What is Economics?

•Economics is the social science that studies the production, distribution, and consumption of goods and services. It is also concerned with the allocation of scare resources to alternative uses so as to achieve maximum possible satisfaction.

Dr.(Mrs.) Sarita Kumari,Associate Professor,IIBM, Navi Mumbai


• The term economics comes from the ancient Greek oikonomia , “management of a household, administration” from oikos , “house” + nomos , “custom” or “law”. Hence “rules of the house(hold)”. • Lord Robbins defines economics as a “science which studies human behavior as a relationship between ends and scare means which have alternative uses”. Dr.(Mrs.) Sarita Kumari,Associate Professor,IIBM,Navi Mumbai


Micro Vs. Macro Economics
Micro Economics
• It deals with the behavior of individual economic units like consumers, workers, investors & owners of land. • Consumers make purchasing decisions. • Their decisions are influenced by changing prices & incomes. • Firms decide how many workers to hire & how much to produce. • Their decisions are influenced by technology & rivalry in the market place. • It also looks at how economic units interact to 3 Dr.(Mrs.) Sarita Kumari,Associate Professor,IIBM,Navi Mumbai form larger units- markets & industries.

Micro Vs. Macro Economics Cont…
Macro Economics • Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. • It examines the aggregate behavior of the economy – how the actions of all the individuals and firms in the economy interact to produce a particular level of economic performance as a whole. It Dr.(Mrs.) Sarita needs to be Kumari,Associate Professor,IIBM,Navi Mumbai built on microeconomic


• It looks at economy-wide phenomena such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by unemployment rate.
Dr.(Mrs.) Sarita Kumari,Associate Professor,IIBM,Navi Mumbai 5

Objectives/Goals Limited resources Dr.Associate Professor. the question of optimal choices arise.) Sarita Kumari. • Firms are sometimes constrained by the existing technology.Scarcity and Optimal Choices One recurring theme in microeconomics is about limits: • Consumers have limited incomes to spend.(Mrs. • Given the limited means.IIBM. • Workers have a limited number of hours to work or rest. optimal allocation of scarce resources in general.Navi Mumbai 6 . • That is.

7 Dr. -How are prices determined? • Centrally planned economics-governments control prices. • Market economics-prices determined by interaction of market participants.Associate Professor.(Mrs.) Sarita Kumari.IIBM. -Workers make decisions based on prices for labour – wages -Firms make decisions based on wages and prices for inputs and on prices for the goods they produce.Themes of Micro Economics • Prices: -Trade-offs are often based on prices faced by consumers and producers.Navi Mumbai .

the application of economic principles and methodologies to the decision-making process within the firm or organization.“Managerial economics is ..” • Pappas & Hirschey .Navi Mumbai achieve its objectives most 8 Dr.IIBM.(Mrs.” • Salvatore .“Managerial economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organisation canKumari.Associate Professor.“Managerial economics applies economic theory and methods to business and administrative decision-making.What is Managerial Economics? • Douglas .) Sarita .

” • Spencer & Siegelman.“Managerial economics is the integration of economic theory with business practice for the purpose of facilitating decisionmaking Dr.Navi Mumbai and forward planning by management”. 9 . IIBM.(Mrs.What is Managerial Economics Cont…? • Howard Davies and Pun-Lee Lam-“Managerial economics is the application of economic analysis to business problems. it has its origin in theoretical microeconomics.Associate Professor.) Sarita Kumari.

• It is goal-oriented . Mumbai .IIBM. • It provides a link between traditional economics and the decision sciences.Features of Managerial Economics • It is concerned with decision-making of economic nature. • It is both conceptual & metrical. Allocation of scarce resources at the disposable of the firm. • It not only deals with private firms but also Dr. descriptive & prescriptive.Associate Professor. • It is pragmatic.) Sarita Kumari.Navi 10 public enterprises.(Mrs.

IIBM.Associate 11 Professor.The Nature of Managerial Economics Business Decision Making Economic Theory: Micro Economics Macro Economics Decision Sciences: Optimization Techniques: Managerial Economics: Use of Economic Theory & Techniques of Decision Sciences for Solving Business Decision Problems Optimal Solution to Business Decision Problems •Differential Calculus •Statistical Estimation • Linear Programming •Game Theory Dr.Navi Mumbai .) Sarita Kumari.(Mrs.

statistics.IIBM.(Mrs.operation research. Mumbai accounting. • Managerial economics also draws together and relates ideas from various functional areas of management like production Dr. & project management etc.) Sarita Kumari.Associate Professor.Navi financial 12 . mathematics and the theory of decision-making.Scope of Managerial Economics • Managerial economics has a close connection with economic theory(micro economics as well as macro economics). marketing . .

 Pricing & output.) Sarita Kumari.IIBM.  Production & cost.  Profit.The following aspects constitute managerial economics' subject matter:  Objectives of a business firm.  Investment & capital budgeting.Navi Mumbai 13 Scope of Managerial Economics Cont… .  Product policy. sales promotion & Dr.(Mrs.  Demand analysis & demand forecasting.  Competition.Associate Professor.

Associate Professor. • Market research. IIBM.Navi Mumbai 14 . • Investment appraisal.) Sarita Kumari. • Pricing & related decisions. • Security management analysis.(Mrs.Role of Managerial Economist in Decision-Making 1) Specific Decisions: • Production scheduling. • Advise on trade. • Demand forecasting. Dr. • Economic analysis of the industry.

• Input costs.) Sarita Kumari. • Demand for product.Associate Professor. • Firm’s share in the market.(Mrs. • Government’s economic policies. b)Internal Factors: • Production. Dr. • Inventory schedules of the firm.Navi 15 .Role of Managerial Economist in DecisionMaking Cont… 2) General Tasks: a)External Factors: • General economic conditions of economy. • Sales. • Market conditions. IIBM.

etc.Associate Professor. which buy labour.) .(Mrs. capital equipment. Sarita Kumari. IIBM. -Firms.Markets • Markets are an important mechanism for solving the problem of optimal use of scarce resources. • Sellers: -Consumers as workers sell their labour 16 services.Navi Mumbai Dr. • Buyers and sellers • Buyers: -Consumers. who buy goods and services.

Associate Professor.IBM.) Sarita Kumari.(Mrs. • An industry is a collection of firms while a market consists of both firms(as sellers) and consumers(as buyers). Dr.Markets Cont… • Markets as a collection of buyers and sellers of a particular product/products.Navi Mumbai 17 .

• Its boundaries-both geographically and terms of the range of the products. • To determine which buyers and sellers to include. Dr.Associate Professor.) Sarita Kumari.(Mrs.Navi Mumbai 18 .Markets Cont… • Market definition (the extent of market) can be important.IIBM. we need to determine the extent of market. • Market definition identifies which buyers and sellers should be included in a given market.

Associate Professor. • Homes and lands cannot be shifted closer to 19 Dr. even though this may be cheaper.IIBM. . have restrictive geographic • Consider market for housing. • Dwellers in a particular city will not want to stay in houses long distance away.Market Definition-Geographic • Some markets boundaries.(Mrs.) Sarita Kumari.Navi Mumbai cities. • It is city-specific.

Fuel cell powered cars may not be substitutes for petrol-run cars at current petrol prices.Navi Mumbai 20 .) Sarita Kumari.Associate Professor.Market Definition-Range of Products Consider cars • Are petrol cars and fuel cell powered cars (REVA) in the same market? • Sometimes the degree of substitution depends on the current prices. Dr.IIBM.(Mrs. but may become substitutes if the price of petrol increases sufficiently.

) remaining the same. other things(incomes .Navi Mumbai Dr.Demand • The individual demand for a commodity is the amount of it that a consumer will purchase or will be ready to take off from the market at various given prices in a given period of time. • Thus demand implies both the desire purchase and the ability to pay for a good. tests & preferences .IIBM. to • The Law of Demand : There is inverse relationship between price and quantity demanded.) Sarita 21 .(Mrs. & expectations etc. prices of related goods. Kumari. It is illustrated through a Demand Schedule & a Demand Curve.Associate Professor.

• The Market Demand Schedule shows the amounts of the commodity that buyers are prepared to buy at different prices. • Individual Demand Schedule shows the relationship between the amounts of the commodity the individual is ready to buy at various prices.Navi Mumbai 22 .Associate Professor. Dr.IIBM.Demand Schedules • A market consists of the buyers and sellers of a good or service: abstraction from any concept of specific time and location of a market.(Mrs.) Sarita Kumari.

) Sarita Kumari.(Mrs.Demand Schedule & Demand Curve Price of Commodity X( RS.IIBM.Associate Professor.) Quantity Demanded 12 10 10 20 8 30 6 40 4 50 2 60 Price demand curve is a graphical relationship between the price of a and the quantity demanded. Dr.Navi Mumbai good 23 The .

Associate Professor.) Sarita Kumari. Reasons are : .• The downward sloping demand curve obeys the law of demand. • The slope is negative(but may not be constant) at all points of the demand curve. This increase in real income induces the consumer to buy more of that commodity.IIBM.(Mrs. This induces the consumers to substitute the commodity whose24 Dr.Navi Mumbai . it becomes relatively cheaper than other commodities .Income Effect: When price of a commodity falls consumer’s real income increases . Substitution Effect: When the price of a commodity falls.

Dr. • A change in own price leads to movement along the demand curve.) Sarita Kumari.Associate Professor. This is called as change in quantity demanded. • A change in any of the other factors (excluding own price) leads to a shift in the entire curve. prices of related goods and expectations. etc. in addition to the own price. It is expected to depend. tastes & preferences.Navi Mumbai 25 .(Mrs. This is called as shift in demand curve. on incomes.• Demand depends on many things. IIBM.

Associate Professor.IIBM.Changes in Quantity Demanded B that raises the price of Price commodity results in a of Commodity X movement along the demand curve A tax A Quantity of commodity X Dr.Navi Mumbai 26 .) Sarita Kumari.(Mrs.

IIBM.(Mrs.Associate Professor.) Sarita Kumari.Navi Mumbai .Shifts in the Demand Curve Price of Good x Increase in demand Decrease in 27 demand Quantity Demanded of Commodity X Dr.

• How do we expect the “other things” to influence demand? • If I(income) increases. It can also be done by assuming that “everything else” is being kept fixed at certain levels. Dr.Associate Professor. the focus is only on the relationship between price & quantity demanded.• When demand curve is drawn.) Sarita Kumari.Navi Mumbai 28 .IIBM.(Mrs. we expect more to be demanded at every price-the demand curve will shift to the right and vice-versa.

) Sarita Kumari.Navi Mumbai Quantity of Good X 29 .(Mrs.Consumer IncomeNormal Good Price of Good X Increase in Income Increase in Demand An Dr.IIBM.Associate Professor.

) Sarita Kumari.IIBM.(Mrs.Navi Mumbai 30 .Associate Professor. there may be some “inferior” goods whose demand falls as income increases. • For example.• However. and Price of Good X bajra. Decrease in Demand An Increase in Income Dr. an increase in the incomes of poor farmers might lead them to buy more of rice and wheat and less of coarse cereals like jowar.

this will affect pattern of demand.Associate Professor.(Mrs.• If T (tastes & preferences) change such that buyers like a commodity more. New Information • Dissemination of the information on harmful side effects of drugs can lead to fall in demand for these drugs. Government Decisions • Ban on Dr.Navi Mumbai advertising of certain goods can31 . IIBM.) Sarita Kumari. again the demand increases. • Tastes & Preferences can change for many reasons: Demographic Changes • If population comes to consist of larger proportion of older people.

• If the price of a complement rises. the demand curve for tea moves upward and to the right).) Sarita Kumari.Prices of Related Goods: • If the price of a substitute rises. we expect the demand to rise.(Mrs. we expect the demand to fall(as price of petrol rises.Associate Professor.IIBM. the demand curve for vehicles moves downward and to the left).Navi Mumbai 32 . too (as price of coffee increases. Dr.

Navi Mumbai 33 .IIBM.Associate Professor.Market Demand • The market demand for a good or service is the sum total of all individual demands.(Mrs. • Graphically the market demand curve is the horizontal summation of the individual demand curves.) Sarita Kumari. • The market demand at any price is the sum of the individual quantities demanded at that price. Dr.

Navi Mumbai 34 .(Mrs.Market Demand Cont… Dr.) Sarita Kumari.IIBM.Associate Professor.

(Mrs.Market Demand Cont… Determinants of Market Demand: • Price of the good or service (P) • Income of the consumer (I) • Tastes and Preferences of the consumer(T & P) • Prices of other Related Goods and Services (PO) Dr.Navi Mumbai 35 .) Sarita Kumari.Associate Professor.IIBM.

Associate Professor. QD= B + aPP (Keeping I.T.IIBM. and aO indicate the change in quantity demanded of one-unit changes in the associated variables.I. quantity demanded changes by aP units for each one-unit change in price.(Mrs.Navi Mumbai 36 . aP<0 Dr. aT. aP= Holding the other three variables constant.the linear form is QD = B + aPP + aII + aTT + aOPO The coefficients aP.) Sarita Kumari. aI. T and PO constant).Market Demand Cont… The Market Demand Equation: QD = f(P.PO) To quantify……..

Associate Professor.Navi Mumbai 37 . • The law of supply states that quantity supplied of a commodity generally varies directly with price. Dr.Supply • Supply of a commodity is the entire schedule of the quantities of a commodity that would be offered for sale at all possible prices during a period of time.) Sarita Kumari.(Mrs.IIBM.

(Mrs.Navi Mumbai 38 .IIBM. • The Market Supply Schedule shows the amounts of the commodity that sellers are prepared to sell at different prices. Dr.) Sarita Kumari.Associate Professor.Supply Schedules • Individual Supply Schedule shows the relationship between the amounts of the commodity supplied at various prices.

Navi Mumbai 39 .) Sarita Kumari.Associate Professor.IIBM.Supply Schedule and Supply Curve Dr.(Mrs.

) Sarita Kumari.  Technological knowledge.• The upward sloping supply curve obeys the law of supply.  The prices of related goods produced.  The prices of inputs. Navi Mumbai 40 . • Like demand supply also depends on many things like:  Own price.Associate Professor. etc. The slope is positive.  Expectations. Dr. IIBM.(Mrs.

• If input prices increase. Labour sometimes accounts for about two-thirds of all input costs.Navi Mumbai 41 .  As wages rise.How do other things influence supply? • A change in technology that allows the commodity to be produced more cheaply should shift the supply curve downwards and to the right. the supply of goods and services is reduced.(Mrs. because wages are the input price of labour. exactly the opposite should happen.IIBM.) Sarita Kumari.Associate Professor. and thus wage increases create supply reductions(a higher price is necessary to provide the same quantity) for most goods and services. Dr.

IIBM.Associate Professor. B Price of Nutrition Bar A Dr.(Mrs.Navi Mumbai 42 .) Sarita Kumari.Changes in Quantity Supplied • A rise in the price of nutrition bar results in a movement along the supply curve.

IIBM.(Mrs. • Caused by a change in a determinant other than price.Navi Mumbai 43 .) Sarita Kumari. Decrease Price of Good X Increase in in supply supply Dr. either to the left or right.Associate Professor.Shifts in Supply Curve • A shift in the supply curve.

Associate Professor.Navi Mumbai come back to equilibrium. -If the market is not at equilibrium.(Mrs.Equilibrium • The demand and supply curves intersect to determine the market equilibrium. • Equilibrium : a price & quantity pair.Q*). • Reason of calling it equilibrium: -If the market is at price P* and quantity demanded and supplied Q* (P*. . it 44 tends to Dr. IIBM.) Sarita Kumari.Q*) there are no forces to move it away from (P*.

The Equilibrium of Supply & Demand Dr.Associate Professor.(Mrs.) Sarita Kumari. IIBM.Navi Mumbai 45 .

Associate Professor.) Sarita Kumari.(Mrs. IIBM.Solving for Equilibrium Price • Equation of demand curve: Qd = 1200-10P • Equation of supply curve: Qs = 300 + 20P At equilibrium Qd = Qs 1200-10P = 300 + 20P Solving P = 30 Qd = Qs = 900 Dr.Navi Mumbai 46 .

thereby moving toward equilibrium. There is excess demand or a shortage. then quantity supplied> quantity demanded. Suppliers will lower the price to increase sales.• Surplus: • When price> equilibrium price.Navi Mumbai 47 - . Shortage: When price<equilibrium price. Dr. then quantity demanded > quantity supplied. Suppliers will raise the price due to too many buyers chasing too few goods. thereby moving toward equilibrium. There is excess supply or a surplus.Associate Professor.) Sarita Kumari. IIBM.(Mrs.

Navi Mumbai 48 . IIBM.) Sarita Kumari.D’ P’ P* Excess supply S’ P’’ Excess demand S D Q* Dr.Associate Professor.(Mrs.

Navi Mumbai 49 .Shifts in Equilibrium • More interesting is the case where there are shifts in supply and/or demand curves • As a result.IIBM. it is useful to predict the direction of shift. the equilibrium shifts.) Sarita Kumari. • Sometimes. Dr.(Mrs.Associate Professor.

(Mrs.) Sarita Kumari.THANK YOU Dr.Associate Professor.Navi Mumbai 50 .IIBM.

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