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Economist makes assumptions that people act rationally
This means that consumers and producers measure and
Whether eating at home is cheaper than going to a
Economic analysis can be divided into the following
statements involve some degree of value judgment,
1. Thedistribution ofincome inIndia is unequal
2. Thedistribution ofincome inIndia should be equal
Thefirst statement is a positiveone,while the second is
Partial Equilibrium analysis studies the internal
General Equilibrium analysis explains economic
If the price of fuel goes up, the fares of public
Primary objective of every business is to maximize its
Business involverisk and uncertainty
Therefore, crux of business is decision making and
Micro-Economic in character as it is only concerned with
Normative Economics: Managerial economics belong to
Use theory of firm: Managerial Economics uses only those
Prescriptive nature: As it is prescriptive in nature it states
what should be done . It is an applied discipline of
Economic theory which suggests how economic principles
The scope of managerial economics comprehends all
Profit management: - The chief purpose of a business
Capital management: - The problems relating to firm s
A. Thinking Function: This is identification of area of
B. Selection Function: After the analysis of the problem,
Managerial economist is take participate in government
D. Pricing Decision: An economist has to decide the
E. Production Schedule: An economist has to plan the
F. Investment Analysis: An economist, by using different
G. Public Relation: An economist has to work for
H. Social Objectives: An economist to fulfill its role for
A Managerial economist plays a very significant role in
1. Toincrease the profitability ofthe firm
2. Tomake accurate and successful forecast
3. Tomaintain relations with experts
4. Toaware availability ofresources
5. Tosimplify the decision making process
Suppose, a firm has 100 million at its disposal and there are
Toexpand the size ofthebusiness Rs.20million
Setting upnewproduction unit Rs.18million
Buyingshare in another firm Rs.16million
All the other thing being same (Ceteris Paribus), rational
1. This implies that manager has to sacrifice the annual
It is related to the marginal cost and marginal revenue,
Thetwobasic components ifincremental reasoning is:
Theincremental principle maybe stated as under:
Suppose there is a firm with temporary idle capacity. An
The customer is willing to pay Rs.4/- per unit for the whole
One of the fundamental ideas in Economics is that a rupee
Naturally he will choose Rs.100/- today. This is true for two
100/- can be invested so as to earn interest say as 8% so
The term 'macro' denoted' large'. Macro-economics is not
The characteristics that describe a macro economy are
Macro-economic studies what factors and how these factors
Growth economics or the theory of economic growth is
Household do not spend their entire money on consumption,
Since money is thus taken out of the circular flow, saving would
But saving of households comes to the financial market, through
Remittance for
Aggregate demand is the total demand in terms of goods and
Aggregate demand consists of two components, aggregate
AD=C+I
Aggregate supply is the total national output produced and
Aggregate supply consists of supply of consumer goods and
This is another important macro variable that affects the national
Employment means where a person who is willing and capable to
Every country tries to achieve a full employment so that
National income or product is the final figure you arrive at
The average income of the people of a country in a particular
Percapita income is income perhead ofacountry forayear
Personal income is the total income received by the individuals
Personal Disposable Income is the income which can be spent
National income is nothing but the measurement of
There are three different ways of looking at the value of a
National Income (GNI) and Gross National Expenditure (GNE)
Thismethod involves thefollowing steps:
2. The physical units of output are then interpreted in money
3. Thetotal values thus obtained are thenadded up
4. The indirect taxes are subtracted and the subsidies are added
5. The net value is calculated by subtracting depreciation from
A word of caution to be repeated here is that goods produced in a
According to the Income method, it is the net income received
However, income received in the form of transfer payment is
This is the GDP at factor; now we add the money sent by the
The economy is divided on the basis of income groups, such
Incomeofeachofthese groupsis calculated
Income of all the earners is added, including income from
From (3), income earned by foreigners and transfer
We have seen that whatever is earned is spent either on
According to the expenditure method, the total expenditure
This concept rests on the assumption that national income
National income data is necessary for economicplanning of
a country. Such data help in determining the output of each
A sustained increase in national income of a country over
National income is considered as a measure of economic
economic activities. It has been seen that economic activities
Another very interesting feature of business cycle is that their
For ex: Suppose, due to any reason aggregate demand of
Thus contraction of economic activities in one sector would
As the term itself denotes, this is a phase when all macro
This is the highest point of growth; hence it is referred to as
In reality a process of growth cannot continue indefinitely;
Again you can understand from the term contraction that it
Also termed as slump or depression, this is the lowest ebb of
Thus you can seen that there are two turning points in the
Especially in monopolistic and oligopoly firms, where the
Firms employ more people if they increase production; in the
Firms are the main victims of cycles; at the same time they are
These include safe guards against swaying away the wave of
Investment: Firms should deter from investing huge amount of
Inventory: Firms should not create large inventory of raw
Products: Firms should diversify in different markets and
Pricing: Flexibility should be the right strategy, so that during
Under monetary measures, the central bank of the country uses
Rediscount rate: during expansion the central bank increases
Note: increase in money supply encourages people to spend
Reserve ratios: reserve ratios function in the same manner as
Open market operations: during expansion, central bank sells
Selective credit control: all the above methods are aimed at
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Managerial Economics - Module 1

Managerial Economics - Module 1

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Published by Supriya Jain

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Published by: Supriya Jain on Jun 08, 2011
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07/28/2011

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