In this session, we will discuss:

• What exactly is the crux of study of Economics.

• Its common definition• Definitions of the subject given by

different economists since the beginning

• What is managerial or business economics

• What do we study under business economics (Scope of Business Economics).

What is Economics ???

• ‘Economics’ basically is the art and science of economising……to find out how to achieve maximum possible from the minimum resources available.

• Economy class air tickets.• Shopping during sale is

economical.• Bulk buying makes economic

sense.

Definitions

• Simply put, "Economics is the study of how individuals and groups make decisions with limited resources as to best satisfy their wants".

• This definition reveals the basic ideas in Economics

• UNLIMITED WANTS• CHOICES : because of scarcity of

resources.• EFFICIENCY: in the use of

resources

Historical background

• Wealth Definition• The most famous book in

economics is the Inquiry into the Nature and Causes of The Wealth of Nations written by Adam Smith, and published in 1776 in Scotland.

Adam Smith’s definition of Economics:-

“ Economics is the science which inquires into nature and causes of wealth of nations”

• The main cause of prosperity , according to Adam Smith was increasing division of labor.

• Smith gave the example of “making pins”

• 10 workers could produce 48,000 pins per day if 18 specialized tasks in making of pins was assigned to particular workers.

• Average productivity of each worker will be 4800 pins per day

Without division of labor, 1 worker may not be able to produce even 1 pin per day !

Welfare Definition

• "Economics is the study of people in the ordinary business of life." --Alfred Marshall, Principles of economics; an introductory volume (London: Macmillan, 1890)

• “ Political Economy or Economics is the study of mankind in the ordinary business of life; it examines that part of individual & social action which is most closely connected with the attainment & with the use of the material requisites of well being”

Welfare Definition

Scarcity Definition

• "Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses."

• -- Lionel Robbins, An Essay on the Nature and Significance of Economic Science (London: MacMillan, 1932)

Growth Definition

• Economics is the "study of how societies use scarce resources to produce valuable commodities and distribute them among different people."-- Paul A Samuelson, Economics (New York: McGraw-Hill, 1948)

Micro & Macro Economics

• "Economics is the study of how individuals and groups make decisions with limited resources as to best satisfy their wants, needs, and desires".

• From this definition, we can break down the study of economics into two broad categories - microeconomics and macroeconomics.

Microeconomics

• Microeconomics "deals with economic decisions made at a low, or micro, level. How does the change of a price of good influence a family's purchasing decisions? If my wages rise, will I be inclined to work more hours or less hours?"

Microeconomics deals with….

• An individual consumer• A single firm• Individual owners of factors of

production (land, labor and capital etc)

Macro economics

• Macroeconomics, deals with the sum total of the decisions made by individuals in a society, such as "how does a change in interest rates influence national savings?".

Macroeconomics deals with….

• Not with individual incomes..but National Income.

• Not with individual prices but Price level

• Not with individual output but National output.

• Thus, it deals with…… “Aggregates”

Managerial Economics

Definition Scope of Managerial Economics

Significance Role of a Managerial Economist or a manager

Definition

• Managerial Economics/Business Economics deals with those economic theories and techniques of economic analysis, that are applied to analyze business problems and help in business decision making.

What exactly is BE/ME ?

• We take a deeper look at the traditional Micro and Macro economic theories.

• We basically concentrate on theories that are more relevant to business.

Why study BE?

• What matters most to your firm’s success may lie outside it:– “For companies, a central message …

is that many of a company’s competitive advantages lie outside the firm…”

• Understanding “what lies outside” may therefore be the most important thing you can do to be a successful executive

–Economics as the study of “what lies outside”• Relationships with other firms• Interaction with the market• Market interaction with the

macroeconomy• Macroeconomy’s interaction with global

economy; AND…• Theories about the economy! Because:

• Sometimes (not often enough!) theories explain how the real world works

• Frequently (too often!) theories affect how people behave in the economy

ALSO:- • Government follows economic advice

• Firms/unions think about economy in terms of economic models

• Government bodies apply economic theory in policies (e.g.

competition policy, deregulation of telecommunications, etc.)

• So you have to understand economic theory!

Significance of Managerial Economics

(1) Managerial Economics provides a number of tools and techniques for a manager to analyze the real situation while eliminating the less important details about a situation.

This helps in decision making process.

Significance of Managerial Economics

• It provides most of the concepts needed for the analysis of business problems. For example, concepts of elasticity of demand, fixed & variable costs, short & long run costs all help in business decision making.

Significance of Managerial Economics

• However, its true that good decisions cannot be taken by merely studying managerial economics. Decision making also requires ability to analyse problems logically & clearly.

What do we study in BE?/Scope of Managerial

Economics• The firm ( Profit maximizing behavior)• The market/industry ( Types & its

theories)• The economy ( General Macro

economics)• Finance ( New investment decision

making)• International business ( Global

business environment)

Role of a Managerial Economist

• Processing information to take right decisions at the right time.

• Quick & Sensible decision making• An understanding of economic

theory helps managers know what information should be obtained & how to process & use this information.

Role of a Managerial Economist

• The task of organising & processing information takes two forms:

Specific decisions

Formulate a general course of action

Specific decisions

• By specific decisions, we mean finding a solution to a specific problem like closing down a loss making branch, outsourcing copier or computing activities, opening the shop for more hours in a day etc.

General Tasks

• A business is influenced by not only internal decisions but also by general business environment.

• Business environment includes External as well as Internal factors.

• While internal factors are within the control of the firm, external factors relate to general economic condition of economy.

General Tasks

• After analyzing both external as well as internal factors, a managerial economist provides the pricing policies, optimum product mix, forecasts return on investment, future demand for the product etc.

Opportunity Cost

• If you have chosen to attend this class (for whatever reasons) what have you sacrificed?

• In the same way, if a firm decides to produce good X from a given resources it will have sacrificed production of another good, say, Y.

• Thus, the cost of producing good X is the amount of good Y, which is sacrificed!

Opportunity Cost

• Thus, if there are no sacrifices, there is no opportunity cost. These sacrifices may be monetary or real.

• When asked how much something costs, people usually answer by giving its price, or money cost. 

• Economists usually measure cost differently, using what they call opportunity cost, defined as the value of the next best alternative opportunity that is given up in order to do or get something.  

Opportunity Cost

What is wrong with this picture?

Answer !!

• People offer this service in less developed countries, but they don't in richer countries. 

• Most Americans have scales at home (a substitute for public scales), so the demand for this service is small. 

• It's unlikely that this man would get enough customers to cover the opportunity cost of his time.

1. A headline in the New York Times read “Study Finds Enrollment Is Up At Colleges Despite Recession.” How would you rewrite this headline now that you understand the idea of opportunity cost?

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• Using opportunity cost -- an example•         Ernesto is trying to decide whether to

attend college and has determined the money cost of attending college for one year.

• Money Cost of a Year of College   • Tuition:                     $1,000

Books and school supplies:    2,000Room and board:              10,000Transportation:               1,000Miscellaneous expenses:       3,000__________________________________

• Total money cost:           $17,000 •         This tells Ernesto how much money he'll

need to come up with if he decides to go to college.

•          But in order to decide whether to go to college, Ernesto should figure out its opportunity cost.  The first step is for Ernesto to determine the best alternative to going to college.  Let's say that it's working full time at the local Drive-In.  The opportunity cost of going to college, then, is the value of what he would gain if he worked instead of going to college.

•            If Ernesto worked, he wouldn’t have to pay for tuition, books, or school supplies.  He also would earn $10,000 during the year that she worked.  The opportunity cost of a year of college, therefore, is:   • Opportunity Cost of a Year of College

•   • Tuition:                     $ 1,000

Books and school supplies:     2,000Foregone wages from working:  10,000_____________________________________

• Total opportunity cost:      $13,000 •  

Economic Statics & Dynamics

• Economic theory was basically formulated using techniques of economic statics

• However, since 1925, economic dynamics has become more important.

Economic Statics• Definition of Statics : It is the study

of static relationship between between variables.

• A relationship between variables is said to be static if the values of economic variables relate to the same point of time or same period of time.

Examples of static analysis

• Law of demand, law of supply etc.• Professor Schumpeter describes

the meaning of static analysis as follows: “ By static analysis we mean method of dealing with economic phenomena that tries to establish relationship between elements of economic system – Prices & Quantities all refer to the same point of time.”

Economic Statics• In static analysis, certain

determining conditions & factors are assumed to remain constant at the point of time when the relationship between two economic variables are expressed.

• By static analysis, we focus on the establishment of equilibrium position at any point of time… and we are not concerned with the path by which the system reaches to that equilibrium position.

Economic Dynamics• It is a much more realistic method

of analyzing the behavior of the economy.

• The technique of economic dynamics was first of all clarified by Ragnar Frisch in 1929.

Definition of Economic Dynamics

• If the analysis considers the relationship between variables whose values belong to different points of time, it is known as Dynamic Analysis.

Examples of Dynamic Analysis

• If supply of a good (S) in the market in the given time (t) depends on price that prevails in the preceding period, then the relationship between Supply and Price is said to be dynamic in nature and such analysis is called Dynamics.

Economic Dynamics

• In simple words, we can say that an economy is a dynamical system when various variables in it, such as output, demand, prices etc have values at any time dependent on their values at some other time.

Economic Dynamics

Any Questions ??????????