Introduction

Introduction to Economics
Economic System

Principles of managerial economics

Integration with other managerial decision-making process
Tools and analysis for optimization
Role of Government and private sector
Competition Vs Cooperation
Relationship with other management subjects
Production Possibility Frontiers (PPF)
Productive efficiency Vs economic efficiency
Economic growth & stability
Microeconomics and Macroeconomics
The role of markets and government
Positive Vs Negative externalities.
Introduction to Managerial Economics

➔ Managerial economics is a stream of management studies that

focus on decision-making and problem-solving.

➔ Both microeconomics and macroeconomics theories are applied.

It focuses on the efficient utilization of scarce resources.

➔ It is a discipline that brings together the concepts of business and

economics.

➔ It enables leaders and managers with relevant data—demand

projections, capital management, pricing decisions, profit
management, cost analysis, and production analysis.
Microeconomics for Solving Operational
Problems
Production
Theory

Market
Profit
Structure
Management
Pricing
Theory Microeconomics

Demand
Investment
Theory
Theory
Macroeconomics for Handling External Environment Issues

Political

Legal Economic

Environmental Social

Technological
 Importance
Following are areas where managerial economics plays a key role:

● The companies use managerial economics for forecasting demand. Based on demand
projections, long-term business policies are formulated.
● The external environment poses various challenges and uncertainties. This discipline creates
an estimate of those threats; as a result, firms can prepare themselves for damage limitation
strategies.
● Inventory management is crucial for business. By employing demand analysis, firms can plan
inventory beforehand.
● It facilitates the determination of the future cost of the business. Scarce resources can be
utilized efficiently; this way total cost of production and sales can be mitigated.
● This study aids top-level management in making critical capital management
decisions—investing in the right venture.
 Economic System
The economic system refers to the system of economic processes like production,
consumption, and investment prevailing in a geographical location. The role and
significance of the participants like government and private entities vary with the
types of the economic system.

What to produce, how to produce, when to produce, how it is distributed, and which
entity controls the economic processes are some of the questions to be considered to
understand and interpret the design of an economic system.

For example, in capitalism dominated by the free market, prices and production
decisions are greatly controlled by private entities, and government intervention is
minimal.
Economic System
Examples
China: It is one of the popular examples of a socialist market economy but not a pure
socialist economy. There are private companies in China, but the government has the
predominant role in the economy; they plan, manage and exercise direct control over the
national economy.

Belarus: It is a country in Eastern Europe. Even if they state their system as market
socialism, the framework resembles the properties of a command economic system
where the central government owns most of the businesses and banks and controls the
production and distribution of goods. Of course, there are reforms and deregulations, but
still, the public sector dominates the economy and government intervention is significant.

United States: The structure in the United States is an example of a mixed economy
because encouragement for the free market and government intervention for the public
good exists concurrently. Hence, reflecting the characteristics of capitalism and
socialism.
Principles Of Managerial Economics

★ Economic principles assist in rational reasoning and defined thinking.

★ They develop logical ability and strength of a manager.
★ Some important principles of managerial economics are:
○ Marginal and Incremental Principle
○ Equi-marginal Principle
○ Opportunity Cost Principle
○ Time Perspective Principle
○ Discounting Principle
○ Risk and Uncertainty
 Marginal and
Incremental Principles

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APPLICATION OF ECONOMICS IN THE
MAJOR AREAS OF MANAGEMENT

There is an established link of economics as an applied science to several areas of management,

such as:

1. Economics and Production Management

2. Economics and Marketing
3. Economics and Finance
4. Economics and Personnel Management
5. Economics and Operations Research.
Economics and Production Management
Production management relates to the management of production activity of a firm. A
production has to take decision, such as:

● What quantity and quality to produce in the given line of production?

● How to produce?
● How to increase productivity? and so on.

For all such rational decisions, in optimal utilisation of the available business resources, the
manager has to resort to economic analysis.

Economics deals with production functions and productivity as well as input-output

relationships which is the major functional area of production management.

The economic efficiency under the large-scale operations, technical substitution among the
factors inputs, laws of returns involved in the process of production, cost-benefit analysis in
inventory management, pricing policy and strategy are all associated economics thoughts,
concepts and tools having almost significance in the production management.
Economics and Marketing
Manufacturing and marketing are integral part of a business activity. Quality of manufacturing
depends on the production management and efficient use of the resources.

However, the success of business is determined by the efficient marketing. Successful marketing
operations are based on the analysis of consumer behaviour and market demand.

Demand analysis is the major area of microeconomics. This is how economics is internally
related to the area of marketing in the field of management.

Economics shows estimation of market-demand functions and measurement of demand

elasticities.

An understanding of demand behaviour and concept of demand elasticity is useful to the

marketers in analysing the market potentiality and determining the pricing strategy for judging
the sales function.

Economics provides an understanding of distinctive market competitions which is significant in

deciding the marketing approaches.
Economics and Finance

Finance is the lifeblood of modern commerce. Growth of business needs adequate finance.
Financial management determines the programme and stability of a firm in the competitive
market.

Major dimensions of financial management such as capital budgeting, investment allocations,

depreciation, method of raising money in economical ways, etc., all have their roots in economics
of money banking and finance.

Financial managers' decisions about cash flows arrangement and flows in financial trade-offs in
short and long terms are enrooted in economics.

Different financial ratios such as, profit-earning ratio, rate of returns, etc., analysis is a
contribution of economics to the course of financial management.
Economics and Personnel Management

Human resource management is the baseline of management in an industrial organisation.

Human capital is a major input and its quality is very important for the enhanced productivity.
Wage-rates, salaries, perks, etc., remuneration determination for the human resource acquired
by the firm has its economic bearing.

In this way, economics and personnel managements are inter- linked. Labour economics and the
HRM have utmost connection. Labour training, trade unionism, industry-labour relations,
workers participation in management and all such issues imply integration of economics with
personnel management. Recruitment policy, retirement and replacement and all such
management issues are the part of labour economics.

Formulation of wage policy, bonus plan, training schemes and such other decisions in the
process of HRM are based on industrial relations and harmony, labour productivity and
efficiency of production process. Manpower planning is an economic idea.
Economics and Operations Research
Operations research is an integral part of decision science concerned with model building
towards optimisation. Art of economising implies optimisation. Economic ideas such as cost
minimisation and profit maximisation of a firm is the subject-matter of operations research in
business studies. Economics and operations research have a concrete relationship in empirical
investigation in business.

Operations research is useful for the firms in solving diverse business problems such as deciding
advertising budget in different market segments in most effective way, developing equitable
bonus system, improving inventory management, planning and production schedule to minimise
the cost. All these have direct or indirect notions of economics.

Operations research in business management is, thus, application of statistics and quantitative
analysis blended with economic sense to solve business problems and arrive at rational decision
making. Operations research involves positive economics in the most scientific way in the
course of business analysis. In sum, operations research tends to examine and explore in
empirical terms the relation between the several courses of economic-oriented business actions
to meet the firm's objectives.
Role of Government in an Economy
Role of Private Sector in an Economy
Positive and Negative Externalities

What is an externality?
● An externality is a cost or benefit associated with the production or
consumption of a product or service. Externalities affect third parties who
don't take part in the production of a product and don't consume the product
or service.
● Economists input all costs and benefits to assign value to an externality and
qualify this as a cost or benefit. If a product helps society, it's a positive
externality, but if the effect of production or consumption does more harm
than good for society, it's a negative externality.
What are positive and negative externalities?
● A positive externality is a benefit of producing or consuming a
product. For example, education is a positive externality of school
because people learn and develop skills for careers and their lives.
● In comparison, negative externalities are a cost of production or
consumption. For example, pollution is a negative externality that
results from both producing and consuming certain products.
Externalities are often environmental, so it's important for
businesses and consumers to create and enjoy products
responsibly.
 Positive Externalities
01 of Production

Negative Externalities
02 of Production

Positive Externalities
03 of Consumption

Negative Externalities
04 of Consumption
Competition Vs Cooperation

● Competition and cooperation are often opposite , yet in the market

they are two sides of the same activity. One of the oldest
observations by economists is the way in which the division of labor
and exchange enables an uncountable number of people to
contribute to the production of any given product.
● Adam Smith used the example of a wool coat and all the people who
were part of its production, from the owner of the sheep who
produced the wool, to those who contributed to the dye, to those
who made the buttons, to those who put it all together and those
who sold it.
● When we consider the vastly more extensive division of labor in the
21st century, as compared to the eighteenth — particularly the
elaborate communications and transportation processes — the
number of people who contribute to the production of even the
simplest product is beyond our ability to list.
Competition Vs Cooperation

Even though this cooperation is anonymous and unintended, it creates

the same sort of interdependence that intentional cooperation creates.
The more people we rely on to produce what we wish to consume, the
more interdependent we become.

And the more interdependent we are, the more likely we are to behave
civilly and peacefully toward others. We have long known that where
goods can’t cross borders, armies will and where goods can cross borders,
armies won’t. The same is true within countries: People who trade have
far less incentive to use force against their trading partners, given their
reliance on them. This extension of cooperation and peace through
exchange is what Mises referred to as the “Law of Association.”
Competition Vs Cooperation

Underlying all of this is competition. The cooperative process that

produces my shirt is also a competitive process. It is competition among
producers, within with the institutional structure of property rights and
sound money, that enables them to figure out what contracts to create
and what prices to charge in order to best serve customers and earn a
profit. That network of institutions and exchanges facilitates cooperation
via competition, with the result being the progressive enrichment of
humanity.

More reading : https://fee.org/articles/competition-and-cooperation/