EconomicsEconomicsFather of EconomicsFather of Economics: : Adam SmithAdam Smith, in , in 17761776, in his , in his pioneer book, pioneer book, “The Nature and Causes of Wealth of “The Nature and Causes of Wealth of Nation”,Nation”, he mentioned that he mentioned that “Economics is a subject matter “Economics is a subject matter of production and growth of wealth of a nation”of production and growth of wealth of a nation” ..David Ricardo: Emphasized that “Economics is a subject matter of distribution of wealth”. Robinson in 1931, in his book “Nature and Significance of Economic Science”, emphasized that economics is a subject matter of scarcity.He has emphasized on certain important points such as:Unlimited wantsScarce meansAlternative use of meansProper allocation of resources

2

Recent Definition of Economics: Recent Definition of Economics:

Economics is a branch of social Economics is a branch of social science which studies the production, science which studies the production, consumption and distribution of goods and consumption and distribution of goods and services in an economy.services in an economy.

So Economics concentrates on:• Production

– What to produce?– How to produce?– For whom to produce?• Consumption of goods and services• Distribution

04/08/23

3

Types of Economics:Types of Economics:1. Positive and Normative Economics:

Positive economics concerned with explaining what it is, that is, it describes theories and laws to explain the observed economic phenomenon.

On the other hand, the normative economics concerned with what should be or what ought to be.

More specifically, it is a body of systematized knowledge relating to criteria of what ought to be and concerned with the ideal as distinguished from actual.

Moreover, the normative economics involves value judgments or what are simply known as values. It stress upon what is good and what is bad. 04/08/23

4

2. In modern economics, the subject matter of economics is divided into two broad categories such as:

• Micro-Economics• Macro Economics

The term micro-economics derived from the Greek ward ‘MIKROS’ meaning “SMALL” and the term macro-Economics derived from the Greek ward ‘MACROS’ meaning “LARGE”.

Thus, Micro-economics deals with the analysis of small individual units of the economy such as individual consumer, individual firms and small aggregates or group of individuals such as various industries and markets.

04/08/23

5

Macro-economics on the other hand, is concerned with the economic activity in large. It analyses the behavior of the whole economic system in totality or entirety. It studies the behavior of the large aggregates such as total employment, the national product or income, the general price level of the economy. Therefore, macro-economics is known as aggregate economics.

Professor BouldingBoulding says, “macro-economics deals not with individual quantities as such but with the aggregate of these quantities, not with individual income but with the national income, not with the individual price but with the price level, not with individual outputs but with national product”.

04/08/23

6

Besides, we have some important classification of specialized traditional economic branches, such as:

3. Development Economics:

This branch of economics deals with

• The factors that determine economic development and growth of a country,

• The causes of under-development, poverty in less developed countries,

• Problems faced by these countries, • And the policies to achieve high level of economic

growth and employment.04/08/23

7

4. Public EconomicsPublic Economics:: This branch of economics has been specialized:

• To underscore the economic role of the To underscore the economic role of the government.government.

• To find out the sources of government revenues.To find out the sources of government revenues.

• To look at government’s fiscal policyTo look at government’s fiscal policy

• To measure the effects of taxation and public To measure the effects of taxation and public expenditure.expenditure.

• To evaluate the causes and consequences of To evaluate the causes and consequences of budgetary and fiscal deficits.budgetary and fiscal deficits.

• And, finally, to look after the public sector And, finally, to look after the public sector economic activities.economic activities.04/08/23

8

5.5. MonetaryMonetary Economics: Economics:It studies It studies the monetary effects of the monetary effects of

the country including the country including demand for and supply demand for and supply of moneyof money, , working of the money marketworking of the money market, , credit and financial systemcredit and financial system, , management of management of monetary systems.monetary systems.

6. 6. International Economics:International Economics:It studies the It studies the causes and causes and

consequence of international trade in goods consequence of international trade in goods and servicesand services, , international flow of capital,international flow of capital, international monetary and financial international monetary and financial institutionsinstitutions, , balance of payments and balance of payments and international payment systemsinternational payment systems..

04/08/23

9

7. 7. IndustrialIndustrial Economics: Economics:

This branch is concerned with the working, growth and structure of the industrial sector (Firm and Industries) of the country.

It also deals with the management and organization of the industries, and problems and prospects of the industrial growth.

8. 8. Labour EconomicsLabour Economics::

It examines the problems faced by labour as an economic class and problems associated with labour organizations, labour productivity and wages, exploitation of labour, labour welfare schemes, and labour laws and their effects.04/08/23

10

9. 9. Econometrics:Econometrics:It is a combined study of statistics and mathematical It is a combined study of statistics and mathematical

techniques applied to economic data with view to testing techniques applied to economic data with view to testing hypothesis.hypothesis.

More specifically, it is study to quantify the More specifically, it is study to quantify the relationship, if any, between the dependent and relationship, if any, between the dependent and independent variables and to measure the effects of independent variables and to measure the effects of economic policies.economic policies.

10. 10. History of Economic Thought:History of Economic Thought:

It is the study of evolution and development It is the study of evolution and development of economic thoughts and ideas, their backgrounds, logic of economic thoughts and ideas, their backgrounds, logic and flaws. It contributes to the understanding of economic and flaws. It contributes to the understanding of economic science.science.

04/08/23

11

11. 11. Regional economics:Regional economics:It studies:It studies:• The development of various regions of the country.The development of various regions of the country.• It looks into the causes of imbalance in regional It looks into the causes of imbalance in regional

development.development.• It examines why growth of urban economy is faster than It examines why growth of urban economy is faster than

that of rural economy.that of rural economy.

12. 12. Financial Economics:Financial Economics:This branch is concerned with the This branch is concerned with the

development and working of financial sector, especially the development and working of financial sector, especially the financial institutions that cater to the financial requirement financial institutions that cater to the financial requirement of the industries and of the capital markets.of the industries and of the capital markets.

It also studies how fluctuations in the financial It also studies how fluctuations in the financial sector effects the working and growth of industrial sector.sector effects the working and growth of industrial sector.04/08/23

12

13. 13. Environmental Economics:Environmental Economics:

It examines how industrial growth It examines how industrial growth affects, rather destroys, natural environment affects, rather destroys, natural environment of the country.of the country.

It also studies how world industrial It also studies how world industrial growth affects the global environment and growth affects the global environment and causes global worming, and hence, affects causes global worming, and hence, affects climatic conditions.climatic conditions.

04/08/23

13

14. 14. Managerial Economics:Managerial Economics:Managerial economicsManagerial economics is however, is however, an integration an integration

of both micro economic and macro economic aspects. It of both micro economic and macro economic aspects. It is that branch of economics which serves as a link is that branch of economics which serves as a link between abstract theory and managerial practice.between abstract theory and managerial practice.

According to Mcnair and Merian, “managerial economics is the use of economic modes of thought to analyze business situation”.

According to Spencer and Siegelman, “managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management”.

Hague defined managerial economics as “a fundamental academic subject which seeks to understand and to analyze the problems of business decision making”.04/08/23

14

Basic Features of Managerial EconomicsBasic Features of Managerial Economics:: Managerial economics is concerned with decision making

of economic nature. This implies that managerial economics deals with identification of economic choices and allocation of scarce resources.

Managerial economics is goal oriented and perspective. It deals with how decisions should be made by managers to achieve the organizational goal.

Managerial economics is pragmatic. It concerned with those analytical tools which are useful in decision making.

Managerial economics is both conceptual and methodological. It provides some well developed tools and methods to verify the economic concepts, which helps the managers in decision making. 04/08/23

15

Finally, managerial economics provides a link between traditional economics and decision sciences for managerial decision making. This can be better understood by the help of following diagram:

Managerial Economics

Decision Sciences (Tools and Techniques

of Analysis)

Decision Problem

Optimal Solution to Business Problem

Traditional Economics

04/08/23

16

Nature of Nature of ManagerialManagerial Economics: Economics: Managerial economics is concerned with the business

firm and the economic problems that every business management need to solve.

More specifically, Managerial economics is micro economic in nature,

where the unit of study is firm. Managerial economics is concerned with normative

micro economics rather positive micro economics. In normative micro economics, the manager should think what should happen rather what does happen to the firm. More specifically, the managerial economics tell us what objectives a business should pursue and how they should be set.

04/08/23

17

Managerial economics concentrate on making economic theory more application oriented. While traditional economics tries to solve the complicated theoretical issues, managerial economics tries to introduce complication s which the economist ignores by assuming them away. Hence, it is more pragmatic.

Managerial economics also concentrates on macro economic aspects to understand the economy as a whole. More specifically, it tries to see how the aggregate economy or Government intervention affects the business situation.

04/08/23

18

Chief Characteristics of Managerial Economics:Chief Characteristics of Managerial Economics:The main characteristics of managerial The main characteristics of managerial

economics are as follows:economics are as follows: Managerial economics is micro-economic in character Managerial economics is micro-economic in character

as it concentrates on the study of firm.as it concentrates on the study of firm. Managerial economics also takes the help of macro Managerial economics also takes the help of macro

economics to understand and adjust the environment in economics to understand and adjust the environment in which the firm operateswhich the firm operates..

It is normative rather than positive economicsIt is normative rather than positive economics It is both conceptual and methodological.It is both conceptual and methodological. The concept of managerial economics is mainly based The concept of managerial economics is mainly based

on “the theory of firm”. It is only for the analysis of on “the theory of firm”. It is only for the analysis of profits that helps in taking of the “the theory of profits that helps in taking of the “the theory of distribution”.distribution”.

Knowledge of managerial economics helps in making Knowledge of managerial economics helps in making wise decisions/choices, which helps the managers to wise decisions/choices, which helps the managers to allocate the scarce resources properly.allocate the scarce resources properly.04/08/23

19

Importance of Managerial Economics:Importance of Managerial Economics: In order to make In order to make managers more competitive managers more competitive

and efficientand efficient, the managerial economics , the managerial economics provides provides a number of tools and techniquesa number of tools and techniques. . With the help With the help of such models/techniques, the managers can of such models/techniques, the managers can capture the essential relations builds in the capture the essential relations builds in the economy.economy.

Managerial economics provides the Managerial economics provides the important important concepts such as concept of concepts such as concept of elasticity of demandelasticity of demand, , fixed and variable costsfixed and variable costs, , short run and long run short run and long run costscosts, , opportunity costsopportunity costs, , net present valuesnet present values etc. etc. to understand and solve the business problems.to understand and solve the business problems.

04/08/23

20

Managerial economics is helpful in making decisions like:

– What should be the product-mix?– What should be the production technique and

input mix that is least costly?– What should be the level of production and the

price for the product?– How to take investment decisions?– What should be firm’s advertisement?– How to allocate advertisement fund between

different media?04/08/23

21

Scope of Managerial Economics:Scope of Managerial Economics:Managerial economics closely connected Managerial economics closely connected

with the economic theory with the economic theory i.e. both micro and macro i.e. both micro and macro economics, operation research, mathematics, statistics economics, operation research, mathematics, statistics and decision making.and decision making.

Managerial economics also Managerial economics also draws together draws together and related ideas from various functional areas of and related ideas from various functional areas of management likemanagement like production, marketing, finance and production, marketing, finance and accounting, project managementaccounting, project management etc. etc.

An efficient and competent managerial An efficient and competent managerial economist has to integrate all such concepts and ideas to economist has to integrate all such concepts and ideas to understand and analyze practical managerial problems.understand and analyze practical managerial problems.

04/08/23

22

As far as managerial economics is concerned, the following aspects constitute its subject matters:

Objective of business firm. Demand analysis and demand forecasting. Production and costs. Competition: Perfect; Monopoly; Monopolistic and

Oligopoly. Pricing and output. Profit. Investment and capital budgeting. Product policy, sales promotion and market strategy.

04/08/23

23

Managerial Economics and Other Important Areas:Managerial Economics and Other Important Areas: Traditionally, Traditionally, managerial economics drew heavily upon managerial economics drew heavily upon

economic analysis for its decission making processeconomic analysis for its decission making process. . But latelyBut lately, , the development of mathematical and statistical the development of mathematical and statistical

technique for analyzing situation faced by a managerial technique for analyzing situation faced by a managerial economist have also promoted their use in decision making economist have also promoted their use in decision making processprocess. These are:. These are:

1. 1. Managerial Economics and Traditional Economics:Managerial Economics and Traditional Economics: It helps the managers to understand the market conditions and It helps the managers to understand the market conditions and

the general economic conditions/environment with which firm the general economic conditions/environment with which firm operates.operates.

To provide clues to understand and analyze the resource To provide clues to understand and analyze the resource allocation problem.allocation problem.

It deals with efficiency concepts such as technical efficiency, It deals with efficiency concepts such as technical efficiency, allocative efficiency and the economic efficiency as well.allocative efficiency and the economic efficiency as well.

04/08/23

24

2. Managerial Economics and Operation Research:

• To take effective decisions.• To solve the decision related problems.• Its time consuming and costly matter (negative

points).3. Managerial Economics and Mathematics:• The relationship helps the managers in:• Providing tools and methodologies.• Provides mathematical tools/models to analyze the

economic concepts such as geometry, algebra, calculus, vector and determinants, input-output tables etc.04/08/23

25

4. Managerial Economics and Statistics:Managerial Economics and Statistics:• To quantify the past economic activity and to

predict the future course.• To understand and solve the decision making

problem by averages, dispersion, probabilities, index numbers etc.

5. Managerial Economics and the Theory of Managerial Economics and the Theory of Decision Making:Decision Making:

• Helps to decide whether maximization of profit for the firm or maximization of utility for the consumer.

• To find the solution that balances the conflicting objectives.04/08/23

26

Role of Managerial Economics in Business:Role of Managerial Economics in Business: Managing decisions and processing informations are Managing decisions and processing informations are

two primary tasks of managers. two primary tasks of managers. The task of organizing and processing informations The task of organizing and processing informations

and then making intelligent decisions can make two and then making intelligent decisions can make two important formsimportant forms, such as:, such as:

Task of taking specific decisions by managers.Task of taking specific decisions by managers. General tasks to carry out a course of action that General tasks to carry out a course of action that

furthers the goal of the organization.furthers the goal of the organization.

Specific Objectives:Specific Objectives:– Production schedulingProduction scheduling– Demand forecastingDemand forecasting– Market researchMarket research04/08/23

27

– Economic analysis of the industry– Investment appraisal– Security management analysis– Advice on foreign exchange management– Advice on trade– Pricing and related decisions– Analysis and forecasting environmental factors

General Tasks:General Tasks:Business is influenced by two sets of decisions like:• External factors• Internal factors

04/08/23

28

External Factors:External Factors: General Economic ConditionsGeneral Economic Conditions: : This includes:• The level and rate of growth of national income.• Regional income distribution,• Influence of international factors on the domestic economy,,• The business cycles etc.Demand for the product: This suggests,• Is there a change occurring in the purchasing power of the public in

general or in some particular region?• Is this change in purchasing power a result of change in population

and migration or due to change in real income of the people as a result of price level change?

• Are fashion, taste, and preferences undergoing any change and thus affecting the demand for the products?

The managerial economist tries to find their roots and advises accordingly. 04/08/23

29

Factors influencing the input costs of the firm:For example:• What about the cost of labour in different regions and for

different operations?• What about the credit conditions in the market?• Is there going to be some change in the government credit

policy?• How different inputs can be combined to minimise the cost of

production?

Market ConditionsMarket Conditions: Here a manger has to understand the nature of the

market from which the firm is buying the raw materials and of the market where it is selling its output. This understanding helps the manager to recommend the pricing policy successfully.

04/08/23

30

Firm’s share in the market:Firm’s share in the market:

The managerial economist can also help in The managerial economist can also help in the expansion of the firms share in the market. He is to the expansion of the firms share in the market. He is to find out the opportunities and the policies which help in find out the opportunities and the policies which help in the expansion of the firms share in the local and internal the expansion of the firms share in the local and internal markets. This, he can do by understanding the nature and markets. This, he can do by understanding the nature and trend of the demand.trend of the demand.

Government’s economic policies:Government’s economic policies:

Besides, the manager has to keep in touch Besides, the manager has to keep in touch with the govt.’s economic policies and the Central bank’s with the govt.’s economic policies and the Central bank’s monetary policies, annual budget of the government etc.monetary policies, annual budget of the government etc.

04/08/23

31

Internal Factors:Internal Factors:Production, sales, inventory schedules of the firm:Production, sales, inventory schedules of the firm:

The manager helps in deciding about the The manager helps in deciding about the production, sales and inventory schedules of the firm. He production, sales and inventory schedules of the firm. He not only provides informations regarding their present not only provides informations regarding their present level but also forecast their future trend.level but also forecast their future trend.

Investment decisions:for this, the managerial economist needs to for this, the managerial economist needs to

forecast the return on the investment and the cost that the forecast the return on the investment and the cost that the firm incurs by taking up the investments.firm incurs by taking up the investments.

Pricing and profit policies etc.

04/08/23

32

Case StudyCase Study

04/08/23