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In this session, we will discuss:

What exactly is the crux of study of Economics. Its common definition Definitions of the subject given by different economists since the beginning What is managerial or business economics What do we study under business economics (Scope of Business Economics).

What is Economics ???

Economics basically is the art and science of economisingto find out how to achieve maximum possible from the minimum resources available. Economy class air tickets. Shopping during sale is economical. Bulk buying makes economic sense.

Simply put, "Economics is the study of how individuals and groups make decisions with limited resources as to best satisfy their wants".

This definition reveals the basic ideas in Economics UNLIMITED WANTS CHOICES : because of scarcity of resources. EFFICIENCY: in the use of resources

Historical background
Wealth Definition The most famous book in economics is the Inquiry into the Nature and Causes of The Wealth of Nations written by Adam Smith, and published in 1776 in Scotland.

Adam Smiths definition of Economics: Economics is the science which inquires into nature and causes of wealth of nations

The main cause of prosperity , according to Adam Smith was increasing division of labor. Smith gave the example of making pins 10 workers could produce 48,000 pins per day if 18 specialized tasks in making of pins was assigned to particular workers. Average productivity of each worker will be 4800 pins per day

Without division of labor, 1 worker may not be able to produce even 1 pin per day !

Welfare Definition
"Economics is the study of people in the ordinary business of life." --Alfred Marshall, Principles of economics; an introductory volume (London: Macmillan, 1890)

Welfare Definition
Political Economy or Economics is the study of mankind in the ordinary business of life; it examines that part of individual & social action which is most closely connected with the attainment & with the use of the material requisites of well being

Scarcity Definition
"Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses."

-- Lionel Robbins, An Essay on the Nature and Significance of Economic Science (London: MacMillan, 1932)

Growth Definition
Economics is the "study of how societies use scarce resources to produce valuable commodities and distribute them among different people." -- Paul A Samuelson, Economics (New York: McGraw-Hill, 1948)

Micro & Macro Economics

"Economics is the study of how individuals and groups make decisions with limited resources as to best satisfy their wants, needs, and desires". From this definition, we can break down the study of economics into two broad categories microeconomics and macroeconomics.

Microeconomics "deals with economic decisions made at a low, or micro, level. How does the change of a price of good influence a family's purchasing decisions? If my wages rise, will I be inclined to work more hours or less hours?"

Microeconomics deals with.

An individual consumer A single firm Individual owners of factors of production (land, labor and capital etc)

Macro economics
Macroeconomics, deals with the sum total of the decisions made by individuals in a society, such as "how does a change in interest rates influence national savings?".

Macroeconomics deals with.

Not with individual incomes..but National Income. Not with individual prices but Price level Not with individual output but National output. Thus, it deals with Aggregates

Managerial Economics


Scope of Managerial Economics


Role of a Managerial Economist or a manager

Managerial Economics/Business Economics deals with those economic theories and techniques of economic analysis, that are applied to analyze business problems and help in business decision making.

What exactly is BE/ME ?

We take a deeper look at the traditional Micro and Macro economic theories. We basically concentrate on theories that are more relevant to business.

Why study BE?

What matters most to your firms success may lie outside it:
For companies, a central message is that many of a companys competitive advantages lie outside the firm

Understanding what lies outside may therefore be the most important thing you can do to be a successful executive

Economics as the study of what lies outside

Relationships with other firms Interaction with the market Market interaction with the macroeconomy Macroeconomys interaction with global economy; AND Theories about the economy! Because:

Sometimes (not often enough!) theories explain how the real world works Frequently (too often!) theories affect how people behave in the economy


Government follows economic advice Firms/unions think about economy in terms of economic models Government bodies apply economic theory in policies (e.g. competition policy, deregulation of telecommunications, etc.)

So you have to understand

economic theory!

Significance of Managerial Economics

(1) Managerial Economics provides a number of tools and techniques for a manager to analyze the real situation while eliminating the less important details about a situation. This helps in decision making process.

Significance of Managerial Economics

It provides most of the concepts needed for the analysis of business problems. For example, concepts of elasticity of demand, fixed & variable costs, short & long run costs all help in business decision making.

Significance of Managerial Economics

However, its true that good decisions cannot be taken by merely studying managerial economics. Decision making also requires ability to analyse problems logically & clearly.

What do we study in BE?/Scope of Managerial Economics

The firm ( Profit maximizing behavior) The market/industry ( Types & its theories) The economy ( General Macro economics) Finance ( New investment decision making) International business ( Global business environment)

Role of a Managerial Economist

Processing information to take right decisions at the right time. Quick & Sensible decision making An understanding of economic theory helps managers know what information should be obtained & how to process & use this information.

Role of a Managerial Economist

The task of organising & processing information takes two forms:

Specific decisions

Formulate a general course of action

Specific decisions
By specific decisions, we mean finding a solution to a specific problem like closing down a loss making branch, outsourcing copier or computing activities, opening the shop for more hours in a day etc.

General Tasks
A business is influenced by not only internal decisions but also by general business environment. Business environment includes External as well as Internal factors. While internal factors are within the control of the firm, external factors relate to general economic condition of economy.

General Tasks
After analyzing both external as well as internal factors, a managerial economist provides the pricing policies, optimum product mix, forecasts return on investment, future demand for the product etc.

Opportunity Cost
If you have chosen to attend this class (for whatever reasons) what have you sacrificed? In the same way, if a firm decides to produce good X from a given resources it will have sacrificed production of another good, say, Y. Thus, the cost of producing good X is the amount of good Y, which is sacrificed!

Opportunity Cost
Thus, if there are no sacrifices, there is no opportunity cost. These sacrifices may be monetary or real.

Opportunity Cost
When asked how much something costs, people usually answer by giving its price, or money cost. Economists usually measure cost differently, using what they call opportunity cost, defined as the value of the next best alternative opportunity that is given up in order to do or get something.

What is wrong with this picture?

Answer !!
People offer this service in less developed countries, but they don't in richer countries. Most Americans have scales at home (a substitute for public scales), so the demand for this service is small. It's unlikely that this man would get enough customers to cover the opportunity cost of his time.

1. A headline in the New York Times read Study Finds Enrollment Is Up At Colleges Despite Recession. How would you rewrite this headline now that you understand the idea of opportunity cost? [

Using opportunity cost -- an example Ernesto is trying to decide whether to attend college and has determined the money cost of attending college for one year. Money Cost of a Year of College Tuition: $1,000 Books and school supplies: 2,000 Room and board: 10,000 Transportation: 1,000 Miscellaneous expenses: 3,000 __________________________________

Economic Statics & Dynamics

Economic theory was basically formulated using techniques of economic statics

However, since 1925, economic dynamics has become more important.

Economic Statics
Definition of Statics : It is the study of static relationship between between variables. A relationship between variables is said to be static if the values of economic variables relate to the same point of time or same period of time.

Examples of static analysis

Law of demand, law of supply etc. Professor Schumpeter describes the meaning of static analysis as follows: By static analysis we mean method of dealing with economic phenomena that tries to establish relationship between elements of economic system Prices & Quantities all refer to the same point of time.

Economic Statics
In static analysis, certain determining conditions & factors are assumed to remain constant at the point of time when the relationship between two economic variables are expressed. By static analysis, we focus on the establishment of equilibrium position at any point of time and we are not concerned with the path by which the system reaches to that equilibrium position.

Economic Dynamics
It is a much more realistic method of analyzing the behavior of the economy. The technique of economic dynamics was first of all clarified by Ragnar Frisch in 1929.

Definition of Economic Dynamics

If the analysis considers the relationship between variables whose values belong to different points of time, it is known as Dynamic Analysis.

Examples of Dynamic Analysis

If supply of a good (S) in the market in the given time (t) depends on price that prevails in the preceding period, then the relationship between Supply and Price is said to be dynamic in nature and such analysis is called Dynamics.

Economic Dynamics
In simple words, we can say that an economy is a dynamical system when various variables in it, such as output, demand, prices etc have values at any time dependent on their values at some other time.

Economic Dynamics

Any Questions ??????????