PAPER 1.

1 – ECONOMICS FOR MANAGERS

1ST SEMESTER MBA – AFFILIATED TO BANGALORE

UNIVERSITY
Paper 1.1 – Economics for Managers 2

INTRODUCTION TO ECONOMICS
What is Economics?
Economics is the study of how humans make decisions in
the face of scarcity. These can be individual decisions, family
decisions, business decisions or societal decisions. If you look
around carefully, you will see that scarcity is a fact of life.
Economics is a part of social science which is associated with
the study of production, households, distribution, firms,
consumption of goods and services, industries, government,
decision making, and more. It helps to understand how
limited resources can be utilized to satisfy consumers’ desire
to obtain maximum satisfaction.

What is Scarcity?
Scarcity means that human wants for goods, services and
resources are unlimited and they exceed what is available.
Resources, such as labor, tools, land, and raw materials are
necessary to produce the goods and services that we want
but they exist in limited supply.
Paper 1.1 – Economics for Managers 3

NATURE OF ECONOMICS – AS A SCIENCE, ART & SOCIAL SCIENCE

Economics can be studied as an Art,

Science & Social Science

• Economics as a Science
A subject is considered science
if:
• It is a study of the
relationship between cause
and effect.
• It is capable of measurable
and based on facts.
• It has its own
methodological apparatus.
• It should have the ability to
forecast.
Paper 1.1 – Economics for Managers
TWO NATURE OF ECONOMICS AS A SCIENCE
• POSITIVE ECONOMICS
A Positive Economics or science
that is based on cause-and-effect
relationship between variables,
but it does not pass value
judgment. In other words, it
states “what is”.
Positive statements are about
facts. They state what the reality
is. Economics should be neutral
between ends.
4
• NORMATIVE ECONOMICS
As normative economics or science,
economics involves value
judgments. It is prescriptive in
nature and describes ‘what ought
to be’ or ‘what should be the
things.
Normative economics is concerned
with normative statements. In this
case, economics is not concerned
with facts rather it is concerned
with how things should be.
Paper 1.1 – Economics for Managers 5

EXAMPLES OF POSITIVE & NORMATIVE ECONOMICS

Paper 1.1 – Economics for Managers 6

ECONOMICS AS AN ART
Art is a branch of study that deals with expressing or
applying the creative skills and imagination of humans to
perform a certain activity.
Similarly, economics also requires human imagination for
the practical application of scientific laws, principles, and
theories to perform a particular activity.
Art is a system of rules for the achievement of a given end.
We know that in practice, economics is used for achieving
a variety of goals.
Every individual economic unit has an economic goal to
achieve. It decides its course of action by keeping in mind
the end to be achieved and the situation faced by it.
Therefore, economic laws are widely used and relied upon
at all levels of our economic activities. Hence Economics is
also considered as an Art.
Paper 1.1 – Economics for Managers 7

ECONOMICS AS A SOCIAL SCIENCE

Economics is also considered as social science as it deals

with studying the behavior of human beings and their
relationships in society. This is because of the exchange of
goods takes place within the society and among different
societies to satisfy the needs and wants of people.
Economics is a social science:
•Economists develop models, or theories, which are simplified
representations of the real world.
•Models help economists to understand, explain, and predict
real-world economic phenomena.
•Like other social scientists, economists usually do not
perform laboratory experiments. They typically examine what
has already occurred in order to test their theories.
SCOPE OF ECONOMICS
Earlier, the scope of economics
was limited to the utilization of
scarce resources to meet the needs
and wants of people and society.
Over the years, the
scope of economics has been
broadened to many areas
Presentation title 9

SCOPE OF ECONOMICS
Paper 1.1 – Economics for Managers 10

SCOPE OF ECONOMICS
Microeconomics
This is basic economics. Microeconomics may be defined as that
branch of economic analysis which studies the economic behavior
of the individual unit, maybe a person, a particular household, or a
particular firm.
Macro Economics
Macroeconomics may be defined as that branch of
economic analysis which studies the behavior of not one particular
unit, but of all the units combined. Macroeconomics is a study in
aggregates.
International Economics
With the advent of globalization and cross-border integration,
economic concepts are applied to conduct successful business
dealings between countries. Economic concepts can be used in
areas, such as foreign trade (exports and imports), foreign
exchange (trading currency), the balance of payments, and balance
of trade.
Paper 1.1 – Economics for Managers 11

SCOPE OF ECONOMICS
Public finance
Economic concepts are also applied to assess the government’s
collection of taxes from the users of public goods as well as
expenditure on production and distribution of these goods to the
public.
Welfare Economics
Economic theories and concepts are used to analyze the growth and
development of low-income countries. This helps in improving the
living standard of people in less developed and developing societies
by understanding their needs for various facilities and utilities, such
as health and education facilities and good working conditions.
Health Economics
Economic concepts are also applicable in assessing the problems
faced in promoting health in different countries. These concepts help
the government in making decisions for defining appropriate health
packages and programs for the public.
Paper 1.1 – Economics for Managers 12

SCOPE OF ECONOMICS
Environmental Economics
Economic concepts are used to analyze the utilization and
depletion of natural resources. Moreover, they are applied to study
the impact of increasing ecological imbalance on society.
Urban and rural Economics
In urban development, the scope of economics covers the analysis
of different urban issues such as crime, education, public transit,
housing, and local government finance. On the other hand, in
rural development, economics can be used to analyze the shortage
of natural resources, obtain the best price for production, study
constraints of productivity, adapt to climate change, etc.
 Paper 1.1 – Economics for Managers
13

ASSUMPTIONS IN ECONOMICS
There are certain assumptions in economics about an economic
situation to happen in the future. Economists use assumptions to break
down complex economic processes and advocate different theories to
understand economic variables.
Paper 1.1 – Economics for Managers 14

ASSUMPTIONS OF ECONOMICS
Consumers have rational preferences
This assumption states that consumers act in a rational manner and
focus on satisfying their needs.
It is also assumed that the tastes of consumers remain constant for a
long period. For instance, a consumer who is vegetarian may not change
his/her preferences soon.

Existence of perfect competition

According to this assumption, there is perfect competition in an economy,
wherein there are numerous buyers and sellers. It is assumed that
homogenous products exist in the market and both buyers and sellers
cannot affect prices.

Existence of equilibrium
As per this assumption, equilibrium exists wherein both consumers and
entrepreneurs achieve maximum satisfaction.

In a market, there can be two types of equilibrium: industry equilibrium

and firm’s equilibrium. An industry is at equilibrium if profits achieved
are normal. On the other hand, a firm is at the state of equilibrium if its
profits are maximum.
Paper 1.1 – Economics for Managers 15

WHAT IS BUSINESS ECONOMICS?

Business Economics is the integration of economic theory with
business practice for the purpose of facilitating decision making
and forward planning by management.
Business Economics, also referred to as Managerial Economics,
generally refers to the integration of economic theory with business
practice.
While the theories of Economics provide the tools, which explain
various concepts such as demand, supply, costs, price, competition
etc., Business Economics applies these tools in the process of
business decision making.

Definition of Business Economics or Managerial Economics:

According to Economist John Douglas, “Managerial economics is

concerned with the application of economic principles and
methodologies to the decision-making process within the firm or
organization. It seeks to establish rules and principles to facilitate
the attainment of the desired economic goals of management.”
Paper 1.1 – Economics for Managers 16

CHARACTERISTICS OF

BUSINESS ECONOMICS
Microeconomics
Business economics is microeconomic in character. This
is so because it studies the problems of an individual
business unit. It does not study the problems of the
entire economy.
Normative science
Managerial economics is a normative science. It is
concerned with what management should do under
circumstances. It determines the goals of the enterprise.
Then it develops the ways to achieve these goals.
Pragmatic
Business economics is pragmatic. It concentrates on
making economic theory more application-oriented. It
tries to solve the managerial problems in their day-to-
day functioning.
Prescriptive
Managerial economics is prescriptive rather than
descriptive. It prescribes solutions to various business
problems.
Paper 1.1 – Economics for Managers 17

CHARACTERISTICS OF BUSINESS
ECONOMICS
Uses macroeconomics
Macroeconomics is also useful to business economics.
Macro-economics provides an intelligent understanding of
the environment in which the business operates.
Management oriented
The main aim of managerial economics is to help the
management in taking correct decisions and preparing plans
and policies for the future.
Paper 1.1 – Economics for Managers 18

SCOPE OF BUSINESS
ECONOMICS
The
scope of business economics
is quite wide. Business
economics involves the
application of various economic
tools, theories, and
methodologies for analyzing
solving different business
problems.
Two Categories
There are two categories of
business issues to which
economic theories can be
directly applied, namely:
1.Microeconomics applied to in
ternal or operational issues
2.Macroeconomics applied to e
Paper 1.1 – Economics for Managers 19

SCOPE OF MICRO-ECONOMICS
Operational issues include all those issues that arise within the
organization and fall within the purview and control of the
management.
The following Microeconomic theories deal with most of these
issues.
•Demand analysis and forecasting: Demand analysis is a process
of identifying potential consumers, the amount of goods they want to
purchase, and the price they are willing to pay for it.
•This process is important for an organization to analyze the demand
for its products, and to produce accordingly and helping
organizations in business planning and deciding on strategic issues
•Cost and benefit analysis (CBA): By analyzing costs, management
can estimate costs required for running the organization
successfully.
Cost analysis helps firms in determining hidden and uncontrollable
costs and taking measures for effective cost control. Also, help in
determine the return on investment (ROI).
Paper 1.1 – Economics for Managers 20

SCOPE OF MICRO-ECONOMICS
•Pricing decisions, policies, and practices: Pricing is one of the key
areas of business economics. It is a process of finding the value of a
product or service that an organization receives in exchange for its
product/service. The profit of an organization depends a great deal on
its pricing strategies and policies. Business economics includes
various pricing-related concepts, such as pricing methods, product-
line pricing, and price forecasting.
•Profit maximization: Profit generation and maximization is the main
aim of every organization (except for non-profit organizations). To
maximize profit, organizations need to have complete knowledge about
various economic concepts, such as profit policies and techniques,
and break-even analysis.
•Capital management: Organizations often find it difficult to make
decisions related to capital investment. These decisions require sound
knowledge and expertise in various economic aspects. To make sound
capital investment decisions, an organization needs to determine
various aspects, such as the cost of capital and rate of return.
Paper 1.1 – Economics for Managers 21

SCOPE OF MACRO - ECONOMICS

The scope of macroeconomics is quite broad and covers a wide range
of topics related to the functioning of national and international
economies. The scope of macroeconomics includes the following:
National Income and Output: Macroeconomics studies the
measurement and analysis of national income and output, including
Gross Domestic Product (GDP), Gross National Product (GNP), and
other aggregate measures of economic activity.
Unemployment: Macroeconomics examines the causes and
consequences of unemployment, as well as the policies that can be
used to reduce unemployment rates.
Inflation: Macroeconomics studies the causes and effects of
inflation, as well as the policies that can be used to control inflation
rates.
Economic Growth: Macroeconomics examines the factors that
contribute to long-term economic growth, including technological
progress, investment, and human capital development.
Paper 1.1 – Economics for Managers 22

SCOPE OF MACRO-ECONOMICS
Monetary Policy: Macroeconomics analyzes the role of central
banks in controlling the money supply and managing interest
rates to achieve macroeconomic goals such as price stability and
full employment.
Fiscal Policy: Macroeconomics studies the use of government
spending and taxation policies to influence economic activity
and achieve macroeconomic objectives.
International Trade and Finance: Macroeconomics examines
the interaction of national economies in international trade and
finance, including exchange rates, the balance of payments, and
international capital flows.
Economic Development: Macroeconomics studies the
economic development of countries, particularly those that are
less developed, and the policies that can be used to promote
growth and development
Paper 1.1 – Economics for Managers 23

IMPORTANCE OF BUSINESS ECONOMICS

Business economics plays an important role in decision making in
an organization. Decision making is a process of selecting the best
course of action from the available alternatives.
Role and responsibilities of managerial economics are
explained below.
The following points explain the
importance of business economics:
1.Identifying, analyzing problems and finding solutions
2.Identify, analyze various internal & external business factors
3.Framing various policies
4.Predict the future
5.Establishing relationships between different economic factors
Paper 1.1 – Economics for Managers 24

IMPORTANCE OF BUSINESS ECONOMICS

1. Business economics covers various important concepts, such
as Demand and Supply analysis; Short run cost and
Long run costs; and Law of Diminishing Marginal Utility.
These concepts support managers in identifying and
analyzing problems and finding solutions.
2. It helps managers to identify and analyze various internal and
external business factors and their impact on the functioning
of the organization.
3. Business economics helps managers in framing various
policies, such as pricing policies and cost policies, based on
economic study and findings.
4. By studying various economic variables, such as cost
production and business capital, organizations can predict
the future.
5. Business economics helps in establishing
relationships between different economic factors, such as
income, profits, losses, and market structure. This helps in
guiding managers in effective decision making and running
the organization.
 Paper 1.1 – Economics for Managers 25

DIFFERENCE BETWEEN MICRO & MACRO ECONOMICS

BASIS OF DIFFERENCES MICRO-ECONOMICS MACRO-ECONOMICS

Meaning Microeconomics studies economic relationships or economic problems of a level of economic Macroeconomics studies economic relationships or economic problems of the level of the economy like
units like specific individual, specific firm, specification industry, etc. national income, national savings, total investments, employments etc.

Subject Matter Price determination of goods and services, their allocation for various functions and Whereas, its subject matter includes level of national income, its effective factors and results, income,
determination of the remuneration of the resources are its subject matter. employment, savings, investments, etc.

Basic Concern Microeconomics is basically concerned with determination of output and price for an individual Macroeconomics is basically concerned with determination of aggregate output and general price level in the
firm or industry. economy.

Scope Its scope is limited to the laws based on marginal analysis. Whereas its scope is wide up to the analysis related to the problems of the whole economy.

Assumptions Study of microeconomics assumes that macro variables remain constant, e.g. it is assumed that Study of macroeconomics assumes that micro variables remain constant, e.g. it is assumed that distribution of
aggregate output is given while we are studying determination of output and price of an income remains constant when we are studying the level of output in the economy.
individual firm or industry.

Helpful Microeconomics is helpful for individual units, firms and industries to achieve the optimum Macroeconomics is helpful for optimum situation of the whole economy and bringing economic stability.
level.
Central Issue Macroeconomics is helpful for optimum situation of the whole economy and bringing economic Level of output (and employment) is the central issue in macroeconomics.
stability.
Simple / complicated Microeconomics is simple, as compared to macroeconomics. Whereas macroeconomics is more complicated as compared to microeconomics.

Use Microeconomics is used for determination of various policies of a firm or industry and talking Whereas, macroeconomics is used for solution of national problems, taking of economic decisions at the level,
decisions about them. determination of economic policies and policy decisions at international level.

Importance The importance of this economics is getting reduced, due to increasing complex problems of the Whereas macroeconomics is more useful in solution of these problems. Hence, importance of
present age. macroeconomics is going on increasing as compared to microeconomics.