Topic 1:

Scope of Economic Analysis & Goals of

the Firm
1a.The Scope of Consumers, Firms &
Markets
Economic or Business Analysis
-: Session 1& 2, Aug 3& 6 2021 :-

Dr GAJAVELLI V S,
Ph.D(HCU); PCL(Harvard)
Coverage & Focus

 Introductionto the Course:

1a-The scope of Economic & Business Analysis.
 CFM Curriculum & Evaluation

 THE ROJECT
- CFM Project-Based Learning(PBL)
Pedagogy.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-2

 Introduction to Managerial
Economics, CFM

The Fundamentals of Economic

analysis

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-3

 A. Consumers, Firms & Markets:
The Subject Matter
 The CFM course forms an important and integral part of the
business curriculum and is designed to impart a global perspective
in formulating and implementing business plans.

 Perhapsas a management student, you are interested in understanding

the economic issues which sometimes appear to dominate the business
world…
 …and most of the time….!?

 Quick Quiz:
 Managers, Can you identify few such business and economic
issues…?

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-4

B. What are the major issues before any
economic and business Organization
entity ?
 
 Firm’s revenues, profitability, competition,
product-pricing, inputs, factor-pricing and the
determinants there of.
 What are the major industrial and market movers.
 What causes ups and down in economic &
business activity at national markets and the
global scale.
 What are the risks and returns in the context of
operations of domestic corporates or Multinational
Enterprises (MNEs). 4-5
Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e
C. Major Concerns
Perhaps as a manager you are interested in
understanding the issues which some times dominate
corporate world:
 How changes in policy instruments such as price, quality
and advertising of a firm are likely to affect the demand
for its product.
 How individual investors react to changes in the interest
rates or cost of capital or market prospects for companies?

 What does it mean when the US $ is strong against

INR or weak against Japanese ¥ ?

And its effect on the firm’s sales, profitability and
competitiveness. How you make use of the
Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-6
Managerial Economic & Business Analysis :
The Subject Matter
 Consumers, Firms and Markets
 Macroeconomic Environment & Policy
 Economic Environment of Businesses

As discussed, these are integrating courses and help you articulate any
business problem in a right manner as market place demands and corporate
world often expects. These integrating courses get you to all other business
functional areas as below and make your understanding holistic and better:

 Marketing Mgt., Financial Mgt., Business Strategy, International Business,

International Marketing, International Finance & Risk-management etc,.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-7

Discussion Objectives
I. Managerial Economics(CFM) & Decision-making

A. To answer the fundamental question - Why study Business Economics or

CFM? and to focus on our Interests.
B. Scarcity and Efficiency: The Twin themes of Business world - To
understand the scope and applications of economic analysis; CFM and other
functional areas of MBA curriculum.

II. Important Branches of Economics & Key concepts

C. To examine the branches of economic analysis: Micro Eco., Macro Eco.
and International Eco. vs. C-I-E(company-industry-economy)
framework.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-8

 Discussion Objectives

 D.To understand Scarcity, Choice & Opportunity Cost and

three basic issues before any Organization – business, Govt. or
non-Govt. organizations(NGOs).

 E.To examine alternative economic systems and their market

orientation(“ease of doing business”) and what it means to
businesses, CEOs and individuals like you and me;

 F.
Role of Modern Govts. In Toda’s Markets& Economy; and
Concluding Remarks and observations

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-9

Some basic essential terminology
that you see in every Business& Economic logic&
in decision-making…

Concepts like,

 scarcity-efficiency-resource management;
 rationality;
 assumption;
 Costsvs. Benefits or Risk vs. Return as drivers of
human behavior in both personal and
organizational domains.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-10

 Introduction to CFM
“ Everything you needed to know about
economic& business analysis,
but were too embarrassed to ask ”

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-11

 What is Economic or Business or Managerial
analysis ?
 One possible definition is the ‘science of how scarce resources
are allocated’.
 In this session we are going to look at the scope of economic
analysis & definition and an economic model for
individual(personal) or rofessional(organisational) choices.
 Management sciences and Business Economists assume or
observed that individuals (and firms) act rationally and will
always maximise personal gain (or profits) vs. costs; and so is
Firms..!
 Rationality and Assumption are words that appear in every
paragraph of an economic& business text-book, business
reporting and your business curriculum.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-12

 What is Rationality ?!

“ It is not from the benevolence of the butcher, the brewer, or the baker
that we expect our dinner, but from their regard to their own self-
interest. “ -Adam Smith, The Wealth of Nations, 1776

 Quick Quiz : 1. Every time stock markets skyrocket, will that reflect
economic& business realities?
 2. Can you recall the recent financial market crashes and the corporate
bankruptcies in today’s modern financial systems? Does the rational behavior
reflect the market conditions? Logically,If investors are rational then there can
not be any such major problems – say, a market crash. THINK OVER.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-13

 Rationality and Financial Markets…
'The economy today
Rationality got a boost from
defined! Alan Greenspan,
who said it's O.K. to
be irrationally
exuberant.‘
Alan Greenspan, formerly
Chairman Federal
Reserve, the Central
Bank of USA, during
1987-2006.

Who paid the

ultimate price?:
Investor & firms /
CEOs& CFOs

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-14

 “The theory
“The of economics
analysis is a method
of economics is a
rather than
method a doctrine,
rather than a an apparatus
doctrine, an
of the mind,
apparatus of a technique
the of thinkingof
mind, a technique
which helps
thinking whichits possessor
helps to drawto
its possessor
correct
draw conclusions.”
correct conclusions.”
 --John Maynard Keynes

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-15

 …. taking deeper dive

I. Managerial Economics(CFM) &

Decision-making

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-16

 A. Why study Business Economics / CFM?
For whom the Bell tolls ? – Yes, Every one
who is involved in decisions.

 To understand the challenges of the market place, both

‘domestic’ & ‘global’ ; personal and professional
alike – the underlying economics!.
Ex: Akasa Airlines; Covid-19
Uncertainty; India Inc.’s Growth Prospects.
 The role of Govt.,& Its regulation; and
 The Economics of your day-to-day life. All your
life – from cradle to grave – you will run-up against
the brutal truths of economics!

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-17

 Market shocks..!
 The business technology giant Microsoft said Thursday it would lay off workers,
primarily in the company's sales division. Part of reorganizing operations focusing on
Cloud computing business with an increasing competing from Amazon and
Google. , BBC World Business Report,

 80% of Indian engineers not fit for jobs, says survey

 The new Annual Employability Survey 2019 report by Aspiring Minds reveals that
80% of Indian engineers are not fit for any job in the knowledge economy and only
2.5% of them possess tech skills in Artificial Intelligence (AI) that industry
requires. 15.8.2021, Business Today

 IndiGo does not want Govt. in any Air India deal. We would look at acquiring all of
AI’s international operations and AI Express, Times Business, 7.7. ‘17

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-18

 B. Scarcity & Efficiency : The Twin Themes
of Business Economics
Ever-growing in its significance
& scope
What are the major concerns of this growing
subject ?
 Managing scarce resources efficiently or optimally
 THE MARKET FORCES – Supply and demand
 Studies how the prices or rewards of resources --
say labor(Engineers, MBAs and daily woorkers),
physical capital, and land -- are set in the economy,
and how these prices are used to allocate resources.
 Explores the behavior of the financial markets
including cost of funds (or interest rates rates) and
stock prices of say Tata Motors or Infosys.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-19

 Scope& Applications of Economic Analysis – A
COMMON THEME …continued.,
 The common theme that emerges:” Economics is the
study of how organizations or societies use scarce
resources to produce valuable commodities and
distribute them among different people”.
 Economics asks what goods are produced, how these
Goods are produced, and for whom they are produced.
 Economics analyses movements in the overall economy –
Trends in prices, output, unemployment and global
business or foreign trade. Once such trends are
understood , economics helps develop the policies by which
the governments can improve the performance of the
economy or national markets…

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e Contd..

4-20
Contn.. …. and the corporates ?!

Consider a dream land without scarcity…

Indeed, the world is full of economic goods(!?)

economics is an important subject because of the fact
of scarcity and quest for efficiency. In their
absence imagine the role of market mechanism,
prices and economic goods???. Do we need
Managers?

And that is where economic analysis makes its

unique contribution and gives competitive edge
to its users …like you, me and organisations.
Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-21
The Nature and Scope of CFM in
Managerial Decision-making – ‘Article from BS’

A. What is CFM or Managerial Economics ?

 Managerial economics is the use of economic analysis to
make business decisions involving the best use of an
organization's scarce resources.
 Joel Dean and William Baumol, highly respected
economists and industry consultants, defines
managerial economics as:
“the use of economic analysis in the formulation of
business policies ( both tactical or short-term and
strategic or long-term responses) ”……???
Tactical responses are basically through pricing, design and advertising; where as
strategic aspects include introduction of a new product or exploring a new market,
business acquisitions with an eye on capturing market share or enhancing
synergies etc.
Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-22
 Managerial Economics / CFM & Decision Making
by Managers& CEOs:
 Relationship to other MBA business streams

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-23

II. Important Branches of Economic(s) Analysis
& Key concepts

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-24

C. Branches of Studies in Economic Analysis :
Microeconomic Analysis Vs. Macroeconomic Analysis
& Decision-making at the firm-level(think..!?)
In our Survey we will distinguish between:
Microeconomic Analysis : Analyses the behavior of individual
components like individuals, industries, firms and households. Studies
how individual prices are set and consider market. Studies efficiency
properties of the markets.

Macroeconomic Analysis: Studies the functioning of the economy or

market as a whole. It examines how the level and growth of
output(GDP) are determined, analyses inflation(Prices) and
unemployment, asks about the total money supply and investigates why
some national markets thrive(India, China& USA) while others
stagnate(say, African countries).
International Economics: Takes even broader view of business
environment – very much relevant for both domestic and multinational
companies in the context of globalization of production, distribution
and finance.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-25

 Macro vs. Micro Analysis

 Macro  Micro
 Economy as a whole.  Markets considered
separately.
 Representative  Representative topics:
topics:
level and growth of product markets,
total output, general specific labor markets
price level, job (e.g. market for human
creation. capital), oil prices,
monopolies.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-26

Company-Industry-Economy(C-I-E) Frame-work :
Where you use Micro, macro analysis ..?

Studies on Corporate Performance have found that changes in

the value of business and profitability of business operations
can be attributed to the following factors

Economy-wide factors(Macro) : 30 – 35%

Industry factors(Specific) : 15 – 20%

Company factors(Micro) : 30 – 35%

Other influences : 15 – 20%

Then, how a graduating MBA use this as a tool of mastering
business curriculum, trying to know the prospects of
companies?
Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-27
The two branches – mico and macro
economic analysis – converge to form the
core of modern economic& business
analysis.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-28

" When the rate of change on the
outside(of firms’) exceeds the rate of
change on the inside, the end is in
sight “
 This quote from Jack Welch, formerly CEO of
General Electric, sums-up how firms need to
continuously monitor the external economic &
business environment to prepare for the
future or become extinct.
 That is because issues of global competition,
economic environment, technological advances,
and population diversity, as well as the need for
professional and organizational excellence, will
become more pronounced, maintains Edward
Barlow, President of Creating the Future,
Inc….Best of Luck.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-29

D. The Three Problems of an Economic &
Business Entity
 Unlimited Wants
 Scarce Resources –
Land(La), Labour(L),
Capital(K)
 Resource Use
 Choices
 Opportunity / real
cost

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-30

 The Three Economic Problem
Economics studies human behaviour as a relationship between ends
and scarce means

 What goods and services should an economy produce?

– should the emphasis be on agriculture, manufacturing or
services, should it be on infrastructure and housing?
 How should goods and services be produced? – labour
intensive, land intensive, capital intensive? Efficiency?
What is the input-mix that result in least cost and
maximum efficiency gains?
 Who should get the goods and services produced? –
even distribution? more for the rich? for those who work
hard?

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-31

The Economic& Business Way of Thinking:
Scarcity, Choice & Opportunity Cost

The three problems of economic organization:

Example: say, OPEC (Organization of Petroleum Exporting
Countries)
 What ?
 How ?
 For Whom ?
As a graduating manager, you must try to understand the
above basic problems at different levels of economic
organization – you, me firms, Govt. and a national
economy.
An economic and rational way of
thinking !
Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-32
E. Market, Command and Mixed Economies:
Their MARKET ORIENTATION:
Scarcity Quick Quiz:
What are the
different ways
Imposes (Choice ) that a society or a
business can
Fundamental Economic Questions: answer the
• What to Produce ? fundamental
• How to Produce ? economic
• For Whom to Produce ? problems of what,
how and for
whom? And how
Answered by they are
pertinent to
Type of Economic System: Managers / CEO
• Market Economy
• Mixed Economy
• Command Economy
Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-33
Look , what the erstwhile USSR a command
planned economy, NOW Russia, talking
about !

Russia is looking to enter into private joint ventures in high-tech

sectors with India Inc. The sectors that Russia is keen to
collaborate in are information technology, telecommunications,
energy, space, defense, railways, civil aviation and ports.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-34

 F. Role of Governments in a Modern Economy

 Govt. is a manager of the big economy & mega

markets
 Inefficiency – monopolies and externalities
 Inequality of incomes under markets
 Macro-economic & business problems:
fiscal(spending& taxes) and monetary policies(cost of
funds for households& firms) used for market stability
and to stimulate growth(GDP) and jobs.
 – giving a breathing space to all the market
players !.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-35

" When the rate of change on the
outside exceeds the rate of change
on the inside, the end is in sight “
 This quote from Jack Welch, formerly CEO of
General Electric, sums-up how firms need to
continuosly monitor the external economic &
business environment to prepare for the
future or become extinct.
 That is because issues of global competition,
economic environment, technological
advances, and population diversity, as well as
the need for professional and organizational
excellence, will become more pronounced,
maintains Edward Barlow, President of
Creating the Future, Inc….Best of Luck.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-36

 Model Discussion Question

 ‘Indeed, the gains that accrue to the

individual participants form the essence of
a market economy’, Discuss.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-37

 THANK YOU

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-38

 What is the purpose of an
economic model?

To forecast or predict the

results of various changes in
economic& business
variables

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e

39 4-39
 What is the
scientific method?
Problem identification
Model development
Testing a theory

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e

40 4-40
 Discussion Objectives
 Articles 1A : India’s economic growth slowed sharply in first quarter -
Decline follows Narendra Modi’s ban on the use of most circulating cash, Financial Times,
31, May 2017.

 Video - Market Challenges:

 Protectionism in Practice: examining the economic impact of tariffs(taxes
on imports),
 https://transact.ft.com/en-gb/?play=protectionism-in-practice&utm_sourc
e=FT&utm_medium=PaidPostArticle
 https://www.youtube.com/watch?v=U4X6bm8mc80

 Case Study –1: Amcott Loses US$ 3.5 Million; Manager Fired.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-41

 Growing Importance of Economic Analysis:
Cool heads at the service of warm hearts

Markets vis-a-vis Modern Govts.

 Economists, Markets, Govt’s objectives(both micro and
macro); and its social Programs.
 Market efficiency / limitations
 Economic goals & Govt. managerial expertise.
 Society must find the right balance between the
discipline of the market forces and the compassion of
govt. social programs or the Govt. as country’s CEO /
Economic Manager.
Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-42
 Economic Science :
Positive vs. Normative Economic Approach
In thinking about economic questions, we must distinguish
questions of fact from question of fairness:

Positive Economic Approach:

Positive Economics describes the facts of the firms, industry
and economy-it deals with what is (or verifiable questions)
believed about the way the economy or market works.
Among the questions that positive economics considers are:
How inefficiency affects profitability of businesses? How
decline in overall economic activity – say a slow-down in
GDP – effects profitability and performance of businesses?
What is the economic effect of reducing corporate profit
taxes? How price rise effects our buying power?
Kirt C. Butler, Multinational Finance, South-Western College Publishing, 3e 4-43
Normative Economic approach
Normative economics deals with what ought to be or what
should be and involves value judgments that cannot be
empirically tested. Ethical standards and norms of fairness
underlie normative economics.
For example, should the United States penalize India for
violating U.S patent and copyright laws? Should welfare
programs be reduced in order to encourage the
unemployed youth to find income-earning jobs? Should the
GoI enact flexible labor laws for companies to create more
jobs in the long-term.
By and large whose domain is this..!?
Indeed, there are no right or wrong answers to
these questions because they involve value
judgments , instead
Kirt C. Butler, Multinational ofSouth-Western
Finance, facts. College Publishing, 3e 4-44