Amity School of Business Economics for Managers: Gaurav Shreekant 1.

Amity School of Business

Economics for Managers:

Gaurav Shreekant

1


We see people around us engaged in various activities, agriculture, trade, industry, teachers teaching at schools and colleges, lawyers practicing in courts, doctors treating patients, workers working in factories, artists entertaining audience and so on. The motive behind all such activities is to earn money in the process of satisfying human wants. Activities performed for money sake are called economic activities.

Economic activities form the subject matter of economics, and are different from non-economic activities, undertaken out of love, affection or social responsibility.

Introduction to Economics


Adam Smith, considered to be father of economics, regarded Economics as “the study of wealth.”

Alfred Marshall, the great English economist, shifted focus from production of wealth to its distribution and consumption (welfare aspect). In words of Marshall, “Economics is a study of man’s actions in ordinary business of life: it enquires how he gets his income and how he uses it.” Economics, he thus considered to be a science of man rather than of wealth.

Let’s define Economics


Further, Lionel Robbins, forwarded a more logical definition of economics in his famous book, ‘An Essay on the nature and significance of Economic Science’. In his words, “Economics studies human behaviour as a relationship between ends and scarce means which have alternative uses”. This scarcity definition of Robbins is based upon four fundamental characteristics of human existence which give rise to economic problems: 1. Man has unlimited wants (or ends);2. The means or resources to satisfy them are limited;3. Further, these resources are not specific but have alternative uses;4. Society has therefore to choose between wants.

Scarcity definition (modern definition)


According to Spencer Singlemen: “Managerial Economics deals with integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management.”While economics provides various concepts such as Demand, Supply, Price and Competition etc. Managerial Economics applies these concepts in the management of business.It is a hybrid of two disciplines; Economics and Management.

Managerial Economics


It deals with application of economic principles to the problems business firms.

Though the content of managerial economics is derived largely from micro-economics, other disciplines like Quantitative Techniques, Operational Research, Management and accounting principles play crucial role in business and management decisions.

Nature of Managerial Economics


Why do managers need to know Managerial Economics?

Just as biology contributes to medical profession and physics to engineering, economics contributes to the managerial profession. All other qualifications being same, managers with a working knowledge of economics can perform their functions more efficiently than those without it. The basic function of the managers of a business firm is to achieve the objective of the firm to the maximum possible extent with limited resources (men, material, money etc.) placed at their disposal. Therefore, the basic task of the management is to optimise the use of resources.

Amity School of BusinessScope of Managerial Economics

• Demand Analysis and Forecasting

• Theory of Production

• Cost Analysis, inventory management etc.

• Analysis of market-structure and Pricing

• Advertising

• Profit analysis and profit management

• Capital Budgeting (Investment decisions)


Decision Problems of firms under Risk and Uncertainty

Management and accounting principles

Economic theories

MANAGERIAL ECONOMICS

OPTIMAL SOLUTIONS TOMANAGERIAL DECISION PROBLEMS

Disciplines of Managerial Economics

Operational ResearchQuantitative Techniques


Scope of Managerial Economics

Production and Cost Analysis (Input-Output decisions)

Production and Cost Analysis (Input-Output decisions)

Profit Analysis (Profit maximisation

and alternative Theories)

Profit Analysis (Profit maximisation

and alternative Theories)

Demand analysis and forecasting (Demand decisions)

Demand analysis and forecasting (Demand decisions)

Investment Analysis (Project appraisal and investment decisions)

Investment Analysis (Project appraisal and investment decisions)

Market Structure and Pricing Policies (Price-Output decisions)

Market Structure and Pricing Policies (Price-Output decisions)

Risk and Uncertainty Analysis (Economic forecasting and Planning)

Risk and Uncertainty Analysis (Economic forecasting and Planning)


SCOPE OF MANAGERIAL ECONOMICS

• Economics has two major branches-

• Micro Economics

• Macro Economics

• Both Micro & Macro economics are applied to business analysis and decision making directly or indirectly.

• The areas of business issues to which economic theories can be directly applied may be broadly divided into two categories-

• A- Operational or Internal issues

• B- Environmental or external issues

Amity School of BusinessMicro Economics applied to Operational Issues

Operational problems are of internal nature. They include all those problems which arise within the business organisation and fall within the purview and control of the management.

Some of the basic internal (operational) issues are-1- choice of business and the nature of product, i.e, what to

produce?2- choice of size of firm, i.e., how much to produce?3- choice of technology. i.e., choosing the factor combination4- choice of price5- how to promote sales?6- how to face price competition?7- how to decide on new investments?8- how to manage profit and capital?9- how to manage inventory, i.e., stock of both finished goods and

raw materials?


Microeconomic theories which deal with most of these questions are: -

1- Theory of demand

2- Theory of production

3- Analysis of market structure and pricing theory

4- Profit analysis and profit management

5- Theory of capital and investment decisions


Macro Economics: studying the business environment

Environmental issues pertain to the general business environment in which a business operates. Factors constituting economic environment of a country include: -

1- The type of economic system of the country;2- General trends in production, employment, income, prices,

savings and investment, etc.3- Working of financial institutions;4- Trends in foreign trade;5- Trends in labour and capital markets;6- Government’s economic policies;7- Degree of openness in the economy and the influence of MNCs

on domestic market;8- Government’s attitude towards business.

Amity School of Business Economics for Managers: Gaurav Shreekant 1.

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