ragnar Frisch in the year 1920.

Micro Economics is derived from the Greek word

called ‘Mikros’, which means small.

In Micro economics attention is concentrated on a very

small part of individuals.
MICRO ECONOMICS

Microeconomics is the study of decisions made by people and

businesses regarding the allocation of resources and prices of
goods and services.

Microeconomics focuses on supply and demand and other

forces that determine price levels in the economy.

In other words, microeconomics tries to understand human

choices, decisions and the allocation of resources.
 MICRO ECONOMICS

Worms Eye
View of the
economy
MACRO ECONOMICS
Macro economics is the study of the economic system
as a whole.
It is the study of the performance, structure, behaviour
and decision-making of an economy as a whole. It is
related to issues such as determination of national
income, savings, investment, employment at aggregate
levels, tax collection, government expenditure, foreign
trade, money supply etc.
MACRO ECONOMICS

Bird’s Eye
View of the
Economy
 Manager
A Manager is a person who directs resources to achieve a stated
goal and he/she has the responsibility for his/her own actions as well as
for the actions of individuals, machines and other inputs under the
manager’s control.

MANAGERIAL ECONOMICS
Managerial Economics deals with the application of the economic
concepts, theories, tools, and methodologies to solve practical problems
in a business.
In other words, managerial economics is the combination of economics
theory and managerial theory.
MANAGERIAL ECONOMICS

Managerial economics is the study of how scarce resources are

directed most efficiently to achieve managerial goals. It is a
valuable tool for analyzing business situations to take better
decisions.

DEFINITIONS

Prof. Evan J Douglas defines

Managerial Economics as
“Managerial Economics is
concerned with the application
of economic principles and
methodologies to the decision
making process within the firm
or organization under the
conditions of uncertainty”
DEFINITIONS

According to Milton H Spencer and Louis Siegelman

“Managerial Economics is the integration of economic theory with
business practices for the purpose of facilitating decision making and
forward planning by management”
DEFINITIONS

According to Mc Nair and Miriam, ‘Managerial Economics consists

of the use of economic modes of thoughts to analyze business
situations’
 NATURE OF MANAGERIAL ECONOMICS

1. Micro Economic in Nature

2. Pragmatic
3. Positive Economics and Normative Economics
4. Conceptual in nature
5. Macro in nature
6. Problem solving
NATURE OF MANAGERIAL ECONOMICS

1. Managerial economics is concerned with the analysis of finding

optimal solutions to decision making problems of businesses/
firms.
2. Managerial economics is a practical subject therefore it is pragmatic.
3. Managerial economics describes, what is the observed economic
phenomenon (positive economics) and prescribes what ought to be
(normative economics)
NATURE OF MANAGERIAL ECONOMICS

4. Managerial economics is based on strong economic

concepts
5. Managerial economics analyses the problems of the firms in
the
perspective of the economy as a whole ( macro in
nature) 6. It helps to find optimal solution to the business
problems
SCOPE OF MANAGERIAL ECONOMICS

1. Demand Analysis and Forecasting.

2. Cost & Production Analysis
3. Pricing Decisions, Policies and Practices
4. Profit Management
5. Capital Management
Demand Analysis and Forecasting
Demand forecasts serves as a guide to the management for
maintaining its market share in competition with its rivals,
thereby securing its profit.
Thus, demand analysis facilitates the identification of the
various factors affecting the demand for a firm’s product.
This, in turn helps the firm in manipulating the demand for its
output.
Cost and Production Analysis

A firm’s profitability depends much on its costs of production.

Prepare cost estimates of a range of output, identify the factors
causing variations in costs and choose the cost-minimizing
output level, taking also into consideration the degree of
uncertainty in production and cost calculations.
Main topics to be discussed:- cost-output relationships,
Economies and Diseconomies of scale etc.
Pricing decisions, Policies and Practices

Since a firm’s income and profit depend mainly on the price

decision, the pricing policies and all such decisions are to be
taken after careful analysis of the nature of the market in which
the firm operates.

Eg: Market Structure Analysis, Pricing Practices and Price

Forecasting.
Profit Management

A successful business manager is one who can form more or

less correct estimates of costs and revenues at different levels
of output.
The more successful a manager is in reducing uncertainty, the
higher are the profits earned by him.
It is therefore, profit-planning and profit measurement that
constitutes the most challenging area of business
economics.
Capital Management

Investments are made in the plant and machinery and buildings

which are very high.
Therefore, capital management requires top-level decisions.
It means capital management i.e., planning and control of
capital expenditure.
It deals with Cost of capital, Rate of Return and Selection of
projects.
CIRCULAR FLOW OF ECONOMIC ACTIVITY

Decision makers (Institutions) in an economy.

Households
Firms
Government
External factor
These decision-makers act and react in such a manner that all
economic activities move in a circular flow.
 CIRCULAR FLOW OF INCOME
The major four sectors of the economy are engaged in three
economic activities of production, consumption and exchange
of goods and services. These sectors are;

1. Households: Households fulfill their needs and wants

through purchase of goods and services from the firms. They
are owners and suppliers of factors of production and in turn
they receive income in the form of rent, wages and interest.
FACTORS OF PRODUCTION
1. Land: It includes all natural resources on the earth and
below the earth.
2. Labour: is the work force of an economy. The value of the
worker is called as human capital
3. Capital: It is classified as working capital and fixed capital
4. Organization: It refers to the individuals who organizes
production and take risk
FACTORS OF PRODUCTION
All these resources are allocated in an effective manner to
achieve the objectives of consumers (to maximize satisfaction),
workers (to maximize wages), firms (to maximize the output
and profit) and government (to maximize the welfare of the
society).
CIRCULAR FLOW OF INCOME
2. Firms: Firms employ the input factors to produce various
goods and services and make payments to the households. 3.
Government: The government purchases goods and
services from firms and also factors of production from
households by making payments.
4. Foreign sector: Households, firms and government of India
purchase goods and services (import) from abroad and
make payments. On the other hand all these sectors sell
goods and services to various countries (export) and in turn
receive payments from abroad
CIRCULAR FLOW OF INCOME
CIRCULAR FLOW OF
INCOME
 CIRCULAR FLOW OF INCOME

• Households: Households fulfill their needs and wants

through purchase of goods and services from the firms. They
are owners and suppliers of factors of production and in turn
they receive income in the form of rent, wages and interest.

• Firms: Firms employ the input factors to produce various

goods and services and make payments to the households.
CIRCULAR FLOW OF INCOME
• Government: The government purchases goods and services
from firms and also factors of production from households by
making payments.
• Foreign sector: Households, firms and government of India
purchase goods and services (import) from abroad and make
payments. On the other hand all these sectors sell goods and
services to various countries (export) and in turn receive
payments from abroad
NATURE OF FIRM
Firm: - Is a business organization that buys factors of
production in order to produce goods and services that can be
sold at a profit.
A firm is an association of individuals who have organized
themselves for the purpose of turning inputs into output. The
firm organizes the factors of production to produce goods and
services to fulfill the needs of the households.
NATURE OF FIRM
The major objectives of the Firm
‣To achieve the organizational goal
‣To maximize the output
‣To maximize the sales
‣To maximize the profit of the organization
‣To maximize the customer and stakeholders’
satisfaction ‣To maximize stakeholder’s Return on
 ‣
Investment To maximize the Growth of the organization
FORMS OF ORGANIZATIONS

⁘Sole Proprietorship
⁘Partnership Firm
⁘Joint Stock Company
⁘Limited Liability Company (LLC)