Micro Economics for Managers

Economics: The World Around You

Prepared by Dr. SHIVASHANKAR K

BSC(Agmaco), MBA, DEM, DIRM, PhD, NET (A.S. R. B)

Objectives:
1.The course is to familiarize the students with basic concepts and techniques of micro economic analysis and its applications to managerial decision making. 2.It is also to acquaint the students with the basic concepts of economic theory of consumer behavior, the nature of economic costs and their relationship to choice of output and technology, etc. Pedagogy : Lectures, Assignments, case study, management games and Seminars

MODULE 1 Overview, definition, nature and scope of Managerial Economics. Demand Analysis and Forecasting Factors affecting demand, demand distinctions, Price and income elasticity of demand, Methods of demand forecasting, Demand forecasting over Product Life Cycle. Project on Demand Forecasting

MODULE 2 Production Functions, Cobb-Douglas Production Function, cost-input relationship Returns to scale, factors of productivity Cost concepts cost output relationships in the short run and the long run, economies of scale.

MOUDLE 3 Market Structure and Pricing Theory Market Structure perfect competition, monopoly, monopolistic competition oligopoly, Kinked demand curve. Price output decisions under different market structures. MOUDLE 4 Pricing Policies and Practices discriminations, price leadership.

Pricing

Strategies, Price

MOUDLE 5 Behaviour of the Firm and Profit Theories Nature and Objectives of the Firm, Theories of the Firm, Overview of the alternate theories of the objectives and behaviour of the firm. Profit theories, Profit maximization as an objective

What is Economics?


Economics is a social science.

Economists study how individuals, individually and collectively, make decisions about:
Buying consumer goods and services (consumption) Producing goods and services for sale Building factories, equipment, and tools Building and buying houses Setting prices and reacting to them Coordinating activities in the economy Import goods rather than make them themselves

What is Economics? (Continued)



Economics is form of applied logic (reasoning).

Economists study the reasoning that drives economic decisions and outcomes. The linkages, the chains of cause and effect, are very long and complex in real-world economies. As a result, one might think of economics as the study of unintended consequences.

Meaning of Economics:

Economics can be called as social science dealing with economic problem and mans economic behavior. It deals with economic behavior of man in society in respect of consumption, production, distribution etc. economics can be called as an unending science.

Economics provide optimum utilization of scarce resources to achieve the desired result. It provides the basis for decision making.

Definition of Economics


Economics is a way of analyzing and understanding the ways individuals and groups of people behave in terms of their choices regarding the things they want but cant get enough of for free (scarce goods). To make sense of this definition, we must examine the concepts of scarcity, economic choice, and rational selfinterest.

Human Nature and Reality

 People

have unlimited wants.  People have limited time, income, wealththey have limited resources with which to acquire the things that they want.  As a result, they must make choices.  Choices involve pursuing some things while forgoing others.

Scarcity and Goods



A good is called scarce if there is not enough of it freely available (i.e., at zero price) to satisfy human wants.
An economic good is any good (physical product) or service (nonphysical product) that is scarce. A free good is a good for which there is no scarcity.

Clarifying Concepts
 

Scarcity means that not enough is available for free. A shortage occurs when not enough is available at the current price. A shortage is a problem of price. Poverty occurs when the goods are scarce, and those who need them do not have the income to obtain them.Poverty is a problem of income.

Goods to Produce Goods

 

Resources are the elements needed to produce other goods. Resources are also called
factors of production Inputs

They are:
Land (includes natural resources) Labor (physical and intellectual services of people) Capital (plant, machinery, equipment used in production)

Resources in Production
land rent

Resource Suppliers

labor wages capital interest

Producers of Goods

Economics can be studied under two heads: 1) Micro Economics 2) Macro Economics Micro Economics: It studies how individual make their choices about  what to produce,  How to produce, For whom to produce, and what price to charge. It is also known as the price theory It is the main source of concepts and analytical tools for managerial decision making. Various micro-economic concepts such as Demand, supply, Elasticity of demand and supply, Marginal cost, various market forms, etc. are of great significance to managerial economics.

Macro Economics: Its not only individuals and farms who are faced with having to make choices. Governments face many such problems. For e.g. How much to spend on health How much to spend on services How much should go in to providing social security benefits.

Following are the various economic concepts which are useful for managers for decision making:

Price elasticity of demand Income elasticity of demand Cost and output relationship Opportunity cost Multiplier Propensity to consume Marginal revenue product Production function Demand theory Theory of firmprice, output and investment decisions Money and banking Public finance - fiscal and monetary policy National income Theory of international trade

Meaning of managerial economics:

Firms. In it economic theories and concepts are used to solve practical business problem. It lies on the borderline of economics and management. It helps in decision making under uncertainty and improves effectiveness of the organization. The basic purpose of managerial economic is to show how economic analysis can be used in formulating business plans. In the words of Mc Nair and Merriam, ME consists of use of economic modes of thought to analyze business situation.
Managerial Economics = Management + Economics

Micro vs. Macro



Microeconomics
Studies the economy at the level of individual consumers, workers, firms, goods, and markets

Macroeconomics
Studies the economy at the aggregate level, at the level of the economy as a whole. Examines total consumer behavior, total employment, total production, total sales, etc.

Meaning of Decision making: Decision making is the most important function of business managers. Decision making is the central objective of Managerial Economics. Decision making may be defined as the process of selecting the suitable action from among several alternative courses of action.

Scope of ME
Decision related to demand:- demand, elasticity of demand, demand forecasting etc Related to cost & Production: law of production Related to pricing: mkt analyis, pricing policies etc., Relating to profit mgt. Macro economic factors: eg. Business cycles, inflation and govt policies etc.,

FAQs of the module

1. 2. 3. 4. 5. 6.

What is Economics and Differentiate b/w the Micro & Macro economics Comment on the nature of economics Enlist some economical tools which help in Managerial Decisions Define Managerial economics What do you mean by factor of production. Give the difference between b/w scarce and Free goods

Thank you