Chapter 1

An Introduction to

Economic Analysis
An Introduction to Economic Analysis

Objectives of the Session

To understand positive and normative economics To know about the interdependence of macroeconomics and microeconomics To know about economics analysis typical managerial decisions To understand Economists, finance manager and functional areas of management An Introduction to Economic
Analysis

Introduction

Economic analysis evolves from basic propositions about how individual human beings behave, struggle with the problem of scarcity and react to an observed change. There are two basic ingredients of economic phenomena: scarcity and choice. Opportunity cost is the real cost of making a choice.
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Positive and Normative Economics

The scientific approach to the analysis of economic events, commonly referred to as positive economics. Normative economics involves prescriptions or statements about what ought to be, rather than What is.
An Introduction to Economic Analysis

Interdependence of Macroeconomics and Microeconomics

In microeconomics, the underlying assumptions is that the total output, total employment and total spending are given. What macroeconomics take as given- the distribution of output, employment and total spending which microeconomics seeks to explain. Analysis of economy is not done in two watertight compartments.
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An Introduction to Economic Analysis

Interdependence of Macroeconomics and Microeconomics

When macroeconomic variables are analyzed, one must allow for changes in microeconomic variables that influence the macroeconomic variables and vice versa

An Introduction to Economic Analysis

Economic Analysis and Typical Managerial Decisions

Decisions within a corporate unit are taken at various levels from the junior executive up to the chief executive.

Decisions at the lowest level pertain to the day to day operations of the unit. Decisions at the middle management level pertain to the current and near-future operations of the firm. The decisions at the highest levels concern the longterm plans of the company.

In every practicing manager needs a good understanding of both microeconomics and to Economic macroeconomics. An Introduction Analysis

Typical Corporate Decisions

Demand Forecasting Pricing and other Marketing Decisions Cost Analysis Investment Appraisal Specific Industry Analysis Government, Regulation and Policy Impact Analysis.
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Economists, Finance Manager and Functional Areas of Management

The primary function of the economists are to teach, contribute research and empirical findings and formulate policies. In many companies economists act as advisors to functional manager in finance, marketing, production, personnel and in other departments.
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Economists, Finance Manager and Functional Areas of Management

A knowledge of economics is essential for sound policy making. A finance manger may call upon the economist for forecasts relating to the money and capital market, inflation rates, and other trends in the economy.

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Production Possibility Curve

Y-Good

It helps us to understand the problem of scarcity better. It shows what can be produced with the given resources and technology Technology is the knowledge of how to produce goods and services.

Y
A B C D

E O X-Good
An Introduction to Economic Analysis

X
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Shift in Production Possibility Curve

Y
A A Y-Good

F O X-Good

F X

Increase in the quantities of economic resources Improvement in the quality of resources Advances in technology

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