CONCEPTS IN ECONOMICS

DefinitionDefinition of the subject comes from the

economist Lionel Robbins, who said in 1935 that

"Economics is a social science that studies human behaviour as a relationship between ends and scarce means which have alternative uses. That is, economics is the study of the trade-offs involved when choosing between alternate sets of decisions."

Basic economic problem

The basic economic problem is about scarcity and choice since there are only a limited amount of resources available to produce the unlimited amount of goods and services we desire.

All societies face the problem of having to decide:

What goods and services to produce

How best to produce goods and services

Who is to receive goods and services

Economic Systems

Traditional economy(Barter System)

Free market economy

Planned or command economy

Mixed economy

Classification

Economics

Microeconomics

Macroeconomics

Microeconomics

UtilityTerm given by Jeremy BenthamThe term utility refers to the want satisfying

power or capacity of a commodity or service., assumed by the consumer to constitute his demand for that commodity or service.

Utility is a subjective term.Utility is a relative term. It depends on time

and place.Utility has no moral or ethical consideration.Consumers experience diminishing utility as

they increase their consumption.

Marginal and Total utility

Total utility is the utility derived by consuming all units of a commodity

TU=∑MU

Marginal utility is the utility derived by consuming an extra unit of output

MU=TU(n)-TU(n-1)

Total utility and marginal utility

Production

Production refers to the output of goods

and services produced by businesses within a market. This production creates the supply that allows our needs and wants to be satisfied. To simplify the idea of the production function, economists create a number of time periods for analysis.

Types of production functionShort run productionThe short run is a period of time when there is at least

one fixed factor input. This is usually the capital input such as plant and machinery and the stock of buildings and technology. In the short run, the output of a business expands when more variable factors of production (e.g. labour, raw materials and components) are employed.

Long run productionIn the long run, all of the factors of production can

change giving a business the opportunity to increase the scale of its operations. For example a business may grow by adding extra labour and capital to the production process and introducing new technology into their operations

Costs of production

Costs are defined as those expenses faced by a business when producing a good or service for a market. Every business faces costs and these must be recouped from selling goods and services at different prices if a business is to make a profit from its activities.

In the short run a firm will have fixed and variable costs of production. Total cost is made up of fixed costs and variable costs

TC=TFC+TVC

opportunity cost

Scarcity of resources imposes constraint on the choice set , also makes us realize that there are trade offs.

The opportunity cost of an item is what you give up to obtain that item.

Opportunity cost is defined as what the resource would have yielded in the next best alternative, which has to be foregone if the resource is put to its current use.

Profits

Any managerial decision can be evaluated in the context of its objective.

For a producer, the objective is its maximize its profits

Profit=TR-TC

MarketA market is a group of buyers and sellers of a

particular good or service. The buyers as a group determine the demand for the product and the sellers as a group determine the supply of the product.

• Perfect Competition• Monopolistic competition• Oligopoly• Monopoly

Equilibrium

The word equilibrium means it is a state from which there is no tendency to change.

Equilibrium denotes in economics absence of change in movement.

When demand and supply are equal at a particular price, it is the state of equilibrium.

Equilibrium

Partial equilibrium: Partial equilibrium also known microeconomic analysis is a study of the equilibrium position of an individual , a firm, an industry or a group of industries viewed in isolation

General equilibrium: General equilibrium is an extensive study of a number of economic variables , their interrelationship, for understanding the working of the economic system as a whole.

It helps to understand the working of the economic system.

MarginMarginal changes are small, incremental

adjustments to an existing plan of action

Marginal changes in costs or benefits motivate people to respond.

The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its marginal costs.

MC=MR

Managerial economics

Managerial economics involves application of economic principles to the future of the firm or business enterprise.

According to McNair and Meriam,’ Managerial economics consists of the use of economic modes of thought to analyze business situations.’

Characteristics

It is mainly a study of a business enterprise It is concerned with microeconomic concepts It is concerned with decision making of an

economic nature. It takes the help of statistical tools to find

numerical values of economic parameters It is useful for prediction It uses macroeconomic factors in

determining business strategies

Scope of managerial economics1) Theory of demand and demand

forecasting2) Pricing3) Cost analysis4) Resource allocation5) Profit analysis6) Investment analysis7) Strategic planning8)Business Environment

Economic theory and managerial economics1) Opportunity cost2) Elasticity of demand3) Revenue concepts4) Production function5) Demand theory6) Fiscal and monetary policies7) Theory of international trade8) National income9) Business cycles

Specific role of Managerial economist

Sales forecastingMarket researchEconomic analysis of competitorsPricingCapital projectsProduction