DEFINITIONS Adam Smith: Father of modern economics. Wealth of
nations. ALFRED MARSHALL: Material welfare: creation of wealth.
LEONEL ROBBINS: Science of scarcity or science of choice.
SCIENCE OF SCARCITY OR SCIENCE OF CHOICE: In 1931, Lionel
Robbins challenged the traditional view of the nature of economic
science. He defined Economics as follows: Economics is the science
which studies human behaviour as a relationship between ends and
scarce means which have alternative uses.
Ends (wants): Wants are unlimited. So, one is compelled to
choose between the more urgent and the less urgent wants. Thats why
Economics is also called a SCIENCE OF CHOICE. Means (Resources):;
Means is limited. Resource means land, labour, capital and
entrepreneur (organisation). Since these resources are limited, the
ability of the society to produce goods and services is also
limited. So, the term SCARCITY is used in respect of means. Means
is scarce in relation to ends.
Scarce means are capable of alternative uses. Economic activity
lies in mans utilisation of scarce means having alternative uses
for the satisfaction of multiple ends. Means refer to time, money
or any oth;er form of property. These are all limited. Ends are
unlimited. So, choice-making is essential. Thats why Economics has
been called a science of choice.
According to Prof. Stigler, Economics is the study of the
principles governing the allocation of scarce means among competing
ends when the objective of allocation is to maximise the
satisfaction. Robbins raised his point with two foundation stones,
viz: Multiplicity of wants, and Scarcity of means.
MICRO AND MACRO ECONOMICS These are relative terms. Micro
economics refers to study of sub-groups or an element in a large
mass of data, whereas macro economics refers to study of the
universe ( the entire field of study). For ex: A study of demand
for certain product in a given market condition or place is a
micro-economic study in relation to the demand condition prevailing
in the entire nation or world. So, if the market condition for
steel in Bangalore city is under study, then it is micro-economic
study in relation to market condition for steel in India (macro) or
Is Economics a science or art? MANAGERIAL ECONOMICS Definitions:
McNair & Meriam define ME as ME is the use of economic modes of
thought to analyse business situations. Prof. Evan J. Douglas
defines: ME is concerned with the application of economic
principles and methodologies to the decisionmaking process within
the firm or organisation under the conditions of uncertainty.
SUBJECT-MATTER AND SCOPE OF ME ME is concerned with the
application of economic concepts and analysis to the problem
formulating rational managerial decisions. There are 4 groups of
problem in both decisionmaking and forward planning. They are: 1.
Resource allocation. 2. Inventory queuing problem. 3. Pricing
problem. 4. Investment problem.
Study of ME essentially involves the analysis of certain major
subjects like: Demand analysis and methods of fore-casting demand.
Cost analysis. Pricing theory and policies. Break-even point and
analysis. Capital budgeting for investment decisions. The biz firm
and objectives. Competition.
GOALS OF MANAGERIAL ECONOMICS 1. Production goal. 2. Inventory
goal. 3. Market-share goal. 4. Profit-maximisation goal. 5.
CONCEPTS APPLIED IN M E 1. Opportunity cost. 2. Equi-marginal
principle. 3. Incremental cost principle. 4. Time perspective (time
element). 5. Discounting principle.
OPPORTUNITY COST It is the maximum possible alternative earnings
that will be sacrificed if the productive capacity or service is
put to some alternative use. For ex: if an own building is used to
run own business, then the rent that could be earned by letting it
out is sacrificed. This is an opportunity cost of the productive
capacity of an asset.
This sacrificed benefit is related(deducted)to the
revenue/return earned from the project. 2. EQUI-MARGINAL PRINCIPLE
This principle is used in determining options in resource
allocations. For ex: an input is used in several biz activities.
The question is as to how the input is allocated among various
activities,e.g., the input is capital.
The combination of factors of production is such where: MC = MR
The knowledge of Equi-marginal principle helps the businessman in
selecting the combination of various factors of production.
3. INCREMENTAL CONCEPT This refers to additional cost incurred
due to changes in the level of production acti-vity. When the
production pattern is changed, extra cost is incurred. Incremental
Cost= New TC Old TC. If the incremental revenue is more than
incremental cost, it is welcome. Note: The concept of incremental
cost does not arise if the biz is set up afresh. It arises only
when a change is contemplated in the existing biz.
4. TIME PERSPECTIVE Economists use the functional time periods
in analysing equilibrium pheno-menon. The functional time periods
are: Short period and Long period. Short Period Fixed cost remains
constant Long Period Fixed cost vary. Short Period If the expansion
is under-taken, the firm tolerates normal losses. Long Period If
the loss persists, it indicates complete failure of biz.
5. DISCOUNTING PRINCIPLE In(capital budgeting) decision-making
process, the p.v of the project is discounted from the future net
cash-inflow from the project. The present gain is valued more than
a future gain.
PRINCIPLE OF EQUI-MARGINAL UTILITY The marginal utility (mu)
theory applies to one commodity at a time. Consumer buys more than
one commodity at a time with his given money income. Now, the
problem is as to how to allocate a given money on various goods he
wants. Consumers main objective in spending money is to attain the
equilibrium (E). Equilibrium is a situation in which the consumer
gets maximum satisfaction from the consumption of given commodity.
So, E = mu/p where, p=price. If p=mu, the consumer is said to have
RISK AND UNCERTAINTY The element of risk and uncertainty is
involved in all decisions including investment decisions.
Uncertainty is a situation where there is more than one possible
outcome to a decision but the probability of each specific outcome
occurring is not known.
Module-2: DEMAND ANALYSIS ESTIMATION AND FORECASTING Produce
products which have continuous demand in the market. Types of
Demand: For managerial decisions, classify the large number of
goods and services avail-able in every economy as under: 1.
Consumer goods and producer goods: Goods and services used for
final consumption are consumer goods. Producer goods refer to the
goods used for production of other goods, e.g., P&M,
2. Perishable and durable goods. 3. Autonomous and Derived
demand: The goods whose demand is not tied with the demand for some
other goods are said to have autonomous demand, while the rest have
derived demand, e.g., pen-ink. 4. Individuals demand and market
5. Firm and Industry demand: E.g., Demand for Maruthi cars firms
demand. Demand for all types of cars Industrys demand. 6. Demand by
market segments and by total market. 7. Joint demand and composite
DEMAND CURVE SHIFTS IN DEMAND CURVE a. Increase in Demand. b.
Decrease in Demand.
ELASTICITY OF DEMAND Alfred Marshall introduced and perfected
the concept of ED. The law of demand indicates only the direction
of change in quantity demanded in response to a change in price.
The law of demand makes only the general statement and it ignores
the specific aspect. The specific aspect is provided by a concept
Meaning of EoD EoD means a quantitative response to a change in
price, income or the price of a related/substitute product.
Definition of EoD by Alfred Marshall: The elasticity or
responsiveness of demand in a market is great or small according to
the amount demanded increases much or little for a given fall in
price and diminishes much or little for a given rise in price.
Thus, EoD refers very much to price EoD.
KINDS OF EoD: 1. The price EoD 2. The Income EoD 3. The Cross
EoD. 1. THE PRICE EoD: Price EoD expresses the responsiveness of
quantity demanded to changes in its price.
Price Elasticity= Proportionate change in quantity demanded/
Proportionate change in its price. eP= ^Q/Q = ^Q/Q X P/^P. ^P/P If
5% change in price leads to 12% change in quantity demanded, price
EoD is 12/5= 2.4.
Classification of Price EoD a. Perfectly elastic demand. b.
Perfectly inelastic demand. C. Unitary elastic demand. d.
Relatively elastic demand. E. Relatively inelastic demand. a.
Perfectly elastic demand: If a small change in price leads to big
rise in the quantity demanded, it is perfectly elastic demand. The
shape of the curve is horizontal straight line.
B. Perfectly inelastic demand: Even if a big rise in the price
of a product does not affect the quantity demanded, it is inelastic
demand. ( That means the demand does not show any response to a
change in price). Perfectly inelastic demand has zero elasti-city.
Demand curve is that of a vertical straight line. This situation is
not found in the present day economies. In this case, the seller
can charge any price and still sells the same quantity.
3.Unitary Elastic Demand: This is the dividing line between
elastic and inelastic demand. Here, eD=1. That means the response
to change in quantity demanded is the same as change in price. The
unitary eD curve is that of a rectangular hyperbola.
The perfectly elastic and perfectly inelastic demand are not in
real world and hence they have only theoretical value. There are
only two possibilities namely, either the demand is elastic or
inelastic. FACTORS DETERMINING Ed: Some important factors are 1.
Luxury or Necessity goods 2. % of income 3. Substitutes 4.
MEASUREMENT OF ELASTICITY Elasticity is a measurable concept.
There are 3 ways to measure 1.Ratio method 2. Total Outlay method
3. The Point method. 1. RATIO METHOD: EoD= % change in qnty
demanded % change in price
2. TOTAL OUTLAY METHOD In this method, the changes in the total
outlay (expenditure) on the good is calculated. In this method, it
is possible to know whether the elasticity is =1, >1 or