Module 1 - INTRODUCTION TO MANAGERIAL ECONOMICS

INTRODUCTION

In this course, I will be discussing about various concepts of micro economics and macroeconomics
with management perspective.

This module will introduce you to the concepts of Economics.

Economics is social science that studies economic action of human being in daily life.An action taken
by human being to satisfy the needs or wants is called as an Economic action.Economic action means
an action undertaken for direct satisfaction of wants/needs. For instance our wants for cloths, number
of actions are undertaken to satisfy them. For example sowing cotton seeds, spinning, weaving,
printing,tailoring are all economic action. All these economic actions are directed towards satisfying the
human need for clothing. A social science deals with all these action namely production, distribution
and consumption of goods and services are called Economics.In order to facilitate these actions
resources are required.Economics is concerned about allocation of resources among competing need
as man has unlimited needs/wants.

Managerial Economics has different approach .It studies the economic aspects of managerial decision
making. Managerial Economics is about analytical tools and techniques which are useful o to improve
the decision making process within the firm.

Managerial economics is the application of economic theory and methodology to decision making
process of private, public and non-profit organizations. Various concepts of managerial economics can
be applied to both profit and non-profit institutions.

Economics has two major branches: microeconomics and macroeconomics. The Micro economics
deals with the theory of individual choice such as decisions made by a consumer or a business firm.
Macroeconomics is the study of the economic system in its totality. It deals with broad aggregates as
total output (GDP), national income, employment and unemployment, the general price level as also the
growth of the economy.

In this Module. I will give introduction to Managerial Economics.

Let me start with definition of Managerial Economics

DEFINITIONS

According to T. J. Coyne, “Managerial Economics is economics applied in decision making. It combines

a broad theory with everyday practice, emphasizing the use of economic analysis in clarifying problems,
in organizing and evaluating information, and in weighing alternative courses of action”

This definition can be illustrated in the following figure.

 Figure 2.1 The role of managerial economics in decision making situations

It necessitates the integration and applications of practices, principles, and techniques from the areas
of accounting, finance, marketing, production,human resource management and other functions or
disciplines associated with economics to make decisions.

The other Definition given by renowned economists are as follows

Mansfield, “Managerial economics is concerned with the application of economic concepts and
economic analysis to the problems of formulating rational managerial decisions”.

Spencer and Siegel man have defined the subject as “the integration of economic theory with business
practice for the purpose of facilitating decision making and forward planning by management”.

Dr. Alfred Marshall, one of the greatest economists of the nineteenth century, writes “Economics is a
study of man’s actions in the ordinary business of life: it enquires how he gets his income and how he
uses it”. Prof. Lionel Robbins defined Economics as “the science, which studies human behavior as a
relationship between ends and scarce means which have alternative uses”

SCOPE OF MANAGERIAL ECONOMICS

Managerial Economics is about the application of economic principles and methodologies to the
process of decision making under uncertain conditions.

Its topics include: demand and its determinants, supply and its determinants, production functions, cost
conditions, capital budgeting techniques, business and economic forecasting short term and long-term
corporate profits, and the problem of pricing in theory and practice.

Managerial economics also investigates the firm: its place in the industry, its contribution to the national
economy and even its impact on international affairs.

NEXT : THE NEED FOR MANAGERIAL ECONOMICS

THE NEED FOR MANAGERIAL ECONOMICS

The major reason for studying managerial economics is that it is useful. Every manager and
everyindividual has to make economic decisions every day.
The study of managerial economics gives a major benefit for students and practicing managers. It helps
them to learn practical applications of micro and macroeconomic theory.

It is helpful in making such short run and longrun decisions such as:

• What are products and services to produce?

• How to produce?What inputs and production techniques to employ?
• How much to produce and what prices should be charged for them?
• What time capital equipment be replaced?
• How should limited capital resources be allocated?
• What are the sizes and locations of new plants?

SIGNIFICANCE OF MANAGERIAL ECONOMICS

Managerial economics provides management with a strategic planning tool that can be fruitfully utilized
to gain a clearer perspective of the way the world at large works, and what can be done to maintain
profitability in an ever-changing environment. Much of managerial economics offers decision makers a
way of thinking about changes and a framework for analysing the consequences of strategic options.

Managerial economics is primarily or largely concerned with the practical application of economic
principles and theories for strategic decisions made within all types of business enterprises namely
selection of product,methods,allocation of resources,promotional strategy, pricing decisions etc.

Module 1 - Short Answer Questions

1. Define Managerial Economics.

2. Discuss two cases of business decision making where managerial economics is used?

3. Name any two Classical economists

Module 1 - Long Answer Questions

1. What is meant by Managerial Economics? Explain the nature and scope of Managerial Economics?

2. Managerial economics is the integration of Economic theory with business management practices
for decision making & forward Planning. Explain.

3. “Managerial economics is the integration of economic theory with business practices for the
purpose of facilitating decision- making and forward planning by managers”. Explain
Module 2 - FUNDAMENTAL PROBLEMS OF ECONOMICS

INTRODUCTION

In this module, I am going to introduce youto the fundamental problems of Economics.

All countries face the economic problem, the problem of how to make the best use of limited, or scarce,
and resources. The reason for economic problem the fact that needs and wants of people are endless;
the resources available to satisfy these needs and wants are limited.

LIMITED RESOURCES

It is generally said that the main purpose of economic activity is to produce of goods and services to
satisfy changing needs and wants of an economy.

Resources are limited in two ways:

• In physical quantity, as in the case of land, which has a finite quantity?

• In the case of labor and machinery(in use ), which can only be used for one purposeat any one

time

• The economic problem is about scarcity and choice

SCARCITY AND EFFICIENCY

Let us take scarcity first. If infinite amount of every good could be produced or if human desires were
fully satisfied, what would be the consequences? People would not worry about stretching out their
limited financial resources because they could have everything they wanted; businesses would not need
worry about the labor costor healthcare; governments would not need to struggle over expenditure or
spending, because nobody would care. Since all of us have as much as we want, no one would be
concerned about the distribution of incomes among different people or classes. In such case, there
would be no economic goods, that is, goods that are scarce or limited in supply. All goods would be
freely available for everyone likes ands in the desert or seawater at the beach. Prices and markets would
be irrelevant indeed.In such a case, economics would no longer be a useful subject.But no society has
reached up to this limitless possibility. Goods are limited,while wants are unlimited. Even after few
centuries of rapid economic growth,production in the world is simply not high enough to meet everyone’s
consumption desires. Our world production output would have to be many times larger before the
average world could live at the level of the average person.In some countries, hundreds of millions of
people suffer from hunger and material deprivation.With unlimited wants, it is important that an
economy makes the best use of its limited resources. That brings us to efficiency.Efficiency is the most
effective use of a society’s resources in satisfying people’s wants and needs. An Economy is producing
efficiently when it cannot increase the economic welfare of anyone without making someone else worse
off.

The limited resources and unlimited wants /needs results in Scarcity.The Economy tries to use the
limited resources with efficiency.This makes an individual /Business Firms/Government to make choice
with opportunity cost.

CHOICE AND OPPORTUNITY COST

Choice and opportunity cost are two concepts in economics. As the resources are limited, producers
and consumers have to make choices between competing alternatives.An Individuals must choose the
best way to use their skill and effort, firms must choose the best way to use their workers and machinery,
and governments must choose the best way to use taxpayer’s money

Making an economic choice results in sacrifice because alternatives must be given up. Making a choice
creates in the loss of benefit that an alternative would have provided. For example, if an individual has
Rs100 to spend, and if books are Rs.10 each and downloaded music tracks are Rs1 each, buying a book
means the loss of the benefit one gets from the 10 downloaded tracks. Similarly, land and other
resources, which have been used to build an apartment,could have been used to build a factory. The
loss of the next best option represents the real sacrifice and is known as opportunity cost. The
opportunity cost of choosing the apartment is the loss of the factory, and what could have been
produced.

It is necessary to appreciate that opportunity cost relates to the loss of the next best alternative, and not
just any other alternative. The true cost of any decision is always the closest option not chosen.

Each and every economy makes choices which incur opportunity cost.

FUNDAMENTAL PROBLEMS OF ECONOMICS

The existence of scarcity creates the fundamental economic problem faced by every society whether
rich or poor,how to make the best use of limited resources to satisfy human needs and wants. To solve
this fundamental problem, every society must answer these three basic questions

America’s Economist Paul Samuelson, is often credited with providing simple explanation of the
economic problem – namely, that in order to solve the economic problem societies must endeavour to
answer three basic questions – What to produce? How to produce? And, for whom to produce?

4.1What to Produce?
Societies have to make decision about the best combination of goods and services to meet their wants
and needs. Societies must decide on quantities of different resources to be allocated to these goods
and services. For example, an economy must decide whether they should produce wheat or weapons,
build roads or buy textbooks for schools.

4.2 How to Produce?

Societies also have to decide the best combination of factors of production to create the desired output
of goods and services. For example, how much land, labor, and capital should be used to produce goods
such as weapon and cars? For example, what should be used to make pipe?Copper or plastic. Should
machines be used to make clothing or should Human make it by hand? Which fertilizer is best for
growing apples?
4.3 For whom to produce?
All Economy need to decide who will benefit from the output from its economic activity, and how much
they will receive. This is often known as the problem of distribution.Different societies may develop
different ways to answer these questions.

FUNDAMENTAL ECONOMIC PROBLEMS

In considering about economic problems, it must distinguish questions of fact from questions of
fairness. Positive economics describes the facts of an economy, while normative economics is based
on value judgments. It is an approach to economics which deals with what “is” and how it works.

Example: Observation that a consumer buys so many cigarettes at specific price is positive economics.

Normative economics consists of ethical precepts and norms of fairness. It is an approach to

economics which deals with what “ought to be”. It makes value judgments whether the outcome is good
or bad. The consumer should not consume cigarettes because it is bad for health is an example of
normative economics.

SOCIETY’S CAPABILITY

There are various ways by which a society can answer these questions of what,how and for whom?
Societies are organised through alternative economic systems and economics studies the various
mechanisms that asociety can use to allocate its scarce resources.Generally,there are two distinguish
fundamental ways of organising an economy. At one end, government takes most economic decisions,
with those on top of the hierarchy giving commands to those further down the ladder. At the other end,
decisions are made in markets, where individuals or Business firm voluntarily agree to exchange goods
and services,usually through payments of money.

Let’s briefly study each of these two ways of an economic organisation.

In majority of democratic countries, the market answers most economic questions.Thus their economic
systems are called market economies.In a market economy,an individuals and private firms make
the major decisions about production and consumption.It is a system of prices, of markets,of profits
and losses, of incentives and rewards determines what, how, and for whom. Firms produce the
goods that yield the highest profits (the what)by the techniques of production that are least costly (the
method). Consumption isdetermined by individual’s decisions about how to spend the incomes
generated by their labor and property ownership (forwhom).

The extreme case of a market economy, in which the government keeps its hands off economic
decisions, is called a laissez-faire economy or free market Economy. In this economy, firms and
households act in self-interest to decide how resources get allocated, what goods get produced and
who buys the goods. This is opposite to command economy, where the central government gets to keep
the profits.
ECONOMIC SYSTEM

On contrary, a command economy is one in which the government makes all important decisions about
production and distribution. The government answers the major economic questions through its
ownership of resources and its power to enforce decisions. Many of contemporary
society fall completely into either of these two categories.Rather, all societies are mixed economies,
with elements of market and command. There has never been a 100% market economy.

Module 2 - Short Answer Questions

1. What is Scarcity?

2. What is Efficiency?

3. What is need?

4. Differentiate wants and need.

5. What is Opportunity cost?

6. What is Mixed Economy?

Module 2 - Long Answer Questions

1. Explain fundamental problems of Economics .Suggest measures to overcome fundamental
economic problems

2. How would you show your understanding of “Scarcity and Efficiency are the twin themes of
Economics”?

3. Give a note on the Economic System in different economies .

4. Explain the different types of economic system and its characteristics

Module 3 - PRODUCTION POSSIBILITY FRONTIER
Module 3 - Lesson

INTRODUCTION

The wants in an economy are unlimited in nature .The resources to attain this wants are limited. When
resources are limited, scarcity arises. An economy attempts to solve the problem by efficient allocation
of resources and making choice. In the process of doing so opportunity cost is incurred where some
wants are traded off for another.

Whenever an economic agent chooses between alternative ways of allocating scarce resources, an
opportunity cost arises. The opportunity cost resulting from this decision is the value of the next best
alternative use of scarce resources. Opportunity cost can be described using production possibility
frontiers (PPFs) which provide a simple and powerful way to illustrate the effects of making an economic
choice.

In this module, I am going to give you insight into Production Possibility Frontier.

The Production Possibility Frontier (PPF) is a point in which an economy produces its goods and
services with utmost efficiently and, thus allocates its resources in the best possible manner.

If an economy is unable to produce as per PPF, it indicates that the resources are not allocated
effectively and the production shall drop.

There are specific assumptions are to be made toillustrate the production possibility curve.

1. The Economy is operating at full employment and achieving full production.Nor unemployment

nor underemployment exists.

2. The available supplies of factors of production are fixed.They shall be shifted or

reallocated;within limits between different uses for example an unskilled worker may work in a

farm or a car company or supermarket.

3. The technology does not change

4. The resources and technology are fully and efficiently utilized.

5. The technique of production remains constant.

Production possibility is about the balance between inputs and outputs in an economy .A output is goods
or services produced in an economy .A output results from combinations of different resources in
different process. The resources used to produce goods or service is called as inputs.Another term for
input is factors of Production namely Land, Labor and capital. As discussed earlier inputs are limited
and an economy needs are unlimited.The need to choose among different products can be explained by
Production Possibility Frontier. Economist Prof. Paul A. Samuelson used the concept of the production
possibility curve to explain the economic problems of a society. Production Possibility Curve (PPC) is
the locus (the path of a moving point) of various combinations of two commodities which can be
produced with given amount of resources and technology. It is also known as transformation curve
Let us dramatize the choice considering that an economy can produce only two goods namely wheat
and Machines.Production Possibility curve (PPC)can be drawn based on the choice of combination of
two goods.The combination is made with assumptions held. It is supposed that the productive
resources are being fully utilized and there is no change in technology. The following table gives the
various production possibilities.

Table 1: Production Possibility Schedule

Based on the above schedule we can plot al the coordinates of A, B, C, D, E and F, which show
the combination of two goods, wheat and machines.If all available resources are empl oyed for the
production of machines,15,000 machines are produced and no wheat is produced. If, on the other hand,
all available resources are utilized for the production of wheat, 5000 tones are produced. These are the
two extremes shown as A and F and in between them are the situations represented by B, C, D and E. At
B economy produces 14,000 machines and 1000ton of wheat.

At C the production possibilities are 12,000 machines and 2000 tons of wheat , as we move from A to F,
we give up some units of machines for some units of wheat For instance, moving from A to B, we
sacrifice 1000 machines to produce 1000 tons of wheat, and so on. As we move from A to F, we sacrifice
increasing amounts of machines. Thus, in a full-employment economy, more and m ore of one good can
be produced only by reducing the production of another good. This is due to the basic fact that the
economy’s resources are limited.This is shown in the diagram.

It appears from the PPC that any point within the enclosed area OFA, say, P, indicates that resources
are underutilized . Movement from the point within the enclosed area to any point on the curve AF shows
fuller utilization of resources at present. f the society is able to increase the resources due to the process
of growth, new curve is formed. The rightward shifting of the curve (new curve) shows the growth of
resources. PPC is concave to the origin. To explain the concavity of PPC we have to understand the
meaning of opportunity cost and marginal opportunity cost too.

Resources are limited and these can of alternative uses. It is, therefore, necessary that we must make
the best possible utilization of resources to maximize output. Therefore shifting of resources from
present commodity to the production any alternative commodity can earn more value. An outward shift
is an indication of economic growth. When it shifts inwards, it shows that the economy is shrinking due
to a failure in its allocation of resources and optimal production capability.

PPF plays a crucial role in Business and economics. It can be used to demonstrate the point that any
country ‘s economy reaches its greatest level of efficiency when it produces only what it is best qualified
to produce and trades with other nations for the rest of what it needs.

Module 3 - Short Answer Questions

1. What is Production Possibility Frontier?

2. State the factors of Production.

3. State two uses of PPF

Module 3 - Long Answer Questions

1. Graphically explain the economy’s production possibility curve in terms of economic growth..

2. Discuss the significance of production possibility curve in Business Decisions

Module 4 - MICRO AND MACRO ECONOMICS
Module 4 - Lesson

MICRO ECONOMICS

The word „Micro‟ is from the Greek word mikros which means small. Microeconomics deals with small
segments of the society. Microeconomics is defined as” the study of behaviour of individual decision-
making units, such as consumers, resource owners and firms”. It is also known as Price Theory as its
major subject-matter deals with the determination of price of commodities and factors.

Microeconomics has both theoretical and practical importance. It solves the three central Problems of
an economy, i.e., what to produce, how to produce and for whom to produce.

MICROECONOMICS IS CONCERNED WITH

 Supply and demand in individual markets

 Pricing
 Individual consumer behaviour. e.g. Consumer choice theory
 Individual producer behaviour.
 Individual labour markets.

IMPORTANCE OF MICROECONOMICS

Microeconomics has both theoretical and practical importance. It is clear from the

Following points:

1. Microeconomics aids in formulating economic policies which enhance productive

Efficiency and results in greater social welfare.

2. Microeconomics describes the working of a capitalist economy where individual units

(Manufacturers and consumers) are free to take their own decision.

3. Microeconomics explains how, in a free enterprise economy, individual units attain

Equilibrium position.

4. It aids the government in formulating price policies.

5. It enhances in efficient employment of resources by the entrepreneurs.

6. It makes business economist to make conditional predictions and business forecasts.

7. It explains gains from trade, disequilibrium in the in the balance of payment position and
determination of international exchange rate.

LIMITATIONS OF MICROECONOMICS

Microeconomics does not explain the functioning of an economy as a whole. It does not explain
unemployment, poverty, illiteracy and other problems prevailing in the country
MACRO ECONOMICS

The word „Macro‟ is from the Greek word makros meaning large. Macroeconomics deals with
aggregative economics. Macroeconomics is defined as “the study of overall economic phenomena,
such as problem of full employment, GNP, savings, investment, aggregate consumption, aggregate
investment, economic growth, etc.” It is also known as Theory of Income and Employment since its
major subject-matter deals with the determination of income and employment. The study of
macroeconomics is used to solve many problems of an economy like, monetary problems, economic
fluctuations, general unemployment, inflation, disequilibrium in the balance of payment position, etc.

MACROECONOMICS IS CONCERNED WITH

 Employment
 National output
 National Income
 Inflation
 General Price level and stability
 Balance of Trade

IMPORTANCE OF MACROECONOMICS

Macroeconomics has emerged as the most challenging branch of economics. In the words of
Samuelson, “no area of economics is today more vital and controversial than Macroeconomics.”

The importance of macroeconomics on theoretical and practical reasons is clear from the following
points:

1. It explains the complexities of an economic system. It gives tools to explain the working of the
complex economic systems.

2. It helps to provide a framework for formulating appropriate macroeconomic policies (e.g., for
inflation, poverty, unemployment, etc.) to direct and regulate economy towards desirable structure.

3. It helps in find the causes for economic fluctuations and provides remedies.

LIMITATIONS OF MACROECONOMICS

Some of the major limitations of macroeconomics are:

(i) Macroeconomics ignores changes in an individual firm of the aggregate. The results drawn on the
basis of aggregate variables may be misleading.

(ii)Economist Hicks states it as, “most of macro magnitudes which figure so largely in economic
discussions are subject to errors and ambiguities.”
Difference between Microeconomics and Macroeconomics

Although microeconomics and macroeconomics differ from each other, there is a close relationship
between them.

Macroeconomics is based on many principles and results of micro economics in a larger economic
view.

The aggregate production and consumption in macroeconomics is result of production and

consumption of households and individual firms.

It can be stated that the microeconomics is used to study how macroeconomic changes can affect the
behaviour of microeconomic units. For example, an increase in inflation or a change in the real
exchange rate could have an effect on the production of goods in a particular economy

For example, an increase in inflation could lead to a change in the price of raw materials for individual
firm, which in turn would affect the price of the final product paid by the consumer.

Hence it can be seen that there is an overlap between these two branches of Economics as they rely
on each other.
Module 4 - Short Answer Questions
1. What is Micro Economics?

2. What is Macro Economics

3. Differentiate Micro and macro Economics

Module 4 - Long Answer Questions

1. Discuss the elements of Microeconomics

2. Discuss the elements of Macroeconomics

3. Compare and contrast Microeconomics and Macroeconomics