UNIT – 1

DETAILS OF ECONOMICS

TERMS AND DEFINITIONS





 WHAT IS ECONOMICS

Economics is the study of how

societies use scarce resources
to produce valuable goods and
services and distribute them
among different individuals.
Economics: Study pf principles of the way
money, business and industry are
organised.
Study of SCARCITY and its implications for
the used of resources, production of goods
and services, growth of production and
welfare overtime and great variety of
other complex issues of vital concern to
the society.

In 20th century English Economist LIONEL

ROBBINS defined Economics as relation
between scarce resources and unlimited
human wants.

ALFRED MARSHELL: Economics is study of

mankind in the ordinary business of life.

Micro economics is concerned with

the supply and demand interact in
individual markets for goods and
services.

Macro economics is typically a nation

wide- how all markets interact to
generate high phenomena that
economic called Aggregate variables.

Economics is the social science that studies the

production, distribution and consumption of
goods and services.

Economics is a science which studies human

behavior as a relationship between ends and
scarce means which have alternative uses.

• It deals with decisions relate to economic

variables like demand, supply, price, stock
input, stock output, finance, profit, etc.,
• It is the study of the consequencing [effect of
some previous occurrence ] in the context of
uncertainty.

• It is the study to compare the present

situation to take future decisions.
• Degree of Inflation, globalization and open
free trade make some countries rich and
some countries poor.
• Choice arises because resources (limited
means) with alternative uses are to be used
to satisfy ends (wants) which are unlimited
and varying.

 ENGINEERING ECONOMICS
Engineering Economics is a subject of economy
for application to Engineering projects.

Engineers seek solutions to problems and

economic utility of each potential solution is
considered with technical aspects.

It is time value of money.

 Twin themes of economics:

The twin themes of economics are
1. Scarcity --- like goods

2. Efficiency---Society must use resources

efficiently and effectively. It should satisfy
people’s wants and needs. But good quality
and quantity are to be given to the society.

 ECONOMIC ACTIVITY:
Resources are men, material, machine,
money, time, energy, etc., and these are
scarce resources.
Economic activity involves forgoing current
consumptions to increase our capital.

By building a new roads, increasing the quality

of education, etc., we enhance future
productivity of our economy and thus make
way for increasing future consumption.
This is called economic activity.

 Nature and scope of

economic science
Economic science is a hive (honey bee)
with complicated activities like people
buying, selling, bargaining, investing
and persuading.

Economics is based on Analysis and

Theories.

Scientific approach:
observing economics based on
historical records and statistics.
Example: budgets, deficits.
Econometrics: tool which tests
datamines {The act of extracting information from a large
wide-focus data source, typically a database} to get

solutions to people of everyday life.

 Problems in Economic organisation or

Trio of Economic problems
The three problems to be resolved are:
Society must decide
1. WHAT commodities are to be produced and
in what quantity.
2. determine HOW MANY possible goods and
services it will make
3. WHEN they will be produced

Few high quality goods or many cheap ones

To produce many consumption goods like Pizzas

or produce fewer consumption goods and
more investment goods [pizza making
machines] to produce more consumption
demand of tomorrow.

How these goods are produced.

Who will do the production
What resources and what techniques are to be
used
ex: electricity from oil or coal or wind mill or
sun [green energy].
Factories to be run by men or robots

For whom they are produced. For Many poor or

little rich .
Classification of economy
• Market economy: Individual and private firms
make major decisions about production,
distribution and consumption

• Command economy: Government make all

important decisions about production,
distribution and consumption. (Ex: Soviet
union)
• Mixed economy: With elements of both
market and command economies. In most of
the countries this method is followed
including India.

CIRCULAR FLOW OF MARKET ECONOMY or TRIO OF MIXED ECONOMY

For whom to be produced

How goods are to be produced

What to be produced
A factor market is a market in which companies buy
the factors of production or the resources they
need to produce their goods and services.
A product market is the economic marketplace where
final goods or services are traded. It is not limited
by a physical location since it refers to the
commercial environment of a given economic
system.
A factor market is different from the product, or
output, market—the market for finished products
or services.
In the product market, households are buyers and
businesses are sellers. But in a factor market, the
reverse is true: households are sellers and
businesses are buyers.

 Working capital cycle

way to success of organisation is to have shorter working
capital cycle
2 months
2 months
1 month
1 month

Inventory
Debtors

2 months
3 months
1 month
1 month
3 months
2 months


 Managerial economics:
Managerial economics suggests application
of economics principles with regard to policy
formulations , decision making and future
planning.
It describes goals of an organization and
prescribes means of achieving these goals.
It acts as a via media between economic
theory and pragmatic (practical means)
economics

It is the science of directing scarce

resources to manage the cost
effectively.
It bridges the gap between ‘theoria’
and ‘pracis’.
It uses quantitative technical tools like
Regression analysis, Correlation and
Lagrangian calculus (Linear).
It is the study of application of
managerial skills in economics.

In statistical modelling, regression analysis is a

statistical process for estimating the relationships
among two or more variables. It includes many
techniques for modelling and analysing several
variables, when the focus is on the relationship
between a dependent variable and one or more
independent variables (or 'predictors').
Correlation is a statistical measure that indicates the
extent to which two or more variables fluctuate
together. A positive correlation indicates the extent to
which those variables increase or decrease in parallel;
a negative correlation indicates the extent to which
one variable increases as the other decreases.

 REGRESSION ANALYSIS
Age and Height can be described using a LINEAR
REGRESSION model.
Since a person’s height increases as age
increases, they have linear relationship.

HEIGHT

AGE

 CORRELATION
Positive correlation: Metric's of consumer spending
and GDP.
When spending increases , GDP also rises as firm
produces more goods and services to meet
consumer demand.
Negative correlation: The more time you spent on
running, the lower the fat of the body tends to be.
ie., as time spent on running increases the fat on
the body decreases correspondingly.

It helps in anticipating, determining

and resolving potential problems.
The problems may be due to costs,
prices, future market, Human
resource management, profit, etc.,
It is the application of economic
theory and methodology to decision
making problems faced by both
public and private institutions.

Managerial economics deals with:

1.Demand analysis and forecasting
2. Production function
3. Cost analysis
4. Inventory management
5. Advertising
6. Pricing system
7. Resource allocation

Demand analysis and forecasting:

First know the demand for a
product.
Then only think of producing that
product .
demand analysis helps for
production function to happen.
The current and future demand are
to be investigated by the managers.

Theory of demand:
A business firm is an economic
organization which transforms
productivity sources into goods
which will be sold in the market.
It relates to the consumer behavior.
This is the theory of demand.

 Demand Analysis:
Demand analysis is done to
forecast demand for proper
decision making.
Estimate of future sales is required
for amount of production to be
done and resources required.
It examines various factors that
influences demand.

Production function:
conversion of inputs into outputs is called
production function.
With limited inputs how to produce various
alternative outputs including the best
output.(least cost combination method is
used for this purpose).
Production function is the relation between
quantity of goods produced (output ) and
factors of resources (inputs) used.

Production :
this is used for undisturbed
production process and project
planning.
Production is an economic activity
that makes goods available for
consumption using all available
resources in least cost method.
Average cost of production is to be
minimum.

 Cost analysis

Cost analysis is used to

understand the cost of particular
product.
It takes into account all costs
involved for producing a product.

 Inventory management:
to keep enough and required
stock of Raw material.
How much to keep . high or low.
ABC analysis is done for this.
Simulation exercises is done to
ke e p c o r r e c t a m o u n t o f
inventory.

 Advertising:
this is a promotional activity.
Production differs from marketing.
Products reaches consumers
through proper advertisements
only. Advertisement forms integral
part of decision making and
forward planning.

 Pricing system:
pricing a product.
Pricing = Cost + Profit.
Price theory is to determine level to
which advertisement can be used to
boost sales in market.
Accuracy of pricing will shape the firm.
Price depends on demand of product.
Differential pricing, product line pricing,
price forecasting and pricing policies.

 Resource allocation:
Resource is allocated to get
maximum level of optimization.
Scarce resources (men, material,
machine, etc.,) with unlimited
needs

Theory of Profit:
Profit = Total revenue - Total
economic cost.
Profit depends on - demand of product,
prices of factors of production. Nature
and degree of competition in market
and price changing behaviuor. Profit
management involves use of efficient
techniques for predicting future.

 Theory of capital and investment:

selection of good viable
project, efficient allocation of
funds, avoid over or under
capitalisation.
Capital is a building block of a
business. Capital is scarce and
expensive.

 Environmental issues:
social or political environment where business
operates (Macro economics). Controlled by
type of economic system in that country,
business cycles, industrial policies of
Government, trade and fiscal policies of
Government , taxation, price and labour policy,
employment , income , prices, saving and
investment, financial institutions, foreign trade,
value of society , social organisations like trade
u n i o n s , p r o d u c e r /c o n s u m e r u n i o n s ,
cooperative societies, social structure/social
groups , political system of Nation.

Economic concepts and techniques used

in Managerial economics:
•Theory of firm – how business involves
in variety of decision makings
•Theory of consumer - how consumers
are making decisions
•Theory of market structure and pricing
- structure and characteristics of different
market forms under which business firms
operate.

 Micro Economics:
Micro Economics is the study of economics
at an individual , group or company level
and business decisions.
Focus issues that affect individual and
companies. These can be easily corrected by
Demand – Supply analysis, varying the
production rate and regulating the business.
Therefore Micro Economics is a study of
Economics at a far smaller scale.

 Macro Economics:
Macro Economics is the study of national
economy as a whole and with Government
decisions. Focuses on issues that affect the
economy as a whole.
Some of them are unemployment rates, the
Gross Domestic Product (GDP) of an economy
and the effects of exports and imports.
Therefore Macro Economics is a study of
Economics at a larger scale economic issues.

 BUT BOTH MICRO

ECONOMICS AND
MACRO ECONOMICS
ARE INTERDEPENDENT
 Basic terms and
concepts in economics:
GOODS:
Goods is a material that
satisfies human need,
demand or wants and
provides utility and that
has exchange values.

A consumable item that is useful to

people but scarce in relation to its
demand , so that human effort is
required to obtain it.

Air is a good and no strain to get it.

But purified drinking water is costly
and more demand to get it.

 TYPES OF GOODS
• Tangible goods: we can touch –apple, book,
furniture
• Intangible goods: here value is felt no physical
touching. News heard, listening to digital
contents like MP3, video files, etc.,

An elastic good is one for which there is a

relatively large change in quantity due to a
relatively small change in price and therefore
is likely to be a part of family of substitute
goods.
Ex: when price of pen goes up, consumers might
buy more pencils instead.

An inelastic good is one for which there are few

or no substitute.
Ex: tickets to a major sport event, original work
of famous artists, medicines like insulin.
Complementary goods are inelastic in nature.
Rise in beef price results in decrease in beef
demanded. But decrease consumption is
there in Hamburger buns also even though
there is no change in bun’s price. This is
because beef and buns are complementary
goods. Opposite to substitute goods.

Trading of goods: goods are

capable of being physically
delivered to a consumer.
Intangible goods can only
be stored, delivered and
consumed by means of
media.
Tangible or intangible goods involve
transfer of ownership to the
consumer. Service do not involve
transfer of ownership of service itself
b u t m a y i n v o l v e t r a n s fe r o f
ownership of goods developed by
service provider in the course of
service. Ex: broadband, electricity.
UTILITY: Total satisfaction receiving
from consuming a good or
service.
E x ; E B d e p a r t m e n t g e n e ra t e
electricity and give to customer
who utilises it satisfactorily.
Indian gas for cooking.

It is hard to physically measure but

can determine indirectly by
consumer behaviour theory.
Consumers demand for utility
does not change dramatically
with a change in price. They are
regulated by government ex: gas
price, fuel price, autorickshaw fair
price.
• Utility is the ability to satisfy
human wants and needs. it is the
representation of preferences
over some set of goods or
services.
2 types of utility:
• Cardinal utility: magnitude of utility
differences is treated as a
behaviourally significant quantity.
• Ordinal utility: captures only ranking
and not strength of preferences.

 CARDINAL UTILITY ORDINAL

UTILITY
Substance Utility value Cardinal utility Ordinal utility

1 CUP OF ORANGE
120 utils 1 CUP of orange is better Juice is preferred to tea
than cup of tea by same and tea is preferred to
amount of tea which is water.
better than a cup of water.
1 CUP OF TEA
80 utils

1 CUP OF WATER
40 utils
 VALUE:
Economic value is the measure of benefit
provided by a goods or service to an
economic agent. It is measured in units of
currency.
Value to a customer is what is the
maximum amount of money a specific
actor is willing and able to pay for a goods
or service.

Consumer surplus = Value to the customer

- Market price

ex: drinking water bottle purchase.

Value relate to both buyer and seller.
What buyer is willing to pay for the goods or
service and the price demanded by the seller
for that goods or service.

WEALTH: Wealth is a measure

of value of all the assets of
worth owned by a person,
C o m m u n i t y, C o m p a ny o r
Country.
Wealth = Total market value of
all physical and intangible
assets of the entity - All Debts
involved.

We a l t h i s a c c u m u l a t i o n o f
Resources.
For individual it is common
expression of wealth. For countries
it is measured by Gross Domestic
Product (GDP) or GDP Per Capita.
For United Nations—GDP is the
sum of natural, human and physical
assets.

Natural capital includes forests,

land, fossil fuel, minerals, etc.,
Human includes education, skills of
people, etc.,
Physical includes land, building,
machinery, infrastructure, etc.,
Wealth refers to accumulative
Resources.

 MONEY:

Money is the means of payment in the

form of currency and to buy things. It
is a lubricant that facilitates exchange.
It acts as a match maker between
buyers and sellers. Money is controlled
by Government through Central Banks.
Money is the medium of exchange.

CAPITAL:Capital is finance or fund raised to

operate or expand a business.
Capital can also be goods that can help to
produce other goods in future
(investment), ie., machines, roads,
factories, schools, office building,
infrastructure, etc.,

Fixed capital:
Land, machinery, factories, equipments,
buildings, Personal Computers which are
used to increase productive potential.

Working capital:
stocks of semi finished and finished goods
(inventory) which will ultimately go as a
finished consumer goods in near future.

Liquid Assets (Money): this

is for immediate expenses
to production
process( salary, invoices,
taxes, interests, etc.,)

Social capital: goodwill,

etc.,

 LABOUR:
Labour is a measure of work done by
human beings. Labour market
functions through the interaction of
workers and employers.

Energy is an individual
factor of production
with an elasticity larger
than labour.
Division of Labour:
Today’s economy is depending on
specialisation of individuals and
firms connected by an extensive
network of trade.
Rapid economic growth happens
by specialisation. High production
is possible in particular occupation.

Specific skills and resources:

Put a task into many small modules.
Put skilled persons for that module.
Combine modules to get best
result.
This is called Division of labour.
Dividing production into a number
of small specialised steps or tasks.

Japan specialised people into

automobiles and electronics and
exports large quantity and pay
less for raw materials which it
imports. Countries trying to be
self sufficient – attempting to
produce most of them they
want – go to stagnation.
Factors of production:Factors
of production are any
commodities or services used
to produce goods or services
for ultimate use.
4 categories of Factors of production
are
LAND: like natural resources (water, air,
soil, minerals)
LABOUR: technical and marketing
CAPITAL: machines, tools, buildings,
etc.,
ENTREPRENEURSHIP: capability of
doing own business

The above four are used to produce

goods or services. Resources are
input to production process.
Finished goods are output.
So output depends on inputs. Input
is the starting point and output is
the end point of production
process.

Production function is input vs

output relationship.These factors
of production are also called as
PRODUCER GOODS. Goods or
services purchased by consumers
are called CONSUMER GOODS.
Production means creation or
addition of utility.
Primary factors are stocks including land,
labour, capital, goods applied to
production. Primary factors facilitates
production but not become part of the
product (unlike raw materials) nor
transformed by the production process
(fuel to machinery).

Secondary factors are materials and

energy (because these are obtained from
land, labour and capital)

GDP(Gross Domestic Product): GDP is the

monetary value of all finished goods and
services produced within a country borders
within a specific period. GDP includes all
public and private consumptions,
Government outlays (assets, etc.,),
investments, exports and imports, etc.,
Enormous natural resources and highly
developed banking system fixes the quality
and greatness of economy of a country.
(Qatar and USA).
The U.S. has the most technologically powerful economy in the world and its firms are
at or near the forefront in technological advances; especially
in computers, pharmaceuticals, and medical, aerospace, and military equipment.
The U.S. dollar is the currency most used in international transactions and is the
world's foremost reserve currency, backed by its economy.

U S A’s e c o n o m y i s f u e l l e d b y
abundant natural resources, a well-
developed infrastructure, and high
productivity. It has the seventh-
highest total-estimated value of
natural resources, valued at $45
trillion in 2016. Americans have the
highest average household and
employee income.
GDP is measurement
of Nation’s overall
Economic activity. GDP
data per capita is how
rich is the average
resident of a country.
 GDP means the sum total of all goods and
services produced in a country, expressed in
money terms, during a specific period,
generally an year. It is a vital macroeconomic
parameter both as an indication of the
capacity of the Economy as also its efficiency.
This is so because GDP correlates well with
most of the other socio-economic indicators
like poverty, unemployment, standard of
living and even literacy and standard of
health.




 The following equation is used to
calculate GDP:
GDP=Private consumption+ gross
investment + government
investment + government spending
+ (exports - imports)





 The Sectoral breakup of GDP is as
follows: -
1) Agriculture:17%
2) Industry:29%
3) Service:30%
The Sectoral breakup of GDP throws up
some concerns about the Indian
Economy. The Agricultural Sector that
engages more than 50% of the Indian
work force earns just 17% of the GDP.





 ECONOMIES OF SCALE
In micro economics, economies of scale are cost
advantageous that enterprises obtain due to
size, output or scale of operation.

Cost per unit of output generally decreasing

with increasing scale on fixed cost and are
spread over more units of output. Operational
efficiency is also more with increasing scale
leading to lower variable cost.

 ECONOMIES OF SCALE
• Large manufacturing company will
have lower cost/unit of output than
a smaller facility company.

• Company with many facilities will

have cost advantage over companies
with limited facilities.

ECONOMIES OF SCALE
As quantity of production increases from Q to
Q2, the average cost of each unit decreases
from C to C2. Economies of scale are cost
advantageous that a business can exploit by
expanding their scale of production.

The effect of economies of scale is to reduce

the average [unit] cost of production. It is
doing things more efficiently with increasing
size or speed of operation.

 DIFFERENT SOURCES OF
ECONOMIES OF SCALE ARE:

• PURCHASING – Bulk buying

• MANAGERIAL – Specialisation of managers
• FINANCIAL -- Getting capital at lower interest rate like
banks
• MARKETING -- Spreading cost of Advertisement over
great range of output in media markets
• TECHNOLOGICAL -- Advantage of returns to scale in
production function.

ECONOMIES OF LARGE SCALE:

Costs become lower when more products are
produced. Production of one lakh cars will be
cheaper than producing 1000 cars a month. The
smaller the country and its domestic market is
limited, the more incentive it has to look to
international trade as a way of gaining the
advantages of large scale production.
Ex: Luxembourg or Belgium has much more to
gain than US. Large scale production helps in
minimisation of cost and efficient use of
resources.

Adam Smith: division

of labour and
specialisation are two
major key factors for
large scale production
and lead to large scale
economy.
Classifications of Large scale economy:

Internal large scale economies (factors

internal to the firm)

External large scale economies (factors

affecting from outside the firm)

 TYPES OF INTERNAL LARGE SCALE

ECONOMICS
Technical economics: Large scale production
leads to the installation of costly and upto
date machineries thereby cost per unit
become less when large quantity is produced.
Utilisation of the byproducts for themselves
will also lead to more production.
Managerial economics: Tasks of Managers are
split up into divisions and so efficiency goes
up.

Marketing economics: Large scale of

purchase or sale. The firm can buy
raw materials at cheaper rate. Best
and huge selling can be done by
effective Advertisement in
Newspapers, Journals, TV, Radio, etc.,

Financial economics: Raising loans at

lower interest rates from Government
Banks.

Risk bearing economics: This is

spreading of risk. Firm produces many
products. If demand for one product is
shaken, it can divert sale on other
products thus maintaining the profit for
the firm.
Economies of scale: For a large scale
production organisation, it is able to
reduce its cost and this leads to large
economies of scale.

Internal Diseconomies in Large scale

economy:
1. Lack of coordination
2.Loose control of management
(misuse of delegation of authority,
red tapism)
3. Lack of proper communication
4.Lack of identification – by
Managers to his workers where per
unit cost goes up.

External economies of Large

scale:
This is not specific to a firm.
Result of Company ’s
geographical location. Ex: fast
food chains located in city enjoy
benefits of lower transportation
costs, skilled labour at less cost.

Economies of localisation- when industry

is concentrated in particular area more
skilled labourers and less transportation
cost are the result.

Economies of vertical integration-

splitting up of production process – giving
some tasks to specialised firms. Ex:
repair of machines to the firm which has
specialisation in that.

Economies of information-
setup of research institutes
for getting market
information and technical
information for analysis .
Economies of by-products –
make use of waste materials
to bring down cost per unit.

External Diseconomies:
1.Diseconomies of pollution
2.Excessive pressure on transport
facilities
3.Rise in the prices of factors of
production
4. Scarcity of funds
5. Marketing problems of the product
6. Increase in risks.

 ECONOMIES OF SMALL SCALE:

Produce more crops in the same field by
novel methods and get more output.
Cost per unit can be reduced by getting
more work from the same labourer.
Same size of chicken has to produce
more eggs. For this, choose better
breeds and cultivate more in farms to
get reduction in cost per unit.

Economies of small scale are

not based on increasing the
size of operation , building
big factories, buying more
lands to farm but only based
on utilising what we have to
the fullest extent.
Law of Diminishing Marginal Utility:
This is a law of Economics and of
Micro Economics.
Definition: As a person increases the
consumption of a product [without
time gap] while keeping consumption
of other products constant, there is a
decline in the Marginal Utility that
person derives from consuming each
additional unit of that product.

Each additional plate of food

provides less utility than the
one before.
A psychological generalisation
that the perceived value of or
satisfaction gained from a good
to a consumer declines with
each additional unit acquired
or consumed.

Two types of Utility

theory:
•Law of Diminishing
Marginal Utility
•Law of Equi Marginal
Utility.

 Law of Diminishing
Marginal Utility:
Alfred Marshall: During the course
of consumption, as more and more
units of a commodity are used or
consumed, every successive unit gives
utility [Marginal Utility] with a
diminishing rate provided other
things remain the same, although the
Total Utility increases.

The term ‘Marginal’ refers to the

effect of a small change in the
consumption from the present
one to previous one.
Marginal Utility:
It is a measure of relative
satisfaction gained or lost from an
increase or decrease in the
consumption of that Good or
Service. [A motor vehicle].

Law of Diminishing
Marginal Utility:
As a consumer consumes
more and more units of a
specific commodity, utility
from the successive units
goes on diminishing.

ASSUMPTIONS ON LAW OF DIMINISHING MARGINAL

UTILIY:
Various units of goods are homogeneous..
There is no time gap between consumption of different
units.
Consumer aims at maximisation of utility of the
product ie., rational
Tastes, preferences, fashion remains unchanged.
Consumer has perfect knowledge of price in market.
No price change.
Utilities of different commodities are independent of
each other.
It assumes Law of Diminishing Marginal Utility.

 Schedule of Law of Diminishing Marginal Utility

Apple Juice in Units Total Utility [TU] Marginal Utility [MR] Condition

1st Glass 20 20 No quality inferior in successive

units and no interval of time in
2nd Glass 32 12 between consumption.

3rd Glass 40 8

4th Glass 42 2

5 th Glass 42 0

6 th Glass 39 -3

 Saturation point: The point where

desire to consume the same product
anymore becomes zero.
Disutility point: If we still consume
the product after reaching the
saturation point, the utility starts to
fall on the negative side. This point
is called Disutility point.

Exemption for this Law of

Diminishing Marginal Utility:
1. Desire for Money
2Desire for knowledge
3Use of Liquor or wine
4Collection of rare or
antique objects

FIRMS
Firms or Enterprise is an organisation
involved in the trade or Goods or
Services or both to consumers.
TYPES OR CATEGORIES OF FIRMS:

• Sole Proprietorships
• Partnerships
• Corporate or Cooperatives

Sole Proprietorships :
Here Firm is owned by a single
individual.
He has unlimited Liability (ie.,
legally responsible for the amount
of money he owed to others). There
is no distinction between personal
assets and Firm’s assets.

Partnerships:
Owned jointly by two or more
persons or many persons.
They have unlimited liability. (ie.,
legally responsible for the amount
of money they owed to others).
There is no distinction between
personal assets and Firm’s assets.

CORPORATES and COOPERATIVES:

They are large firms.
Owners have protection from loosing more
than their investment when their business
fails.
Owners of this type of firms have limited
liability only. (They will loose the amount
they paid for the stock of that firm only)

 CORPORATES AND COOPERATIVES

CORPORATES:
• Corporate business has separate
legal personality from its owners.
• Corporates are Government owned
or private owned and may be profit
or non profit organisation. [Non
profit org: Habitat for Humanity, Red Cross,
and United Way]

CORPORATES:
• A privately owned, for profit Corporate
organisation is owned by its
shareholders who elect Board of
Directors to direct the Corporation and
hire its managerial staff.
• A privately owned, for profit Corporate
organisation can be either privately held
by a small group of individuals or
publicly held with publicly traded shares
listed on a stock exchange. Share
holders= people who have an equity
stake (shares) in a business.

COOPERATIVES:
• Have limited liability. Can be a profit or non
profit organisation. Cooperatives differ from
Corporates in that it has members not share
holders and they share decision making
authority. Cooperatives are coming under
Economic Democracy.
• Types of Cooperatives:
• Consumer cooperatives
• Worker cooperatives

 OBJECTIVES OF FIRM
Profit maximisation
Sales revenue maximisation
Increasing and protecting market share
Surviving an economic down turn /
recession
Pursuing ethical business objectives
(corporate social responsibility)
Providing a public service
Technological improvement

 GOAL OF THE FIRM

• Maximise sales and thereby profit
• Meeting shareholders’ expectation
• Increasing market share
• Achieving objectives of the firm

 Sales maximisation
Human objectives to be taken care of (business is
carried by the people, through the people and for
the people). Staff to be taken care of.
Assume firm’s cost remains same. The firm will
choose lower price and supply higher output
when sales revenue maximisation is main
objective.
Shareholders’ wealth maximisation: shareholders
gain wealth through capital gains (increase in
share price) and through receipts of Dividends.

Stakeholder value maximisation:

a stakeholder is anyone who has
a s t a ke i n a c o m p a n y.
Shareholders, employees,
suppliers, etc.,
so S t a ke h o l d e r v a l u e
maximisation for a firm is that it
must be able to satisfy all its
key stakeholders and not just
shareholders.

 MANAGERIAL DECISION
Managerial decision is concerned
with the operation of the firm such as
choice of firm size, firm growth
rates , employee compensation , etc.,
Decision making is a cognitive
(knowledgeable) process that results
in the selection of a course of action
among several alternative scenarios.

Decision making by management is

economic because it involves choice
from among set of alternative courses
of action.
The optimal decision making is an act
of optimal economic choice,
considering objectives and
constraints.

Various types of decisions based on

following analysis:
Micro vs Macro analysis:
Micro - Individual entities like consumer,
producer, seller, investor, commodity, a
factor, market, etc., are analysed. Macro
- Problem is approached from angle of
totality or aggregate like national income,
national consumption, national
investment, general price level, etc.,

Partial vs General equilibrium analysis:

Partial equilibrium – economic problem is
analysed part by part – one at a time
assuming other things remaining same. Ex:
given the price, cost budget, technology, etc.,
purchase manager has to decide on quality
and quantity of materials to be purchased.
General equilibrium – ‘the given’ or ‘other
things remaining same’ may be relaxed and
interdependence or interactions among
variables may be allowed.

Static, comparative static vs

dynamic analysis:
This has reference to time
dimension . static - at a point of
time allowing no change.
Comparative static - at a point of
time allowing once for all change.
Dynamic - over a period of time
allowing successive changes.

Positive vs Normative analysis:

Positive analysis – problem is
analysed in objective terms
based on principles and
theories.
• Positive statements are objective and do not
involve value judgments or personal
opinions.
• Examples of positive statements include:
• The average temperature in New York City in
July is 77 degrees Fahrenheit.
• The demand for petrol and diesel is inversely
related to the price of petrol and diesel
• The gross domestic product (GDP) of the
United States increased by 2.3% in the
second quarter of 2021.

Normative analysis – problem is analysed

based on the value judgement ( norms) .
Normative analysis express personal
opinions about what ought to be or
what should be. They are not based on
factual observations or evidence and
cannot be tested or verified through
empirical analysis. [Empirical analysis is an
evidence-based approach to the study and
interpretation of information.]

• Examples of normative statements include:

• The government should increase taxes on
tobacco products in order to reduce
smoking.
• It is wrong for people to discriminate against
others based on their race or ethnicity
[cultural background].
• Higher education should be free for all
students. Tuition fees should be abolished.

All the above analysis are

not water tight.
Normally managerial
economics is ---- primarily
micro, partially equilibrium
type, comparative static and
positive in approach.

Decisions are not solution

by itself. It is an attempt
towards a solution.
A decision may solve one
problem but also may
create other problems.

Classification of business decisions

depending upon managerial
functions:
Financial decisions: relates to
costing, budgeting, accounting,
auditing, tax planning, portfolio
composition, capital structure,
dividend distribution, etc.,

Production decisions: relates to

quality and quantity of products,
choice of technology, product mix,
plant location and layout
(PERT[program evaluation review
technique] chart- to coordinate
tasks), production scheduling,
maintenance, pollution control,
etc.,
Personnel decisions:
relates to recruitment,
selection, induction,
training , placement,
promotion, transfers,
retirement of staff.

Marketing decisions: relates

to sales volume , sales force,
sales promotion, market
research, customer service,
packaging, advertisements,
new product positioning,
etc.,
Miscellaneous decisions:
relates to residuary items
like purchasing, inventory
control, information
systems, data processing,
public relations, etc.,

STEPS FOR DECISION MAKING PROCESS

1. Identification of the purpose of the
decision or objective and defining
the problem:
Problem is defined and fully analysed by
asking what is the exact problem?
Why and how to solve the problem?
Who are the affected parties of the
problem? Does the problem have a
dead line or specific time line?

2 . I n fo r m a t i o n ga t h e r i n g :
problems may have many stack
holders and different factors
to be resolved. Gather
information of different stack
holders and factors. Use check
sheets.
3.Principles for judging alternative:
setup the baseline criteria for judging
alternatives to be set. Consider social
constraints on one side and
organisational and input constraints
on the other side. Consider
organisation goal and corporate
culture. Ex: profit making according
to norms.

4.Brainstorm and analyse

the different choices:
list down all items for
brain storming.
Understand causes of
problems and prioritisation
of causes.

5. Evaluation of
alternatives:
use your judgement
principles and decision
making criteria to evaluate
each alternatives for their
positives and negatives.

6.Selection from among

the alternatives:
Select the best
alternative

7. Execute the decision: convert

decision into plan or a sequence of
activities.
8.Evaluate the results: evaluate the
outcome of the decision arrived.
9. Based on evaluation and
feedback Correction is to be done.
Use this for future decision
making also.

Pareto analysis: Pareto analysis is a

statistical technique in decision making used
for the selection of a limited number of
tasks that produces significant overall effect.
It uses Pareto principle called 80/20 Rule.
ie., by doing 20% of work we can generate
80% of benefit of doing the entire job. Vast
majority of problems of 80% are produced
by a few key causes of 20%. This technique
is also called ‘Vital few Trivial [little importance]
many’.

 Relations between Economic

decisions and Technical decisions:
Economic decision refers to:
The decision taken by any producer
regarding the volume of output to be
produced during any particular time period
to maximise its profit.
He either maximise the output or minimise
the cost given the targeted output.

The decision taken by consumer

regarding the quantities of
commodities to be purchased to
maximise his utility. Consumer wants
to maximise his utility subject to his
budget constraint.
Decision taken by Government to
invest in such activities which
maximise social welfare.

It is more concerned with

theoretical aspect of a
production or a consumption
decision.
It is concerned with
optimisation behaviour of a
firm subjected to cost or fund
constraint.

Technical decision refers to:

The decision taken by any
Engineer regarding
application of any particular
technique to complete a job
or project work within a
given time period.

The decision taken by any

architecture regarding the
technicalities of a design
plan for building, housing
complex or factories.
The decision taken by any Entrepreneur (
or even a farmer) with regard to
proportion in which some inputs are
applied in any production process
without any consideration for the prices
of those inputs (ex: proportion of water
and chemical fertiliser to be applied in
any cultivation work). Ex: for
Engineering firm’s design of a thermal
project, technical decisions become
important.
If the same firm makes a cost benefit
analysis with an objective to maximise its
profit or minimise its cost, then the
economic decision becomes relevant. For a
farmer, mixing of chemicals or choosing
best seeds, irrigation water supply are
technical decisions. But for a poor farmer,
it is given input prices, available fund with
him to invest in production process –
economic decision becomes more
relevant.
It is more concerned with the
technical or application aspects of
any productive activity.
It is concerned with achieving a
targeted output with
technologically efficient dose of
inputs (disregarding the input
prices).

Questions????????????

THANKS