Unit I

G. Kiruthika MBA., M.
Phil Assistant Professor, Department of Management Studies
UNIT I: INTRODUCTION
Basic concepts and principles definition and scope of economic, managerial economics– three
fundamental economic problems. Theory of firms: Introduction, forms of ownership-profit
maximization theory.
Basic Concepts
Economics is a social science concerned with the production, distribution, and consumption of
goods and services. It studies how individuals, businesses, governments, and nations make
choices about how to allocate resources. Economics focuses on the actions of human beings,
based on assumptions that humans act with rational behavior, seeking the most optimal level of
benefit or utility.
Types of Economics
The types of Economics can be broadly classified into two. They are
i. Micro Economics
ii. Macro Economics
Micro Economics
Microeconomics focuses on the behavior of individual consumers and producers.
Macro Economics
Macroeconomics, which examine overall economies on a regional, national, or international scale.
Basic Concepts of Economics
It is important to understand the basic economic terms and concepts in detail to get the awareness
of maintaining a proper budget for the house or task or any organization. We have five
fundamental economic concepts in general. They are as follows-
● Supply and demand
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G. Kiruthika MBA., M.Phil Assistant Professor, Department of Management Studies
● Scarcity
● Opportunity cost
● Time value of money
● Purchasing power
Supply and Demand:-
It is one of the basic economic concepts and theories. Supply and demand can be seen everywhere
in our daily life. To understand this concept more clearly, let's take a common example like food
products. If we take food and drinks, they need to travel from the farmer to the consumer with
multiple mediators. So the price may vary. The exact point of the price at which the buyer and
consumer will get to a compromising position, that point is nothing but the state of supply and
demand, it means where the demand meets the supply.
Scarcity:-
This is also the basic concept of economics, which also acts as a factor of demand and supply.
Because the supply doesn't meet the demand, then the condition is termed as a scarcity of that
particular utility, whether it is food or product or money or any other.
Opportunity Cost:-
It is one of the 5 basic concepts of economics. It is like a trade-off market. It is also termed as
exchange policy like if we want something we need to give others in the form of cash or product
or whatever it is. We are creating an opportunity to sell our goods in return for getting our
requirements.
Value for Money:-
It is one of the important concepts in economics because the value of money may vary from time
to time based on different factors. The best example of this is the stock market. If the value of a
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particular stock is about 100 rupees today and it goes on the increase to ＄200 or ＄500 within
hours or days because of inflation. At the same time, the price made decreases because of
deflation.
Purchasing Power:-
Another fundamental economic concept is the purchasing power of consumers because if we take
gold as an example, even though the price of gold is reduced, the buyer may not have the ability to
purchase food at that particular time. If he can purchase some amount of gold, the price may
increase. That ability of the consumer is called the purchasing power.
Principles of Economy
The following are the Principles of economy
⮚ Scarcity forces trade off
The Scarcity Forces Tradeoffs principle reminds people of our limited resources so
wise choices have to be made. Nothing is truly free, someone down the line has to pay for
it.
Real-life example: A family goes to the grocery store and has $100. They need to save $50
for gas, so they only have $50 for groceries. Instead of buying the things they want, they
only buy the things they "need"
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⮚ Cost versus benefits

Definition: The Costs Versus Benefits principle describes the act of a person picking an
option when the benefits are greater than the cost, after the weighed out both options.
Real-life example: A family wants to buy a new flat-screen T.V. The cost is $500. They
only have $600 and won't have a lot of money for a while, but they will finally buy the
T.V. that they want.
⮚ Thinking at the Margin
Definition: Thinking at the Margin is the principle that describes the adding or
subtracting a “unit” to of what we already have. For example, if you wanted one
more glass of water or one less scoop of mashed potatoes.
Real-life example: A young toddler, named Sammy, wanted to go to the ice cream
store. The ice cream man gave him two scoops for a dollar each. He wanted to add
one more scoop, so the ice cream man just gave him another scoop, displaying his
kindness.
⮚ Incentives Matter
Definition: The Incentives Matter principle describes the act of looking for motivation in
making a certain decision or doing an action.
Real-life example: A person is caught with heroin and goes to rehab for motivation to stop.
⮚ Trade makes people better off
Definition: The “Trade Makes People Better” principle tells us that we must not to
try everything for ourselves, but instead to focus on our talents and what we do
well. Then we trade with others, to create more opportunities and options.
Real-life example: A cable guy goes to the house where the pool-boy is working.
The pool-boy's cable isn't working very well, and the cable guys pool is disgusting.
They agree to not pay anything, if they do their career for the other.
⮚ Markets Coordinate Trade
Definition: The “Markets Coordinate Trade” principle tells us that markets are
where business between buyers and sellers happens the best. It is successful and
organized.
Real-life example: Barry is having a garage sale this weekend. In this garage sale
Barry is able to negotiate prices with customers and make the profit he wants off of
his items.
⮚ Future consequences count
Definition: The “Future Consequences Count” principle helps us remember that
everything we do or say has a specific consequence. We must keep that in mind
before we do things and make decisions.
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Real-life example: Jerry goes to shop for his Super-Bowl party, and buys so much
stuff because he can't pay for his bus ticket.
Definition of Economics
1. General Definition of Economics:

The English word economics is derived from the ancient Greek word oikonomia—meaning the
management of a family or a household.
It is thus clear that the subject economics was first studied in ancient Greece.
What was the study of household management to Greek philosophers like Aristotle (384-322 BC)
was the “study of wealth” to the mercantilists in Europe between the sixteenth and eighteenth
centuries.
Economics, as a study of wealth, received great support from the Father of economics, Adam
Smith, in the late eighteenth century.
Since then, the subject has travelled a long and this Greek or Smithian definition serves our
purpose no longer. Over the passage of time, the focus of attention has been changed. As a result,
different definitions have evolved.
These definitions can conveniently be grouped into three:

(i) Smith’s Wealth definition;
(ii) Marshall’s Welfare definition; and
(iii) Robbins’ Scarcity definition.
2. Adam Smith’s Wealth Definition:

The formal definition of economics can be traced back to the days of Adam Smith (1723-90) —
the great Scottish economist. Following the mercantilist tradition, Adam Smith and his followers
regarded economics as a science of wealth which studies the process of production, consumption
and accumulation of wealth.
His emphasis on wealth as a subject-matter of economics is implicit in his great book— ‘An
Inquiry into the Nature and Causes of the Wealth of Nations or, more popularly known as ‘Wealth
of Nations’—published in 1776.
According to Smith:
“The great object of the Political Economy of every country is to increase the riches and
power of that country.” Like the mercantilists, he did not believe that the wealth of a nation lies
in the accumulation of precious metals like gold and silver.
To him, wealth may be defined as those goods and services which command value-in- exchange.
Economics is concerned with the generation of the wealth of nations. Economics is not to be
concerned only with the production of wealth but also the distribution of wealth. The manner in
which production and distribution of wealth will take place in a market economy is the Smithian
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‘invisible hand’ mechanism or the ‘price system’. Anyway, economics is regarded by Smith as the
‘science of wealth.’
Other contemporary writers also define economics as that part of knowledge which relates to
wealth. John Stuart Mill (1806-73) argued that economics is a science of production and
distribution of wealth. Another classical economist Nassau William Senior (1790-1864) argued
“The subject-matter of the Political Economics is not Happiness but Wealth.” Thus, economics is
the science of wealth. However, the last decade of the nineteenth century saw a scathing attack on
the Smithian definition and in its place another school of thought emerged under the leadership of
an English economist, Alfred Marshall (1842-1924).
Criticisms:
Following are the main criticisms of the classical definition:
i. This definition is too narrow as it does not consider the major problems faced by a society or an
individual. Smith’s definition is based primarily on the assumption of an ‘economic man’ who is
concerned with wealth-hunting. That is why critics condemned economics as ‘the
bread-and-butter science’.
ii. Literary figures and social reformers branded economics as a ‘dismal science’, ‘the Gospel of
Mammon’ since Smithian definition led us to emphasise on the material aspect of human life, i.e.,
generation of wealth. On the other hand, it ignored the non-material aspect of human life. Above
all, as a science of wealth, it taught selfishness and love for money. John Ruskin (1819-1900)
called economics a ‘bastard science.’ Smithian definition is bereft of changing reality.
iii. The central focus of economics should be on scarcity and choice. Since scarcity is the
fundamental economic problem of any society, choice is unavoidable. Adam Smith ignored this
simple but essential aspect of any economic system.
3. Marshall’s Welfare Definition:

Alfred Marshall in his book ‘Principles of Economics published in 1890 placed emphasis on
human activities or human welfare rather than on wealth. Marshall defines economics as “a study
of men as they live and move and think in the ordinary business of life.” He argued that
economics, on one side, is a study of wealth and, on the other, is a study of man.
Emphasis on human welfare is evident in Marshall’s own words: “Political Economy or

Economics is a study of mankind in the ordinary business of life; it examines that part of
individual and social action which is most closely connected with the attainment and with the use
of the material requisites of well-being.”
Thus, “Economics is on the one side a study of wealth; and on the other and more important side,
a part of the study of man.” According to Marshall, wealth is not an end in itself as was thought
by classical authors; it is a means to an end—the end of human welfare.
This Marshallian definition has the following important features:

i. Economics is a social science since it studies the actions of human beings.
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ii. Economics studies the ‘ordinary business of life’ since it takes into account the money-earning
and money-spending activities of man.
iii. Economics studies only the ‘material’ part of human welfare which is measurable in terms of
the measuring rod of money. It neglects other activities of human welfare not quantifiable in terms
of money. In this connection A. C. Pigou’s (1877- 1959)—another great neo-classical
economist—definition is worth remembering. Economics is “that part of social welfare that can be
brought directly or indirectly into relation with the measuring rod of money.”
iv. Economics is not concerned with “the nature and causes of the Wealth of Nations.” Welfare of
mankind, rather than the acquisition of wealth, is the object of primary importance.
Criticisms:
Though Marshall’s definition of economics was hailed as a revolutionary one, it was criticised on
several grounds.
They are:
i. Marshall’s notion of ‘material welfare’ came in for sharp criticism at the hands of Lionel
Robbins (later Lord) (1898- 1984) in 1932. Robbins argued that economics should encompass
‘non- material welfare’ also. In Teal life, it is difficult to segregate material welfare from
non-material welfare. If only the ‘materialist’ definition is accepted, the scope and subject-matter
of economics would be narrower, or a great part of economic life of man would remain outside the
domain of economics.
ii. Robbins argued that Marshall could not establish a link between economic activities of human
beings and human welfare. There are various economic activities that are detrimental to human
welfare. The production of war materials, wine, etc., are economic activities but do not promote
welfare of any society. These economic activities are included in the subject-matter of economics.
iii. Marshall’s definition aimed at measuring human welfare in terms of money. But ‘welfare’ is
not amenable to measurement, since ‘welfare’ is an abstract, subjective concept. Truly speaking,
money can never be a measure of welfare.
iv. Marshall’s ‘welfare definition’ gives economics a normative character. A normative science
must pass on value judgments. It must pronounce whether a particular economic activity is good
or bad. But economics, according to Robbins, must be free from making value judgment. Ethics
should make value judgments. Economics is a positive science and not a normative science.
v. Finally, Marshall’s definition ignores the fundamental problem of scarcity of any economy. It
was Robbins who gave a scarcity definition of economics. Robbins defined economics in terms of
allocation of scarce resources to satisfy unlimited human wants.
4. Robbins’ Scarcity Definition:

The most accepted definition of economics was given by Lord Robbins in 1932 in his book ‘An
Essay on the Nature and Significance of Economic Science. According to Robbins, neither wealth
nor human welfare should be considered as the subject-matter of economics. His definition runs in
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terms of scarcity: “Economics is the science which studies human behaviour as a relationship
between ends and scarce means which have alternative uses.”
From this definition, one can build up the following propositions:

(i) Human wants are unlimited; wants multiply—luxuries become necessities. There is no end of
wants. If food were plentiful, if there were enough capital in business, if there were abundant
money and time—there would not have been any scope for studying economics. Had there been
no wants there would not have been any human activity. Prehistoric people had wants. Modern
people also have wants. Only wants change—and they are limitless.
(ii) The means or the resources to satisfy wants are scarce in relation to their demands. Had
resources been plentiful, there would not have been any economic problems. Thus, scarcity of
resources is the fundamental economic problem to any society. Even an affluent society
experiences resource scarcity. Scarcity of resources gives rise to many ‘choice’ problems.
(iii) Since the prehistoric days one notices constant effort of satisfying human wants through the
scarcest resources which have alternative uses. Land is scarce in relation to demand. However,
this land may be put to different alternative uses.
A particular plot of land can be either used for jute cultivation or steel production. If it is used for
steel production, the country will have to sacrifice the production of jute. So, resources are to be
allocated in such a manner that the immediate wants are fulfilled. Thus, the problem of scarcity of
resources gives rise to the problem of choice.
Society will have to decide which wants are to be satisfied immediately and which wants are to be
postponed for the time being. This is the choice problem of an economy. Scarcity and choice go
hand in hand in each and every economy: “It exists in one-man community of Robinson Crusoe,
in the patriarchal tribe of Central Africa, in medieval and feudalist Europe, in modern capitalist
America and in Communist Russia.”
In view of this, it is said that economics is fundamentally a study of scarcity and of the problems
to which scarcity gives rise. Thus, the central focus of economics is on opportunity cost and
optimisation. This scarcity definition of economics has widened the scope of the subject. Putting
aside the question of value judgement, Robbins made economics a positive science. By locating
the basic problems of economics — the problems of scarcity and choice — Robbins brought
economics nearer to science. No wonder, this definition has attracted a large number of people
into Robbins’ camp.
The American Nobel Prize winner in Economics in 1970, Paul Samuelson, observes: “Economics
is the study of how men and society choose, with or without the use of money, to employ scarce
productive resources which could have alternative uses, to produce various commodities over
time, and distribute them for consumption, now and in the near future, among various people and
groups in society.”
Criticisms:
This does not mean that Robbins’ scarcity definition is fault free.
His definition may be criticised on the following grounds:
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i. In his bid to raise economics to the status of a positive science, Robbins deliberately
downplayed the importance of economics as a social science. Being a social science, economics
must study social relations. His definition places too much emphasis on ‘individual’ choice.
Scarcity problem, in the ultimate analysis, is the social problem—rather an individual problem.
Social problems give rise to social choice. Robbins could not explain social problems as well as
social choice.
ii. According to Robbins, the root of all economic problems is the scarcity of resources, without
having any human touch. Setting aside the question of human welfare, Robbins committed a grave
error.
iii. Robbins made economics neutral between ends. But economists cannot remain neutral
between ends. They must prescribe policies and make value judgments as to what is good for the
society and what is bad. So, economics should pronounce both positive and normative statements.
iv. Economics, at the hands of Robbins, turned to be a mere price theory or microeconomic theory.
But other important aspects of economics like national income and employment, banking system,
taxation system, etc., had been ignored by Robbins.
Conclusion:
The science of political economy is growing and its area can never be rigid. In other words, the
definition must not be inflexible. Because of modern research, many new areas of economics are
being explored.
That is why the controversy relating to the definition of economics remains and will remain so in
the future. It is very difficult to spell out a logically concise definition. In this connection, Mrs.
Barbara Wotton’s remarks may be noted – ‘Whenever there are six economists, there are seven
opinions!’
Despite these, Cairncross’ definition of economics may serve our purpose:

“Economics is a social science studying how people attempt to accommodate scarcity to their
wants and how these attempts interact through exchange.” By linking ‘exchange’ with ‘scarcity’,
Prof. A. C. Cairncross has added another cap to economics.
However, this definition does not claim any originality since scarcity—the root of all economic
problems—had been dealt with elegantly by Robbins.
That is why, Robinson definition is more popular:

Economics is the science of making choices. Modern economics is a science of rational choice or
decision-making under conditions of scarcity.
Scope of Economics
According to T. Scitovsky, economics is “a social science concerned with the administration of
scarce resources.” In a like manner, A. C. Cairn-cross defines economics as a “a social science
studying how people attempt to accommodate scarcity to their wants and how these attempts
interact through exchange”. These four aspects of economics may now be discussed.
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❖ Subject matter:
If we take a broad view of the subject matter of economics we may say that,
Economics is the study of all phenomena relating to wealth and value. It is one of
the social sciences that deal with economic goods, the creation of wealth through
the satisfaction of human wants, the explanation of wealth, value and price, the
distribution of income and the mechanism of exchange and markets of an economy.
According to Robbins, economics is the study of the problem of using available

factors of production as efficiently as possible so as to attain the maximum
fulfilment of society’s demands for goods and services. The ultimate purpose of
economic endeavour is to satisfy human wants for goods and services.
The problem is that, whereas wants are virtually without limit, the resources—land,
labour, capital and organisation—available at any one time to produce goods and
services, are limited in supply, i.e., resources are scarce relative to the demands for
them.
The fact of scarcity means that we must always be making choices. If, to take a
simple example, more resources are devoted to producing motor cars fewer
resources are then available for constructing roads or bridges or setting up schools
and hospitals. Thus, economics is a science of scarcity or is a study of the problems
of scarcity.
However, economics does not study the behaviour of human beings in the way
other subjects like Physiology or Psychology study it. Economics is no doubt a
Science, but it is not a pure (exact) science like Physics, Chemistry,
Biology or even Mathematics. Economics is a social science concerned with how

we solve society’s economic problems. Because of the abundance of economic data
and the ample opportunity for scientific research in the real world, Samuelson calls
it ‘the queen of social sciences’.
But, it is not an exact science. It may also be added that, the study of modern
economics is divided into two parts, viz., microeconomics or price theory
(concerned with the behaviour of an economic agent or unit such as an individual
consumer or business firm) and macroeconomics (concerned with the study of
certain broad aggregates, such as national income, output, the level of employment,
the price level or even the growth rate of the economy or the study of the economic
system in its totality).
❖ Science or Art:
For quite a long time there was controversy among economists as to whether it is a
science or an art. The members of the English classical school, such as Adam
Smith, T. R. Mathus and David Ricardo, held the view that it was a pure science
whose task was just to explain the cause of economic phenomena such as
unemployment, inflation, slow growth or even trade deficit.
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According to classical writers, economics is simply the study of cause and effect
relationship.
However, neo-classical and modern economists have pointed out that economics is
both a science and an art. Just to treat economics as a science is to rob it of its
practical value. As Keynes has commented, “Practical men……. are usually the
slaves of some defunct economist.” So, economics has both a theoretical side and a
practical or applied side. In other words, economics is no doubt a science, but it is
both ‘light-bearing and fruit bearing’.
Inflation, unemployment, monopoly, economic growth, pollution, free markets

versus central planning, poverty, productivity and other current issues are all
covered in the study of economics. Economics is a problem- based social science,
and the problems with which it is especially concerned are among the central issues
of our times.
Economics is relevant not only to the big problems of society, but also to the
personal problems, such as one’s job, wages, unemployment, the cost of living,
taxes and voting.
The accomplishments of economics have established it as perhaps the most

successful social science. No other social science has had equivalent impact in
applying reason and science to the shaping of the nation’s social destiny. No other
social science has a Nobel Prize.
Nineteenth century historian Thomas Carlyle gave economics the nickname ‘the
dismal science’. Perhaps economics acquired its reputation as a dismal science
because economists emphasise costs, or because they focus on the negative aspects
of each phase of the business cycle—inflation during expansion and
unemployment during recessions. Economics is really a very optimistic subject in
many ways.
❖ Positive or Normative:
Another controversial aspect of economics is whether it should be neutral or pass
value judgments. The members of the English classical school were of the opinion
that economists were not supposed to make any normative statement or pass any
value judgment on the desirability or otherwise of the economic decisions.
Some later members of the classical school even went to the extent of suggesting
that economists should not give any advice on any issue.
This means that economics should stand neutral as regards ends. However, the
same view has been reaffirmed by Robbins, who commented that the function of
the economist is to explore and explain, not to uphold or to condemn. This simply
means that economists should take ends as given. Their task is just to discover
ways and means of achieving these ends (i.e., to find out ways of accomplishing
objectives).
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No doubt, by restricting himself to positive aspect of economic science (with its

focus on resource allocation and valuation of commodities and factors) Robbins
has narrowed (restricted) the scope of economics. He denied economics the right to
study welfare.
As he has commented, “Whatever economics is concerned with it is not

concerned with the causes of material welfare as such.” He has also ignored
macroeconomics altogether as also the problems of developing countries like India.
So, Robbins’ view of economic science is not only one-sided but misleading, too.
The task of economists is not just to explain why certain things happen (i.e., why
there is so much of unemployment in India in spite of her planned economic
development or why there is so inequality in the distribution of income and wealth
notwithstanding the prevalence of the progressive income tax system).
It is equally vital to pass judgment as to whether certain things are good or bad
from society’s welfare point of view. For example, it is not enough for an
economist to explain the present problem of unequal distribution of income and
wealth in India.
It is the task of the economists to condemn this phenomenon and to suggest certain
measures which should be adopted by the government to solve the inequality
problem.
This means that, economics is both a positive and a normative science. While
positive economics is the scientific study of ‘what is’ among economic
relationships, normative economics is concerned with judgments about ‘what ought
to be’ in economic matters. (Normative economic views cannot be proved false,
because they are based on value judgments.)
❖ Problem-solving Nature:
The classical economists believed that economics could not solve practical
problems, because there were non-economic (social, political, ethical, religious and
other) aspects of people’s lives.
As J.M. Keynes commented in 1923:

“The theory of economics does not furnish a body of settled conclusions
immediately applicable to policy. It is a method rather than a doctrine, an apparatus
of the mind, a technique of thinking which helps its possessor to draw correct
conclusions.”
However, this view is not correct. In fact, the primary function of economists is to
formulate policies and to suggest solutions to economic problems. Acknowledge of
economics is essential for policymaking.
Policy-makers, who do not understand the consequences of their actions are

unlikely to reach their goals. The most important point to note here is that,
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economists can suggest solutions to society’s economic problems such as

unemployment, inflation, trade deficit and slow growth.
This is why modern governments take the help of economists for formulating
monetary fiscal and exchange rate policies. Since the New Deal era in the 1930s,
economists have moved in the forefront of government policy analysis.
Economics offers a social science with models for organising facts and for thinking
about policy alternatives. In fact, the U.S. Council of Economic Advisors is
unique; no such permanent agency exists for any other social science. Indeed, few
scientists of any kind enjoy so much prestige as the economists J.K. Galbraith, Paul
Samuelson, Lester Thurow, or Milton Friedman.
Managerial Economics
Managerial economics is a stream of management studies that emphasizes primarily solving

business problems and decision-making by applying the theories and principles of
microeconomics and macroeconomics. It is a specialized stream dealing with an organization’s
internal issues by using various economic theories. Economics is an indispensable part of any
business. All the business assumptions, forecasting, and investments are derived from this single
concept. This is managerial economics meaning in a nutshell.
Nature of managerial economics

You need to know about its various characteristics to get more information about managerial
economics. In the mentioned below points let’s read about the nature of this concept:
● Art and Science: Management theory requires a lot of critical and logical thinking and
analytical skills to make decisions or solve problems. Many economists also find it a
source of research, saying it includes applying different economic concepts, techniques
and methods to solve business problems.
● Micro Economics: In managerial economics, managers typically deal with the problems
relevant to a single entity rather than the economy as a whole. It is therefore considered an
integral part of microeconomics.
● Uses Macro Economics: A corporation works in an external world, i.e. it serves the
consumer, which is an important part of the economy.
● For this purpose, it is important that managers evaluate the various macroeconomic factors
such as market dynamics, economic changes, government policies, etc., and their effect on
the company.
● Multidisciplinary: It uses many tools and principles that belong to different disciplines,
such as accounting, finance, statistics, mathematics, production, operational research,
human resources, marketing, etc.
● Prescriptive/Normative Discipline: By introducing corrective steps it aims at achieving
the objective and solves specific issues or problems.
● Management Oriented: This serves as an instrument in managers’ hands to deal
effectively with business-related problems and uncertainties. This also allows for setting
priorities, formulating policies, and taking successful decision-making.
● Pragmatic: The solution to day-to-day business challenges is realistic and rational.
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Both managers take a different view of the principle of managerial economics. Others may
concentrate more on customer service while others may make efficient production a priority.
The concepts of Managerial Economics

Liberal Managerialism
A market is a democratic space where people make their choices and decisions in a liberal way.
The organization and the managers must function according to the demand of the customers and
market trends; otherwise, this can lead to business failures.
Normative managerialism
The managerial economics normative view states that administrative decisions are based on
experiences and practices of real life. They have a systematic method for the study of demand,
forecasting, cost control, product design and promotion, recruitment, etc.
Radical Managership
Managers have to have a creative approach to business concerns, i.e. they have to make decisions
to improve the current situation or circumstance. We concentrate more on the need and
satisfaction of the consumer rather than just the maximization of income.
Managerial economic values
The excellent macroeconomist N. Gregory Mankiw has given ten principles to explain the
significance of business operations in managerial economics
Principles of Managerial Economics

Principles of How People Decide
Let us go through the following principles to understand how decision-making takes place in real
life:
● Humans face tradeoffs: To make decisions, people have to make choices on whether to
choose from the different options available.
● Price of Opportunity: Each decision involves a cost of opportunity which is the cost of
those options that we let go of while choosing the most appropriate one.
● Feel fair about the margin: People typically think about the margin or income they
receive before investing in a specific project or individual with their money or resources.
● People respond to stimulus: Decisions to be made highly depend on incentives related to
a product, service or activity. Negative incentives discourage people, whilst positive
incentives encourage people.
Principles of How People Interact
Communication and market impact business transactions. Let us take a look at the following
related principles to justify the statement:
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Trade Could Better Anyone: The theory states that trade is a way for people to share. Everyone
gets an opportunity to offer those good products or services they make. And buy those products or
services that other people are good at manufacturing.
Markets usually represent a good way to organize economic activity
Markets often serve as a means of customer and product interaction. Consumers express their
desires and expectations (demands) while producers determine whether or not to manufacture
necessary products or services.
Governments may often boost the performance of the market
During the time of adverse market conditions, or for the benefit of society, the government
intervenes in business operations. Another such example is when the government agrees on
minimum wages for the benefit of workers.
Principles on How Economy Works
The following theory outlines the economic role of an organization’s functioning:
⮚ The standard of living of a country depends on its capacity to generate goods and services
The companies must be productive enough to produce products and services for the development
of a country’s economy. Ultimately it meets the demand of the customer and enhances GDP to
increase the standard of living in the country.
⮚ Prices increase when the government’s printing lots of money.
If surplus money is available with citizens, their capacity to spend increases, eventually leading to
a rise in demand. Inflation takes place when the manufacturers are unable to satisfy market
demand.
⮚ Society faces a short-term correlation between unemployment and inflation
The government introduces numerous economic policies to reduce unemployment. Such policies
target in the short term, to improve the economy and what kind of practice contributes to inflation.
Scope of Managerial Economics

Managerial economics is commonly used to deal with various business problems within
organizations. Both micro and macroeconomics have an equal effect on the organization and its
working. The points which follow illustrate its significance:
Micro-economy Applied to operational matters
The various theories or principles of microeconomics used to solve the internal problems of the
organization arising in the course of business operations are as follows:
15
● Demand Theory: Demand Theory emphasizes the behavior of the consumer towards a

product or service. This takes into account the customers’ desires, expectations,
preferences, and conditions to enhance the manufacturing process.
● Decisions on Production and Production Theory: This theory is primarily concerned
with the volume of production, process, capital and labor, costs involved, etc. It aims to
optimize production to meet customer demand.
● Market Structure Pricing Theory and Analysis: It focuses on assessing a product’s
price taking into account the competition, market dynamics, production costs, optimizing
sales volume, etc.
● exam and management of profit: the companies are operating for assets hence they
always aim to maximize profit. It also depends on demand from the market, input costs,
level of competition, etc.
● Decisions on capital and investment theory: Capital is the most important business
element. This philosophy takes priority over the proper distribution of the resources of the
company and investments in productive programs or initiatives to boost operational
performance.
Macro-Economics Applied to Business Environment
Any organization is greatly affected by the environment in which it operates. The business climate
can be defined as:
● Economic environment: A country’s economic conditions, GDP, government policies,

etc. have an indirect effect on the company and its operations.
● Social environment: The society in which the organization, like employment conditions,
trade unions, consumer cooperatives, etc., functions also affects it.
● Political environment: a country’s political system, whether authoritarian or democratic;
political stability; and attitude towards the private sector, impact the growth and
development of the organization.
Management economics is an important method for assessing the company’s priorities and
objectives, the organization’s current role, and what the management can do to fill the void
between the two.
Best options pursue in this field.
● Banking Sector
● Government Sector
● Research and Development
● Teaching
● Higher Studies
● Professional Economist
● Financial Risk Analyst
● Data Analyst (Banking)
● Financial Planner (Banking)
● Financial Controller/Financial Economist
● Equity Analyst
● Cost Accountant
● Economic Researcher
● Business Economist
● Agricultural Economist
16
● Investment Analyst
● Actuary
Banking sector job profiles are financial analysts, consultants, financial advisers, investment
bankers, and being an environmental policymaker, development officer, or part of Research and
Development you can also work for the government. If you want to be a lecturer or become a
senior economics teacher in private schools, apply for the NET / CTET exam in the field of
education. Job for newspapers, and become an economic or editorial journalist.
● Business Economist: They deal with various sectors and companies and their main role is
to serve as an intermediary between the corporate and the outside world.
● Asset Manager: They deal with different sectors and businesses and their main role is to
act as an intermediary between the corporate and the outside world.
● Credit and risk manager: We analyze the company’s financial details and calculate the
associated default risk to help both the lender and the buyer.
● Market Analyst: A Market Analyst analyses the market so that their employers can make
a better decision with respect to product launching or rendering services.
● Operations Manager: From output to review of statistics to educating new staff, an
Operations Manager manages all day-to-day activities in the company and needs to make
sure that the organization runs at an optimal level.
● Teaching: After completing an M.A in Economics with a mark of at least 55 percent an
applicant can either seek a Ph.D. at any college or appear for the National Eligibility exam
of the UGC currently being administered by the NTA.
● Equity Analyst: An equity analyst extracts equity information for investment purposes
and explores stock market insights as to where to invest or whether to proceed or sell on
the market.
● Economic services of India: You will complete M.Sc. And MA. in economics with marks
of at least 55 percent before appearing in the Indian Economic Service Exam. The age
range is from 21-30 years. The test is administered by UPSC.
● Public sector Banking Services: Reserve Bank of India also recruits banking-sector
economists through their own various recruitment exams. The age limit is 21-28 years.
● Private and foreign banks: A holder of an Economics degree can try for both private and
foreign banks. The Banking job categories are branch managers, clerks, economic
analysts, planning and development officers, etc.
● Agencies Worldwide: Experienced and famous economists in a well-known international
organization such as the World Bank and the International Labor Organisation(ILO) can
get employment opportunities.
● Work as an advisor: Graduates in Economics can work as an economic consultant
independently. In the case of various scientific research and consulting in the private
sector, companies can ensure optimal job opportunities.
● Entrepreneurship: Economists should have a profound understanding of the market.
They will easily understand industry dynamics and competitive business sectors. Then
they will soon be able to achieve exponential growth by creating their own business. So,
this will generate a huge number of work opportunities. It’ll also help to reduce the
country’s unemployment problem.
17
Final Thoughts
Managerial Economists are the need of every business. They look for talent who can help manage
their money and investments, and help their company grow in the market. These individuals are
highly sought after for their skills to analyse market trends and practices.
In terms of scope, Managerial economics leads to a well respected and high paying job within the
corporate environment. Individuals who are seeking this profile need to build their skills not only
in economic theories, but also in the world of Arts and Sciences for logical and creative thinking,
and management operations.
Three Basic Economic Problems

All modern economies have certain fundamental or basic economic problems to deal with. In
every single economy, including the so-called “affluent society”, resources are limited. As a
result, decisions regarding the resource use have to be made together by individuals, by business
corporations, and by society.
It is the social choice and community preferences which give substance to the question of
macro-economic decisions.
Three Basic Economic Problems of Society
Following figure shows the 3 fundamental economic problems faced by all societies worldwide.
1. What to produce ?
Each and every economy must determine what products and services, and what volume of each, to
produce. In some way, these kinds of decisions should be coordinated in every society. In a few,
the govt decides. In others, consumers and producers decisions act together to find out what the
society’s scarce resources will be utilized for. In a market economy, this ‘what to produce?’ choice
is made mainly by buyers, acting in their own interests to fulfill their needs. Their demands are
fulfilled by organizations looking for profits.
For instance, if cellphones are in demand it will pay businesses to produce and sell these. If no
one desires to buy radio sets, it is not worth producing them.
18
In case a manufacturer produces an item which buyers don’t buy in much quantity, there will
likely be inadequate income. The manufacturer will have to enhance the quality and modify the
product to match buyer tastes. If the item is still not preferred, the producer will most likely halt
the production. In this manner, buyers get the goods they need.
Customers rule the ‘what?’ decision. They ‘vote’ for certain products and services by spending
money on those they like. Each and every manufacturer has to offer what buyers want so that they
can compete effectively against other manufacturers. Government authorities also perform some
part in making ‘what?’ decisions. For example, a law demanding all ladies to wear a helmet
generates demand for helmets, and profit-seeking businesses will produce them.
This basic economic problem is with regards to the mix of resources to use to create each good
and service. These types of decisions are generally made by companies which attempt to create
their products at lowest cost. By way of example, banking institutions have substituted the
majority of their counter service individuals with automatic teller machines, phone banking and
Net banking. These electronic ways of moving money, utilizing capital as opposed to labour
resources, have decreased the banks’ production costs.
In the Nineteen fifties dams were being constructed in China by countless people making use of
containers and shovels. On the other hand dams were being constructed in the united states by
using huge earth moving devices.
The initial approach to production, using a resource combination which includes a small capital
and much labour, is labour-intensive while the second, utilizing a little labour and a lot of capital,
is capital-intensive. Each one of these ‘how’ decisions was made based on lowest cost and
accessible modern technology.
3. For whom to produce ?

This basic economic question is focused on who receives what share of the products and services
which the economy produces. The portion of production which each person and family can
consume is determined by their income. Income is distributed in line with the value of resources
we have to sell.
As an example, a top cricket player will earn far more income than a professor. A top cricket
player has a resource to sell for which many people will pay a high price. Professors are not so
rare, and few people pay for their services.
The for whom decision can even be dependent upon skills shortages, in which case organizations
will provide higher incomes to attract workers with rare skills. In the same way, high wages may
be required to attract employees to rural locations.
The economic problem is at times referred to as the basic, central or fundamental economic
problem. It is one of the crucial economic theories in the functioning of any economy in this
world. Due to scarcity, choices have to be made by consumers, businesses and governments.
Scarcity can be caused by the possible lack of availability in resources, from individuals insatiable
desires, or from a combination of the two. Due to the fact that resources are scarce and many of
our desires are substantial, a choice needs to be made about how to use scarce resources in the
most effective way.
Theory of the Firm

In neoclassical economics—an approach to economics focusing on the determination of goods,
outputs, and income distributions in markets through supply and demand—the theory of the firm
is a microeconomic concept that states that a firm exists and make decisions to maximize profits.
19
A firm maximizes profits by creating a gap between revenue and costs.
Understanding the Theory of the Firm

Neoclassical economics dominates mainstream economics today, so the theory of the firm (and
other theories associated with neoclassicism) influences decision-making in a variety of areas,
including resource allocation, production techniques, pricing adjustments, and the volume of
production.
While early economic analysis focused on broad industries, as the 19th century progressed, more
economists began to ask basic questions about why companies produce what they produce and
what motivates their choices when allocating capital and labor.
However, the theory has been debated and expanded to consider whether a company's goal is to
maximize profits in the short-term or long-term. Modern takes on the theory of the firm
sometimes distinguish between long-run motivations, such as sustainability, and short-run
motivations, such as profit maximization.
If a company's goal is to maximize short-term profits, it might find ways to boost revenue and
reduce costs. However, companies that utilize fixed assets, like equipment, would ultimately need
to make capital investments to ensure the company is profitable in the long-term. The use of cash
to invest in assets would undoubtedly hurt short-term profits but would help with the long-term
viability of the company.
Competition (not just profit) can also impact the decision making of company executives. If
competition is strong, the company will need to not only maximize profits but also stay one step
ahead of its competitors by reinventing itself and adapting its offerings. Therefore, long-term
profits could only be maximized if there's a balance between short-term profits and investing in
the future.
Theory of the Firm vs. Theory of the Consumer

The theory of the firm works side by side with the theory of the consumer, which states that
consumers seek to maximize their overall utility. In this case, utility refers to the perceived value a
consumer places on a good or service, sometimes referred to as the level of happiness the
customer experiences from the good or service. For example, when consumers purchase a good
for $10, they expect to receive a minimum of $10 in utility from the purchased good.
Special Considerations
Risks to Companies that Adhere to the Theory of the Firm
Risks exist for companies that subscribe to a profit-maximization goal. Solely focusing on profit
maximization comes with a level of risk in regards to public perception—and a loss of goodwill
between the company, consumers, investors, and the public.
A modern take on the theory of the firm proposes that maximizing profits is not the only driving
goal of a company, particularly with publicly held companies. Companies that have issued equity
or sold stock have diluted their ownership. This scenario (of low equity ownership by the
20
decision-makers in the company) can lead to chief executive officers (CEOs) having multiple
goals, including profit maximization, sales maximization, public relations, and market share.
Further risks exist when a firm focuses on a single strategy within the marketplace in order to
maximize profits. If a company relies on the sale of one particular good for its overall success, and
the associated product eventually fails within the marketplace, the company can fall into financial
hardship. Competition and the lack of investment in its long-term success—such as updating and
expanding product offerings—can eventually drive a company into bankruptcy.
Forms of Business Ownership
From the standpoint of ownership, business organizations may be of the following types;
1. Sole Proprietorship.
2. Partnership.
3. Company.
4. Cooperative Society.
5. State Enterprise.
Sole Proprietorship
A sole proprietorship is a for-profit business owned by one person. The owner may operate on
his or her own or may employ others. The owner of the business has unlimited liability for the
debts incurred by the business.
Partnership
A partnership is a form of for-profit business owned by two or more people. In most forms of
partnerships, each partner has unlimited liability for the debts incurred by the business.
Company
A company is a limited liability business that has a separate legal personality from its
members. The company can be either privately-owned or government-owned, and privately the
owned companies can organize either for-profit or not-for-profit.
A privately-owned, for-profit company can either be privately held or publicly held. A for-profit
company’s shareholders elect a board of directors to direct the corporation and hire its managerial
staff.
Cooperative Society
Often’ referred to as a “co-op,” a cooperative is a limited-liability business that can be organized

for-profit or not-for-profit.
21
A for-profit cooperative differs from a for-profit corporation in that it has members, as opposed to
shareholders, who share decision-making authority.
Cooperatives are typically classified as either consumer cooperatives or worker

cooperatives. Cooperatives are fundamental to the ideology of economic democracy.
State Enterprise or Government Company
Generally, an enterprise owned by the state is known as a state-owned enterprise, state

enterprise, or government company.
For the expansion of the business, rapid industrialization and development, and to remove
individual monopoly and to establish public interest and ownership, the state interferes in the
business sector.
Considerations in Choosing the Form of Ownership
The following are a few considerations that every entrepreneur should review before choosing
the form of ownership.
1. Tax considerations
Because of the graduated tax rates under each form of ownership, constant changes to the tax
code, and year to year fluctuations in a company’s income, an entrepreneur should calculate the
firm’s tax bill under each ownership each year.
2. Liability exposure
Certain forms of ownership offer business owners greater protection from personal liability due to
financial problems, faulty products, and a host of other difficulties.
Entrepreneurs must weigh the potential for legal and financial liabilities for their company’s
obligations.
3. Start-up and future capital requirements
Forms of ownership differ in their ability to raise start-up capital. Depending on how much capital
an entrepreneur needs and where she plans to get it, some forms are better than others.
Also, as a business grows, it’s capital requirements increase, and some forms of ownership make
it easier to attract financing from outsiders.
4. Control
By choosing certain forms of ownership, an entrepreneur automatically gives up some control

over the business.
22
Entrepreneurs must decide early on how much control they are willing to sacrifice in exchange for
help from other people in building a successful business.
5. Managerial ability
Entrepreneurs must assess their own ability to manage their companies.
If they lack skills or experience in certain areas, they may need to select a form of ownership that
allows them to bring the company people who possess those skills and experience.
6. Business goals
How big and how profitable an entrepreneur plans for the business to become will influence the
form of ownership chosen.
Business often switches forms of ownership as they grow, but moving from some formats to
others can be extremely complex and expensive.
For instance, business owners wanting to switch from a corporation to a limited liability company
face daunting liabilities under current tax laws. That conversion gets taxed as though the entire
company was liquidated or sold off.
7. Cost of formation
Some forms of ownership are much more costly and involved to create than others.
Entrepreneurs must carefully weigh the benefits and the costs of the particular form they choose,
bearing in mind the financial implications of each.
8. Management Succession
When choosing a form of ownership, business owners must look ahead to the day when they will
pass their ventures on to the next generation or a buyer. Some forms of ownership make this
transition much
Consideration of the above factors would lead the prospective entrepreneur to the right choice in
the arena of business.
Profit Maximisation Theory: Assumptions and Criticisms!

In the neoclassical theory of the firm, the main objective of a business firm is profit maximisation.
The firm maximises its profits when it satisfies the two rules:
(i) MC = MR and,
(ii) MC curve cuts the MR curve from below.
Maximum profits refer to pure profits which are a surplus above the average cost of production. It
is the amount left with the entrepreneur after he has made payments to all factors of production,
23
including his wages of management. In other words, it is a residual income over and above his
normal profits.
The profit maximisation condition of the firm can be expressed as:

Maximise π (Q)
Where π (Q)=R (Q)-C (Q)
Where π (Q) is profit, R (Q) is revenue, C (Q) are costs, and Q are the units of output sold.
The two marginal rules and the profit maximisation condition stated above are applicable both to a
perfectly competitive firm and to a monopoly firm.
Assumptions:
The profit maximisation theory is based on the following assumptions:
1. The objective of the firm is to maximise its profits where profits are the difference between the
firm’s revenue and costs.
2. The entrepreneur is the sole owner of the firm.
3. Tastes and habits of consumers are given and constant.
4. Techniques of production are given.
5. The firm produces a single, perfectly divisible and standardised commodity.
6. The firm has complete knowledge about the amount of output which can be sold at each price.
7. The firm’s own demand and costs are known with certainty.
8. New firms can enter the industry only in the long run. Entry of firms in the short run is not
possible.
9. The firm maximises its profits over some time-horizon.
10. Profits are maximised both in the short run and the long run.
Given these assumptions, the profit maximising model of firm can be shown under perfect
competition and monopoly.
1. Profit Maximisation under Perfect Competition Firm:

Under perfect competition, the firm is one among a large number of producers. It cannot influence
the market price of the product. It is the price-taker and quantity-adjuster. It can only decide about
the output to be sold at the market price. Therefore, under conditions of perfect competition, the
MR curve of a firm coincides with its AR curve.
The MR curve is horizontal to the X-axis because the price is set by the market and the firm sells
its output at that price. The firm is thus in equilibrium when MC= MR= AR (Price). The
24
equilibrium of the profit maximisation firm under perfect competition is shown in Figure 1 where
the MC curve cuts the MR curve first at point A.
It satisfies the condition of MC = MR, but it is not a point of maximum profits because after point
A, the MC curve is below the MR curve. It does not pay the firm to produce the minimum output
when it can earn larger profits by producing beyond OM.
It will, however, stop further production when it reaches the OM level of output where the firm
satisfies both conditions of equilibrium. If it has any plans to produce more than OM1 it will be
including losses, for the marginal cost exceeds the marginal revenue after the equilibrium point B.
Thus the firm maximises its profits at M1 B price at the output level OM1.
2. Profit Maximisation under Monopoly Firm:
There being one seller of the product under monopoly, the monopoly firm is the industry itself.
Therefore, the demand curve for its product is downward sloping to the right, given the tastes and
incomes of its customers. It is a price-maker which can set the price to its maximum advantage.
But it does not mean that the firm can set both price and output. It can do either of the two things.
If the firm selects its output level, its price is determined by the market demand for its product. Or,
if it sets the price for its product, its output is determined by what the consumers will take at that
price. In any situation, the ultimate aim of the monopoly firm is to maximise its profits.
The conditions for equilibrium of the monopoly firm are:

(1) MC = MR<AR (Price), and
(2) The MC curve cuts the MR curve from below.
In Figure 2, the profit maximising level of output is OQ and the profit-maximisation price is OP. If
more than OQ output is produced, MC will be higher than MR, and the level of profit will fall. If
cost and demand conditions remain the same, the firm has no incentive to change its price and
output. The firm is said to be in equilibrium.
25
Criticisms of the Profit Maximisation Theory:

The profit maximisation theory has been severely criticised by economists on the following
grounds:
1. Profits Uncertain:
The principle of profit maximisation assumes that firms are certain about the levels of their
maximum profits. But profits are most uncertain for they accrue from the difference between the
receipt of revenues and incurring of costs in the future. It is, therefore, not possible for firms to
maximise their profits under conditions of uncertainty.
2. No Relevance to Internal Organisation:

This objective of the firm bears little or no direct relevance to the internal organisation of firms.
For instance, some managers incur expenditures apparently in excess of those that would
maximise wealth or profits of the owners of the firm. They are observed to emphasize growth of
total assets of the firm and its sales as objectives of managerial actions.
3. No Perfect Knowledge:

The profit maximisation hypothesis is based on the assumption that all firms have perfect
knowledge not only about their own costs and revenues but also of other firms. But, in reality,
firms do not possess sufficient and accurate knowledge about the conditions under which they
operate.
At the most, they may have a knowledge about their own costs of production, but they can never
be definite about the market demand curve. They always operate under conditions of uncertainty
and the profit-maximisation theory is weak in that it assumes that firms are certain about
everything.
4. Empirical Evidence Vague:

The empirical evidence on profit maximisation is vague. Most firms do not rank profits as the
major goal. The working of modem firms is so complex that they do not think merely about profit
maximisation. Their main problems are of control and management.
The function of managing these firms is performed by managers and shareholders rather than by
the entrepreneurs. They are more interested in their emoluments and dividends. Since there is
substantial separation of ownership from control in modern firms, they are not operated so as to
maximise profits.
5. Firms do not bother about MC and MR:

It is asserted that the real world firms do not bother about the calculation of marginal revenue and
marginal cost. Most of them are not even aware of the two terms. Others do not know the demand
26
and marginal revenue curves faced by them. Still others do not possess adequate information
about their cost structure.
Empirical evidence by Hall and Hitch shows that businessmen have not heard of marginal cost
and marginal revenue. After all, they are not greedy calculating machines. As aptly put by C.J.
Hawkins: “To argue that all firms aim to do nothing else but maximise profits has not better basis
in logic or intuition as to argue that all students aim only to maximise examination marks”.
6. Principle of Average-Cost Maximises Profits:

Hall and Hitch found that firms do not apply the rule of equality of MC and MR to maximise short
run profits. Rather, they aim at the maximisation of profits in the long run. For this, they do not
apply the marginalistic rule but they fix their prices on the average cost principle. According to
this principle, price equals AVC +AFC + profit margin (usually 10%). Thus the main aim of the
profit maximising firm is to set a price on the average cost principle and sell its output at that
price.
7. Static Theory:
The neo-classical theory of the firm is static in nature. The theory does not tell the duration of
either the short period or the long period. The time-horizon of the neo-classical firm consists of
identical and independent time periods. Decisions are considered as temporally independent. This
is a serious weakness of the profit maximisation theory. In fact, decisions are ”temporally inter-
dependent. It means that decisions in any one period are affected by decisions in past periods
which will, in turn, influence the future decisions of the firm. This inter-dependence has been
ignored by the neo-classical theory of the firm.
8. Not applicable to Oligopoly Firm:

As a matter of fact, the profit-maximisation objective has been retained for the perfectly
competitive, or monopolistic, or monopolistic competitive firm in economic theory. But it has
been abandoned in the case of the oligopoly firm because of the criticisms leveled against it.
Hence the different objectives that have been put forth by economists in the theory’ of the firm
relate to the oligopoly or duopoly firm.
9. Varied Objectives:
The basis of the difference between the objectives of the neo-classical firm and the modem
corporation arises from the fact that the profit maximisation objective relates to the
entrepreneurial behaviour while modem corporations are motivated by different objectives
because of the separate roles of shareholders and managers.
In the latter, shareholders have practically no influence over the actions of the managers. As early
as in 1932, Berle and Means suggested that managers have different goals from shareholders.
They are not interested in profit maximisation.
They manage firms in their own interests rather than in the interests of shareholders. Shareholders
cannot have much influence on managers because they do not possess adequate information about
companies. The majority of shareholders cannot attend annual general meetings of companies and
thus give their proxies to the directors. Thus modern firms are motivated by objectives relating to
27
sales maximisation, output maximisation, utility maximisation, satisfaction maximisation and

growth maximisation.
28

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Unit I

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G. Kiruthika MBA., M.

Phil Assistant Professor, Department of Management Studies

Microeconomics focuses on the behavior of individual consumers and producers.

Macroeconomics, which examine overall economies on a regional, national, or international scale.

Basic Concepts of Economics

● Supply and demand

● Time value of money

Supply and Demand:-

Value for Money:-

The following are the Principles of economy

⮚ Scarcity forces trade off

⮚ Cost versus benefits

1. General Definition of Economics:

These definitions can conveniently be grouped into three:

(ii) Marshall’s Welfare definition; and

(iii) Robbins’ Scarcity definition.

2. Adam Smith’s Wealth Definition:

3. Marshall’s Welfare Definition:

Emphasis on human welfare is evident in Marshall’s own words: “Political Economy or

This Marshallian definition has the following important features:

4. Robbins’ Scarcity Definition:

From this definition, one can build up the following propositions:

His definition may be criticised on the following grounds:

Despite these, Cairncross’ definition of economics may serve our purpose:

That is why, Robinson definition is more popular:

According to Robbins, economics is the study of the problem of using available

Biology or even Mathematics. Economics is a social science concerned with how

Inflation, unemployment, monopoly, economic growth, pollution, free markets

The accomplishments of economics have established it as perhaps the most

No doubt, by restricting himself to positive aspect of economic science (with its

As he has commented, “Whatever economics is concerned with it is not

As J.M. Keynes commented in 1923:

Policy-makers, who do not understand the consequences of their actions are

economists can suggest solutions to society’s economic problems such as

Managerial economics is a stream of management studies that emphasizes primarily solving

Nature of managerial economics

The concepts of Managerial Economics

Managerial economic values

Principles of Managerial Economics

Markets usually represent a good way to organize economic activity

Governments may often boost the performance of the market

Principles on How Economy Works

The following theory outlines the economic role of an organization’s functioning:

⮚ Prices increase when the government’s printing lots of money.

⮚ Society faces a short-term correlation between unemployment and inflation

Scope of Managerial Economics

Micro-economy Applied to operational matters

● Demand Theory: Demand Theory emphasizes the behavior of the consumer towards a

● Economic environment: A country’s economic conditions, GDP, government policies,

Best options pursue in this field.

Three Basic Economic Problems

3. For whom to produce ?

Theory of the Firm

A firm maximizes profits by creating a gap between revenue and costs.

Understanding the Theory of the Firm

Theory of the Firm vs. Theory of the Consumer

Forms of Business Ownership

Often’ referred to as a “co-op,” a cooperative is a limited-liability business that can be organized

Cooperatives are typically classified as either consumer cooperatives or worker

State Enterprise or Government Company

Generally, an enterprise owned by the state is known as a state-owned enterprise, state

Considerations in Choosing the Form of Ownership

3. Start-up and future capital requirements