Session 1-Introduction to Economics

7/28/2019 Session 1-Introduction to Economics

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Introduction toEconomics

Dr. Utpal ChattopadhyayAsst. Professor

Room No. 206, Ext. 387

E-mail: [email protected]


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What is Economics?

Economics is the study of howpeople allocate scarce

resources among alternativeuses

Economics studies production,distribution and consumption of

goods and services The word originates from Greek

words oikon (house) andnomos (customs or law),

hence meaning rules of thehouse(hold).


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Important EconomicTerms

Scarcity: A condition inwhich resources are not

available to satisfy all theneeds and wants of aspecified group of people

Resources: Land

Labour

Capital

Entrepreneurship &management skills


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Fundamental Questionsin Economics

What goods and services beproduced and in what

quantities?The product decision

How should these goods and

services be produced?The hiring, staffing, procurement and

capital budgeting decisions

For whom should these goodsand services be produced?

The Market segmentation decision


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Branches of Economics

Microeconomics refers to theanalysis ofscarcity and choice

problems faced by a singleeconomic unit e.g. a producer or aconsumer (supply& demand,pricing of output, production & cosetc.)

Macroeconomics is study of theaggregate economy (GDP,employment, fiscal & monetarypolicy, trade among nations etc.)

Positive Vs. Normative Economics

What is vs. what ought to be


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What is ManagerialEconomics?

Managerial economics is the use ofeconomic analysis to make

business decisions involving thebest use (allocation) of anorganizations scarce resources

Managerial economics is (mostly)

applied microeconomics(normative microeconomics)

Managerial Economics deals with

How decisions should be made bymanagers to achieve the firmsgoals - in particular, how tomaximize profit.


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Relationship betweenManagerial Economics and

Related Disciplines

ManagementDecision Problems

EconomicConcepts

DecisionSciences

ManagerialEconomics

Optimal Solutions to Managerial

Decision Problems


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Product Price and Output

Make or Buy

Production Technique

Stock Levels

Advertising Media and Intensity

Labour Hiring and Training

Investment and Financing

ManagementDecisionProblems


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Goals of a Firm

Economic Goals:Maximizing or Satisficing

1. Profit

2. Market share

3. Revenue growth

4. Return on investment5. Technology

6. Customer satisfaction

7. Shareholder value

What is a firm?

A firm is a collection of resources that

is transformed into productsdemanded by consumers


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Goals of a Firm (contd..)Non-economic Objectives:

1. A good place for our employeesto work

2. Provide good products/servicesto our customers

3. Act as a good citizen in oursociety

Is there any conflict between profitmaximization and non-economicobjectives?

No

Satisfied workers tend to be more productive

Satisfied customers tend to be more loyal

Social goals will create good wills and ultimatelypotential sales


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Constraints faced by

Firms

Resource constraints (non-availability of essential rawmaterials, paucity of fund,shortages of skills , insufficientspace etc.)

Legal Constraints (min. wage law,health & safety standards,

pollution emission norms,business laws like Competition Actetc.)

Constraints arising out of Govt.Regulations/Policies (licensing,price regulation, social welfaree.g. backward area development,reservation etc.)


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Questions that a

Manager Must Answer

Should our firm be in thisbusiness?

If so, what price and outputlevels achieve our goals?

How can we maintain acompetitive advantage over our

competitors? Cost-leader?

Product Differentiation?

Market Niche?

Outsourcing, alliances, mergers,acquisitions?

International Dimensions?


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Questions that a Manager

Must Answer-Contd..

What are the economicconditions in a particular market?

Market Structure? Supply and Demand Conditions?

Technology?

Government Regulations?

International Dimensions? Future Conditions?

Macroeconomic Factors?


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Role of a Manager

Practically in all managerialdecisions the task of the manager isthe same i.e. optimization.

A manager attempts either tomaximize or minimize someobjective function (e.g. maximizeprofits or minimize costs), generally

subject to some constraint (e.gshortages of capital, labour, rawmaterials etc.).

The optimal decision in

managerial economics is one thatbrings the firm closest to its goal


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Economic Vs. AccountingProfit

Accounting Profit

Total Revenue- Total Cost

(What is typically reported to the manager bythe firms accounting dept.)

Economic Profit

Total Revenue-Total opportunity Cost

o Opportunity cost of using a resource

includes both the explicit costof theresource and the implicit cost of giving upthe next-best alternative use of the resource

o Generally opportunity cost of producing a

good or a service is higher than itsaccounting cost


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Why Economic Profitsexist?

Innovation

Risk Monopoly Power


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Managerial Economics-

Basic Principles

Opportunity Cost Principle

Discounting &Compounding Principle

Marginal or Incremental

Principle

Equi-marginal Principle

Time Perspective Principle


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MarginalAnalysis

As long as the marginalbenefit of an activity

exceeds its marginal cost,its better to increase thatactivity.

The total net benefit ismaximized when marginalbenefit equals marginal

cost.


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MarginalAnalysis- contd..

A firm maximizes its profitwhen MR = MC

MR= Marginal Revenue(change in total revenueper unit change in output

or sales) MC= Marginal Cost (change

in total cost per unitchange in output)


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Equi-marginal Principle

A rational decision maker wouldallocate resources in such a way thatthe ratio of marginal returns and

marginal cost of various uses of agiven resource or of various resourcesin a given use is the same

For a consumer to maximize his/herutility (satisfaction):

MU1/MC1=MU2/MC2=....=MUn/MCn

MU= Marginal Utility (extra utility derivedfrom consumption of one additionalunit of a good)

MC=Marginal Cost (extra amount spent forbuying one additional unit of a good)


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Cetiris Paribus

Assumption

Frequently used ineconomic literature

A Latin phrase meaning allother things being equal

Helps in measuring

relationship between twokey economic variables,keeping values of all othervariables as constant


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Session Plan forManagerial Economics

PGDIE 38

SessionNo.

Topics

1. Introduction to Economics

2. Demand Analysis- meaning, types anddeterminants of demand, individual andmarket demand functions

3. Determinants of Consumer Behaviourand Utility Theory

4. Elasticity of Demand-Price and IncomeElasticities

5. Production, Cost and Supply Decisions:Production Function, Optimal

Combination of inputs

6 Returns to scale, costs of production,short and long term cost-outputrelationships


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Session PlanContd..

SessionNo.

Topics

7. Break-even analysis

8. Pricing- determinants of price,pricing under different objectives

9. Pricing under different marketconditions-Perfect Competition andMonopoly

10. Monopolistic Competition andOligopoly

11-12. Assignment Presentations

Evaluation:Class Evaluation: 40% (class test/quiz/assignments etc.)Final Examination: 60%

Textbooks:1) Mansfield E, Allen WB and Doetry NN, Managerial

Economics, Theory, Applications and Cases, W.W. Norton& Co., 6th ed., 2005.

2) Gupta, G.S., Managerial Economics, Tata Mc Graw-Hill.

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Session 1-Introduction to Economics

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