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Amity School of Business

Fundamentals of Economics
for Managers

Gaurav Shreekant

1
Introduction to Economics
Amity School of Business

We see people around us engaged in various activities,


agriculture, trade, industry, teachers teaching at schools and
colleges, lawyers practicing in courts, doctors treating
patients, workers working in factories, artists entertaining
audience and so on. The motive behind all such activities is
to earn money in the process of satisfying human wants.
Activities performed for money sake are called economic
activities.

Economic activities form the subject matter of economics,


and are different from non-economic activities, undertaken
out of love, affection or social responsibility.
Let’s define Economics
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Adam Smith, considered to be father of economics, regarded


Economics as “the study of wealth.”

Alfred Marshall, the great English economist, shifted focus


from production of wealth to its distribution and
consumption (welfare aspect). In words of Marshall,
“Economics is a study of man’s actions in ordinary business
of life: it enquires how he gets his income and how he uses
it.” Economics, he thus considered to be a science of man
rather than of wealth.
Scarcity definition (modern definition)
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Further, Lionel Robbins, forwarded a more logical


definition of economics in his famous book, ‘An Essay on
the nature and significance of Economic Science’. In his
words, “Economics studies human behaviour as a
relationship between ends and scarce means which have
alternative uses”. This scarcity definition of Robbins is
based upon four fundamental characteristics of human
existence which give rise to economic problems:
1. Man has unlimited wants (or ends);
2. The means or resources to satisfy them are limited;
3. Further, these resources are not specific but have
alternative uses;
4. Society has therefore to choose between wants.
Managerial Economics
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According to Spencer Singlemen: “Managerial


Economics deals with integration of economic
theory with business practice for the purpose of
facilitating decision making and forward planning by
management.”
While economics provides various concepts such as
Demand, Supply, Price and Competition etc.
Managerial Economics applies these concepts in the
management of business.
It is a hybrid of two disciplines; Economics and
Management.
Nature of Managerial Economics
Amity School of Business

It deals with application of economic principles to


the problems business firms.

Though the content of managerial economics is


derived largely from micro-economics, other
disciplines like Quantitative Techniques,
Operational Research, Management and accounting
principles play crucial role in business and
management decisions.
Amity School of Business

Why do managers need to know Managerial Economics?


Just as biology contributes to medical profession and
physics to engineering, economics contributes to the
managerial profession. All other qualifications being same,
managers with a working knowledge of economics can
perform their functions more efficiently than those without
it.
The basic function of the managers of a business firm is to
achieve the objective of the firm to the maximum possible
extent with limited resources (men, material, money etc.)
placed at their disposal. Therefore, the basic task of the
management is to optimise the use of resources.
Scope of Managerial Economics Amity School of Business

• Demand Analysis and Forecasting


• Theory of Production
• Cost Analysis, inventory management etc.
• Analysis of market-structure and Pricing
• Advertising
• Profit analysis and profit management
• Capital Budgeting (Investment decisions)
Diagrammatic representation of
Managerial Economics
Amity School of Business
Decision Problems of firms under Risk
and Uncertainty

Management and Economic theories


accounting principles

MANAGERIAL
ECONOMICS

Operational Research
Quantitative Techniques

OPTIMAL SOLUTIONS TO
MANAGERIAL DECISION PROBLEMS
Scope of Managerial Economics
Amity School of Business

Demand analysis Production and


and forecasting Cost Analysis
(Demand (Input-Output
decisions) decisions)

Profit Analysis
(Profit maximisation
and alternative Theories)
Risk and Market Structure
Uncertainty
and Pricing Policies
Analysis (Economic
forecasting and (Price-Output
Planning) decisions)
Investment Analysis
(Project appraisal and
investment decisions)
SCOPE OF MANAGERIAL ECONOMICS
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• Economics has two major branches-


• Micro Economics
• Macro Economics
• Both Micro & Macro economics are applied to business
analysis and decision making directly or indirectly.

• The areas of business issues to which economic theories


can be directly applied may be broadly divided into two
categories-
• A- Operational or Internal issues
• B- Environmental or external issues
Micro Economics applied to Operational Issues
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Operational problems are of internal nature. They include all
those problems which arise within the business organisation
and fall within the purview and control of the management.

Some of the basic internal (operational) issues are-


1- choice of business and the nature of product, i.e, what to
produce?
2- choice of size of firm, i.e., how much to produce?
3- choice of technology. i.e., choosing the factor combination
4- choice of price
5- how to promote sales?
6- how to face price competition?
7- how to decide on new investments?
8- how to manage profit and capital?
9- how to manage inventory, i.e., stock of both finished goods and
raw materials?
Microeconomic theories which deal with most of these
questions are: - Amity School of Business

1- Theory of demand
2- Theory of production
3- Analysis of market structure and pricing theory
4- Profit analysis and profit management
5- Theory of capital and investment decisions
Macro Economics: studying the business environment
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Environmental issues pertain to the general business environment
in which a business operates. Factors constituting economic
environment of a country include: -

1- The type of economic system of the country;


2- General trends in production, employment, income, prices,
savings and investment, etc.
3- Working of financial institutions;
4- Trends in foreign trade;
5- Trends in labour and capital markets;
6- Government’s economic policies;
7- Degree of openness in the economy and the influence of MNCs
on domestic market;
8- Government’s attitude towards business.