economics fromthe

rescued grounds
view. This definition clarified the SCope ofeconomics and
scope on ue
gnp of being called Dismal science bnt this definition also criticized
valuable services like
ignored the
that welfare cannot be measured correctly and it was
teachers, lawyers, singers etc., (non-material welfare).
 science in the later half of the 18" century.
Definition of Economics

Classical economists like Adam Smith. Ricardo. Min Malthus and others; social1st
economist like Karl Marx; neo-classical economists like Alfred Marshall, AC Pigou
and Lionel Robbins and modem economists like JM Keynes, Samuelson and others
have made considerable contribution to the development of Economics. Hence a
plethora of definitions are available in connection with the subject matter of
economics. These are broadly divided into
A. Wealth Definition,
B. Welfare Definition,
C. Scarcity Definition and
D. Growth Definition

A. Wealth Definition
Really the science of economics was born in 1776, when Adam Smith published his
famous book "An Enquiry into the Nature and Cause of Wealth of Nation". He defined
economics as the study of the nature and cause of national wealth. According to him,
economics is the study of wealth- How wealth is produced hcquire and accumulate
wealth). He is called as "father of economics and his definition is populary called
"Wealth definition.
Main features
Study the nature of wealth: material goods/different manufactured items.
Inquiry intothe ereation of wealth: causes behind the creation of wealth.
Example: wealth of nation may be increased by raising the level of
production and export.
Emphasis on wealth: many economists believed that economic success of
any nation depended only on the accumulation of wealth.
Economic man: man who is always self-centred and self-interested in nature.
Economic man focused on his own well-being and had only one motive-to
earn money.
Criticisms
Too much emphasis on wealth,
Restricted meaning of wealth,
Noconsideration for human feelings,
No mention for man's welfare

Silent about economic problem etc.,

B. Welfare Definition
It was Alfred Marshallwho rescued the economics from the above criticisms. By his
classic work "Principles of Economics", published in 1890, he shifted the emphasis
from wealth to human welfare. According to him wealth is simplya means (funds) to
anend in all activities, the end being human welfare. He adds, that economics "is on
the one side a study of the wealth; and the other and more important side, a part of the
importance to man
study of man inordinary life of business.". Marshall gave primaryholding Marshall's
and secondary importance to wealth. Prof. A C Pigou was also
4|Page
ManagerialEconomics
 C. Scarcity Definition
fomulated his own conception of economicS
Lionel Robbins According t0
After Aifred Marshall. Economic Science in l932.
and Significance of relationship between
his book The Nature science which studies human behavior as a importance to four
him, "Economics is the which have altermative uses". He gave
ends and scares means existence such as;
fundamental characters ofhunan
human wants whhch
wants - In his definition ends refers to
I. Unlimited unlimited.
are boundless or money)
(Limited Resources) the resources (time and
2. Scarcity of means person to satisfy his wants are limited.
at the disposal ofa but
ofScareS means-Economic resources not only scarce
3. Altermate uses choice of uses.
have alternate uses also. So one has to make scarce
Economic Problem - when wants are unlimited, means areneed to
4. The economic problem arises. Hence we
and have alternate uses, the
anrange wants in the order of urgency.
application.
scarcity definition are: this definition is analytical, universal in criticized
The merits of this also
concept of opportunity cost. Butlight
study and considering the but not fruit,
a positive is too narrow and too wide, it offers only
on the grounds that; it
economics etc.,
confined to micro analysis and ignores Growth
D. Modern Definition

economics surely goes to Lord J.M Keynes.

The credit for revohutionizing the study of
the administration of scares resources
and the
He defincd economics as the "study of
determinants of income and employment".
growth aspects which is known as
Prof. Samuelson recently given a definition based on society end up choosing,
Growth definition."Economics is the study of how people and resources that could have
with or without the use of money to employ scarce productive
distribute them for COnsumption.
alternative uses to produce various commodities and
society. Economics analyses
now or in the future, among various persons or groups in use. Main features of
the costs and the benefits of improving patterns of resources
time
growth definition are; it is applicable even in barter economy, the inciusion of
element makes the scope of economics dynamic and it is an improvement in scarcity
definition.
Jacob Viner, "What economists do is economics
 Donomics is
divided into two important sections,
Microeconomics consumers
Macroeconomi
focuses on cs deals with the behaviour
individual
What is Microecononmics? and
of the aggregate economy
Macroeconomics &
which are: M
and Microeconomics
businesses.
Microeconomics
allocation of
is the study
resources and
of decisions made by people and businesses
regarding the
for taxes. prices of goods and services. The government decides the
It uses the Microeconomics
bottom-up focuses on the supply that detemines the price level of the regulation
strategyandto analyse the economy. In other words, microeconomicseconomy.
understand human's choices tries to
Laking place in the market, instead,allocation of ressources. It does not decide
it explains whythere are what are the chag
The key role of changes happening
examine bow a company could maximisein its the arkei
and capacity, so microeconomics
is to
microeconomics
that it could lower the prices and
infomation can be
compete in its industry. producuo
A lot or
The key factors of obtained from the financial statements.
microeconomics
Demand, supply, and are as follows:
Production theory equilibrium
Costs of production
Labour economics
Examples: Individual
What is Macroeconomics?demand, and price of a product.
Macroeconomics is a branch of economics that depicts a
WIth the economy at a massive scale, and several issuessubstantial picture. It serutinises itself
of an economy are considered. 1he
issues confronted by an economy and the headway that it makes are
as a part and parcel ofmacroeconomics. measured and apprehended
Macroeconomics studies the association between various countries regarding how the policies
of one nation have an upshot on the other. It circumscribes within its scope,
success and failure of the government strategies. analysing the
In macroeconomics, wve nomally survey the association of the nation's total manufacture and
the degree of employment with certain features like cost prices, wage rates, rates of interest.
profits, etc., by concentrating on asingle imaginary good and what happens to it.
The important concepts covered under macroeconomics are as follows:
Capitalist nation
Investment expenditure
Revenue
Examples: Aggregate demand, and national income.
Top 7 Differences between Microeconomics and Macroeconomics
Let us look at some of the points of difference between Microeconomics and Macroeconomics
Microeconomics Macrocconomics
Meaning
Microeconomics is the branch of Economics that is Macroeconomics is the branch of Economics that deais
related tothe study of individual, household and firm's with the study of the behaviour and performance of the
The most important factors studied in
behaviour in decision making and allocation of the economy in total. product (GDP).
involve gross domestic
resources. It coomprises markets of goods and services macrocconomics
unemployment, inflation and growth rate etc.
and deals with economic issues.
Area of study
Macroeconomics studies the whole economy, that covers
Microeconomics studies the particular market segment
several market segments
of the economy
Deals with
Macroeconomics deals with various issues like nation
Microeconomics deals with variousissues like demand, distribution, employment, general price level
pricing, economic income,
supply, factor pricing, product money, and more.
more.
welfare, production, consumption, and
7| Puge
ial Economics
 Business Application issueS.
environmental and external
It is applied to internal issues. t is applied to

Scope national
It covers several issues like distribution. level. and
It covers several issues like demand, supply, facto general price
pricing, product pricing. cconomic welfare, production income, employment, money,
consumption, and more. more.

Significance
am;
the broad price level,
It is useful in regulating the prices of a product Itperpetuates fimness in the economy like deflation
alongside the prices of factors of production (labour, solves the major issues of unemployment, anc
land, entrepreneur, capital, and more) within the inflation, rising prices (reflation),
economy. poverty as a whole.
Limitations
misconception of
t is based on impractical presuppositions, i., in t has been scrutinised that the sometimes fails tc
composition incorporates, which for
microeconomics, it is presumed that there is full that what is true
prove accurate because it is feasible not be true fo
employmnent in the community, which is not at all aggregate (comprehensive) may
feasible.
individuals as well.

After learning the above concepts, we can come to the conclusion that these two concepts are
not antithetical but complementary to cach other and they are bound to go hand in hand.

Meaning and Definition of Managerial Economics.

Managerial Economics as a subject gained popularity in U.S.A after the publication of
the book "Managerial Economics by Joel Dean in 1951. Joel Dean observed that
managerial Economics shows how economic analysis can be used in formulating
policies.
Managerial economics bridges the gap between traditional cconomic theory and real
business practices intwo ways. Firstly, it provides number of tools and techniques to
enable the manager to become more competent to take decisions in real and practical
situation. Secondly, it serves as an integrating course to show the interaction between
various areas in which the firm operates.
According to Prof. Evan J Douglas, Managerial economics is concerned with the
application of business principles and methodologies to the decision making process
within the fim or organization under the conditions of uncertainty. It seeks to establish
rules and principles to facilitate the attainment of the desired economic aim of
management. These economic aims relate to costs, revenue and profits and are important
within both busincss and non-business institutions.

Spencer and Siegleman defined managerial Economics as "the integration of economic

theory with business practice for the purpose of facilitating decision
forward planning of making and
management"
 Scope of Managerial / Business Economics
manageriai econonics refers to its area of study. Scope of Managerial EconomCs is wider
Ihe scope of decisional
sense that while managerial economics dealing the
than the scope ofBusiness Economics in the deals only the problems
organizations, business economics
problens of both business and non-business
organizations. Business economics giving solution to the problems of a business unit or prott
of business the problems of non-profit organizations like
oriented unit. Managerial economics giving solution to
decision making (A) operational or intermal
schools, hospital etc., also. The scope covers two areas of
iSsues and (B) Environmental or external issues.
A) OperationaVinternal iSsues
the control of the
are those which arise within the business organization and are under
These issues how much to
management. They pertains to simple questions of what to produce, when to produce,
category of consumers. The following aspects may be said to be fall under internal
produce and for which
1SSues.

analysis and Forecasting: - The demands for the fim'sproduct would change in response
1, Demand of demand.. A studvy
income, his taste etc. which are the determinants
to change in price, consumer's necessary for forecasting future demand ofthe product.
 DEMAVD equalthe
Introduction demand and supply is forces
When the market
The manufacturers produce and supply goodstto meet demand. This dermand and supplyare static. The
economic conditions ofthe country is in cquilibrium position. always
The demand is notmaking like what to
which gives dynamism to the economic conditions of the country.
managerial decision we
changes in demand or clasticity of demand gives room for the distribute the products. In this unit,
demand
produce, how much to produce, when to produce, and where to demand, elasticity of demand,
shall be examining various concepts of demand, the law of
forecasting, utility concept, law of supply, supply curve and elasticity of supply.
Demand Concents
Meaningof Demand
But in economics demand is something mÛG
Demand is a common parlance means desire for an obiect.
services whicha person can purCs
than ths. In economics Demand" means the quantity of goods and
with a requisite amount of money.
purchased per
According to Prof. Hidbon, Demand means the various quantities of goods that would bequantity whhch
its
time period at different prices in a given market. Thus demand for a commodity is Sinply,
consume is able and willing to buy at various prices during a given period of time. demand is
the behavior of potential buyers in a market.
n the opinion of Stonier and Hague, "Demand in economics means demand backed up by enough money
to pay for the goods demanded. In other words, demand means the desire backed by the willingness to
buy a commodity and purchasing power to pay. Hence desire alone is not enough. There must have
necessary purchasing power, ie, .cash to purchase it. For example, everyone desires to posses Benz car
but only few have the ability to buy it. So everybody cannot be said to have a demand for the car. Thus
the demand has three essentials-Desire, Purchasing power and Willingness to purchase.
Demand Analysis
Dernand analysis mecans an attempt to determine the factors affecting the demand of a commodity or
service and to measure such factors and their influences. The demand analysis includes the study of law
ofdemand, demand schedule, demand curve and demand forecasting. Main objectives ofdemand analysis
are:

1) Todetermine the factors affecting the demand.

2) To measure the elasticity of demand.
3) To forecast the demand.
4) To increase the demand.
S) To allocate the recourses eficiently

Law of Dernand
The law of Demandis known as the "first law in market". Law of
price and quantity demanded of a commodity in the market. In the demand shows the relation between
words of Marshall "the amount
demanded increases with a fall in price and diminishes with a rise in price".
According to Samuelson, "Law of Demand states that people willbuy more at
less at higher prices. In other words while other things lower price and buy
remaining
commodity will decreases the quantity demanded of that commodity and the same an increase in the price ofa
increase the demand of that commodity. So the relationship decrease in the price will
or negative relationship because the variables (price and described by the law of demand is an inveee
demand) move inopposite direction. It she

Managerial Economics
14| Page
 demand may
oflaw of
the cause and effet relationship between price and quantity demand. The concept
be explained with the help of a demand schedules.
Demand Schedule and Demand Curve which
the different quantities ofa commodity
functional
Demand schedule is a statistical/tabular statement showing
which represents
It is atable
will be bought at its different prices during aa specified time period.
demanded. Demand schedule can be Tof a
auantity
Telatonship between price of a commodity and its (DS) and it can be for the whole market-know
Indiidualknown as Inividual Demand Schedule earlier in
MDS can be obtained by aggregating the IDS as illustrated
Market Demand Schedule (MDS).
this unit under the heading of individual and market demand.
we can obtain the demand curve. According
Demand Curve: By plotting the demand schedule on graph. curve .
to Prof. Samuelson, Picturization of demand schedule is called the demand
Individual demand Schednle
of a commodity purchased by an individual
Anindividual demand schedule is a list of quantities demand schedule of an individual consumer
Consuner at different prices. The following table shows the
for apple.
Price of Apple Quantity
demanded
(In Rs.)
10
2
6 3
4
2 5
one to two. In the same way
When the price falls from Rs 10to 8, the quantity demanded increases from schedule we can draw the
the above demand
as price falls, quantity demanded increases. On the basis of
demand curve as follows;

DernandCurve
8

2 3 5
quartty
The demand curve DD shows the inverse relation between price and demand of apple. Due to this inverse
relationship, demand curve is slopes downward from left to right. This kind of slope is also called
"negative slope".
Market demand schedule
Market denmand refers to the total demand for a commodity by ali the consumers. It is the aggregate
quantity demanded for a commodity by all the consumers in a market. h can be expressed in the
following schedule.

Managerial Economic 15| Page

 Market Demand Schedule for egg. Market
Price per Demand by consumers Demand
dozen(Rs) A B C
3
10 0
2
0 6
2 3 1
10
6 3 4
2 14
4 4 5 3
4 18
6
e 1ou
process. For example. let us assune that there
Devanon of market demand curve is a simple of onedozen egps is Rs.10. A buys one dozcu
COnsuners in a market demanding eggs. When the price buys one dozen. When piee
B bus 3 andC
zd B buys 2 dozens. When price falls to Rs.8, A buvs 2. so on. By adding up the
quantity
falls to Rs.6, Abuys 3 b buys 4, Cbuys 2 and Dbuys one dozen and demand curve. So last colunnt
demanded by allthe four consumers at various prices we get the market Demand as
"Market
the above demand schedule gives the total demand for eggs at different prices, i.e.,
given below;

Market Dermand Curve

12 16

quarntity
Assumptions of Law of Demand
Law of demand is based on certain basic assumptions. They are as follows
1) There isno change in consumers' taste and preference
2) Income should remain constant.
3) Prices of other goods should not change.
4) There should be no substitute for the commodity.
5) The commodity should not confer any distinction.
6) The demand for the commodity should be continuous.
7) People should not expect any change in the price of the commodity.

Why docs demand curve slopes downward?

Demand curve slopes downward from left to right (Negative Slope). There are many causes for
downward sloping ofdemand curve:
 School of Distance Education

ELASTTCITY OF DEMAND
Meaning of Elasticity increase in
price leads to an
Law of demand explains the directions of in demand. Afall in changes to changethein
quantity demanded and vice versa. But it doeschanges
not tell us the rate at which demand explains
price. The concept of elasticity of demand was introduced by Marshall. This concept Nutshell, it shows
relationship between a change in price and consequent change in quantity demanded.
the rate at which changes in demand take
place.
Elasticity of demand can be defined as "the degree of responsiveness in quantity demanded to a change
are
in price". Thus it price. There
represents the rate of change in quantity demanded due to a change in
mainly three types of elasticity of demand:
1. Price Elasticity of Demand.
2. Income Elasticity of Demand. and
3. Cross Elasticity of Demand.
Price Elasticity of Demand
Price Elasticity of demandmeasures the change in quantity demanded to a change in pnce. ltS u
ratoof percentage change in quantity demanded to a percentage change in price. This can be measured
by the following formula.
Price Elasticity - Proportionate change in quantity demanded chanqeinquautymaudet
Proportionate change in price
OR
Ep = Change in Quantity demanded / Quantity demanded
Change in Pricelprice
OR
Ep = (02-Q1yQ1 AP- A
(P2-Pl) PI P
P
Where: Ql =Quantity demanded before price change
Q2=Quantity demanded after price change
Pl= Price charged before price change
P2 = Price charge after price change.
There are five types of price elasticity of demand. (Degree of elasticity of denand) Such as perfectly
elastic demand, perfectly inelastic demand, relatively elastic demand, relatively inciastic demand and
unitary elastic demand.
1)) Perfecty elastic demand (infinitely elastic)
When a small change in price leads to infinite change in quantity demanded, it is called perfectly
elastic demand. In this case the demand curve is ahorizontal straight line as given below. (Here ep= z)

pemand curve
 School of Distance Education
2) Perfectty inelastic
demand
In his case, cven a large change in price fails to bring about a change in quantity demanded. i.e., the
gange in pricewill not affect the quantity demanded andquantity remains the same whatever the change
in price. Here demand curve will be vertical line as followsand ep=0
Y

P2

Quantty

3) Relatively elastic demand

Here asmallchange in price leads to very big change in quantity demanded. In this case demand curve
will be fatter one and ep->1

D
P
P1

quantity

4) Relatively inelastie demand

Here quantity demanded changes lessthan proportionate to changes in price. Alarge change in price
leads to small change in demand. In this case demand curve will be steeper and ep=<i

P1

quantty
5) Unit elasticity of demand(Unitary eastic)
Here the change in demand isexactly equalto the change in pricc. When bothare equal, ep L,
elasticity issaid to be unitary.

quantity
The above five types of elasticity can be suminarized as follows
Type Numerical Deseription Shape of curve
SI. No
expression
Horizontal
I Perfectlv elastic infinity
0 Zero Vertical
Pertectlv inelastic
3 Unitary elastic 1 One Rectangular
hyperbola
More than one Flat
4 Relativelv elastic
Less than one Steep
5 Relatively inelastie

3.3Income Elasticity of Demand

of a change in
demand showvs the change in quantity demanded as a result
formula:
Income elasticity of may be stated in the form of
demand