Some Concepts of Economics, Relevant to Business

Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to BusinessSome Concepts of Economics, Relevant to Business

Human wants are the starting point of all economic activities. They refer to the lack of satisfaction, a state of discomfort which every individual desires to eliminate.

They can be Necessities, Comforts or Luxuries. Wants are unlimited.

Recurring in nature.Cannot be satisfied either simultaneously or fully.



Human wants are the starting point of all economic activities. They refer to the lack of satisfaction, a state of discomfort which every individual desires to eliminate. Lionel Robbins indicated that Wants are unlimited while means or resources available to satisfy them are limited or scarce.Resources have alternative uses.



UTILITY

is the capacity of a good to satisfy a human want .

Total utility is the aggregate of utilities derived by the consumer from all the

units of the commodity consumed.

Marginal utility is addition to total utility made by the consumption of an

additional unit of the commodity



UTILITY

Thus Total Utility

TUn = MU1st + MU2nd + MU3rd ……..+ MUnth

therefore TU = ∑ MUs

Whereas marginal utility is MUnth = TUn – TUn-1



DEMAND

Demand =

Desire to buy + Ability to pay + Willingness to pay

See the chapter Three on Demand Analysis



SUPPLY

supply of any commodity refers to various amounts of commodity which the sellers are willing to sell at a different possible prices at any given time.



PRODUCTION

► Commonly understood, production refers to creation of something which can be used to satisfy human want. ► In Economics , the process of addition of utilities to the existing matter *by changing its form, place and keeping it over time is referred to as production**.

Technically in production inputs* are transferred to output** using Land, Labour, Capital & Organization

- termed Factors of Production.



DISTRIBUTION

► The term refers to the sharing of the wealth produced in the community among various factors of production.

Land gets Rent

Labour gets Wages

Capital gets Interest &

Organization gets Profits.



DISTRIBUTION

► The term refers to the sharing of the wealth produced in the community among various factors of production.

however, in general, the term distribution is loosely used to denote the process by which the goods & services produced, are made to reach, through different stages, to the final

consumers.



CONSUMPTION

► in Economics, implies destruction or use of utilities for satisfying human wants.

however, as the consumer goes on consuming more and more units of the commodity , the total utility from the commodity increases, although the marginal utility from the additional unit of commodity consumed goes on diminishing.



CONSUMPTION► in Economics, implies destruction or use of utilities for satisfying human wants.

► however as the consumer goes on consuming more and more units of the commodity , the total utility from the commodity increases, although the marginal utility from the additional unit of commodity consumed goes on diminishing.

If the price of the commodity is to be considered the consumer will go on buying commodity until

Marginal Utility of X = Price of X. or

MUx = Px



CONSUMPTION

If the price of the commodity is to be considered the consumer will go on buying commodity until

Marginal Utility (MU) of X = Price (P) of X.

Since the consumer consumes a combination of commodities

The Law of equi - MU indicates that

MUx = MUy = MUz

Px Py Pz



CONSUMPTION FUNCTION

The psychological law of consumption as given by Keynes indicates that as income (Y) goes on increasing consumption (C) also increases, but at a rate less than increase in income; in such way that the savings (S) will also be increasing with the increase in income.



CONSUMPTION FUNCTION Thus

C = f(Y) and S = f(Y)

Average Propensity to Consume is the ratio of consumption to income i.e. APC = C ÷Y.

Marginal Propensity to Consume is the ratio of change in consumption to change in income i.e.

MPC = ΔC ÷ ΔY.



CONSUMPTION FUNCTION Thus

C = f(Y) and S = f(Y)

Average Propensity to Save is the ratio of savings to income i.e. APS = S ÷Y.

Marginal Propensity to Save is the ratio of change in savings to change in income i.e.

MPS = ΔS ÷ ΔY.



CONSUMPTION FUNCTION Average Propensity to Consume & Save

0

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7

Income

Consumption

Savings



CONSUMPTION FUNCTION

Marginal Propensity to Consume and Save.

Note how the graph indicates that

as income increases consumption increases

at a lesser rate

but savings at higher rate.



COST

Production involves cost.it is aggregate of the expenditure incurred by the producer in the process of production.

it is also the valuation placed on the use of resources

We have several concepts of costs like fixed, variable, average, marginal, money, real, private, social costs etc. We study them later.



PRICEThe value of anything expressed in terms of money is the ‘Price’ of that thing.

Market price is the price which actually prevails in the market at a given point of time.

Normal price is that price which is normally expected to prevail in the long run.

Market price is influenced by demand, as in a short period, supply is inelastic.Normal price is influenced by supply as in a long period , supply is expected to adjust itself to demand.



MONOPOLY

► Monopoly is that market category in which there is a single seller.

► It occurs when there is only one producer of a commodity for which there is no substitute.



PROFIT► is a reward which goes to the organization

( entrepreneur ) as a factor of production for its participation in the process of production.

► In common terminology profit is excess of revenue over its cost.

Gross Profit = Revenue less explicit costs &Net Profit = Gross Profit less Depreciation & Taxes.



OPTIMIZATION

‘ making best possible use of available

resources to obtain the maximum

possible desirable quality of output.’



AVERAGE & MARGINAL

The concepts are applicable to both revenue as well as cost.

Total cost (TC)

Average cost (AC) =

Units of Output Produced

While marginal cost (MC) is additional cost for producing additional unit of output.



AVERAGE & MARGINAL

Either

MCnth = TCn - TCn-1

Or ΔTC

MC =

ΔQ



ELASTICITY ► By elasticity we mean degree of responsiveness of change in one variable brought about by change in some other variable.

► The degree of responsiveness of quantity demanded of X to the change in price of X, is called as Price Elasticity of Demand.



MICRO & MACRO ECONOMICS - Distinction

MICRO Macro

1. Unit of Study Individual Aggregate

2. Method Slicing Lumping

3. Subject Matter Study of product & Study of National

Factor pricing etc. income, general level of prices, trade

cycles etc.

4. Basis Based on Independence Based on inter-dependence

5. Advocated by Alfred Marshall J M Keynes

6. Vision Worm’s eye view. Bird’s eye view. Study of a tree. Study of a

forest.



Concepts Studied

Wants UtilityDemand SupplyProductionConsumption & Consumption FunctionCost PriceMonopoly ProfitOptimization Average & MarginalElasticityMacro & Micro Economics

We will be using and expanding on them in the rest of the course.

bye for now, get going!

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Some Concepts of Economics, Relevant to Business