Economics

Lec-1
Prof. Ravikesh Srivastava

The master economist ... should be a
mathematician, historian, statesman,
philosopher ... He must understand symbols
and speak in words ... He must study the
present in the light of the past for the
purposes of the future
(John Maynard Keynes)


Economics Vs ME
How does managerial economics differ
from regular economics?

There is no difference in the theory;
standard economic theory provides the
basis for managerial economics.

The difference is in the way the
economic theory is applied.
Economics? Its origin
Origin of term Economics from Greek words:
oikon and nomos
Means Laws of Households
As per Alfred Marhall Economics is the study
of mankind in the ordinary business of life.
As per Robbins Economics is a social science
concerned with allocation of scare resources
among competing ends.
Economics-Science of decision
Economics helps in various decision
making:
Production decisions
What to Produce
How to Produce
Whom to Produce
Exchange decisions
Consumption decisions
Economics-the change agent
Study of how economic agents choose
to use their scarce resources.
Scarcity Necessitates Choice
Who are economic agents?
We develop theories and models to
explain their behavior.
Thus, economics is the study of Human Behavior!
Our models are concerned with causality
Absence of poverty implies some basic
level of need has been met.
An absence of scarcity would imply that all
of our desires for goods are fully satisfied.
Scarcity and Poverty

Scarcity and poverty are not the same thing.
We may someday eliminate poverty, but
scarcity will always be with us.
Scientific Process:
What makes Economics a Science
Economic Theory
Formalize Theory as a Empirical Model
Collect data
Estimate parameters of model
Statistical inference
Forecast the future
Document findings
Positive Economics:
The scientific study of what is among economic
relationships Goods are scarce because desire
for them far outstrips their availability from
nature.
Positive economic statements can be proved
either true or false.
Example:
The inflation rate rises when the money supply is
increased


Positive Economics
Normative Economics:
Judgments about what ought to be in
economic matters.
Normative statements reflect subjective
values. They cannot be proved true or
false.
Example:
The inflation rate should be lower.


Normative Economics
The Diverse Fields of Economics
Examples of microeconomic and macroeconomic concerns
Production Prices Income Employment
Micro
economics
Production/Output
in Individual
Industries and
Businesses

How much steel
How many offices
How many cars
Price of Individual
Goods and
Services

Price of medical
care
Price of gasoline
Food prices
Apartment rents
Distribution of
Income and
Wealth

Wages in the
Industry A
Minimum wages
Executive
salaries
Poverty
Employment by
Individual
Businesses &
Industries
Jobs in the steel
industry
Number of
employees in a
firm
Macro
economics
National
Production/Output

Total Industrial
Output
GDP
Aggregate Price
Level

Consumer prices
Producer Prices
Rate of Inflation
National Income
Total wages and
salaries

Total corporate
profits
Employment and
Unemployment
in the Economy

Total number of
jobs
Unemployment
rate
Figure 1 The Circular Flow
Spending
Goods and
services
bought
Revenue
Goods
and services
sold
Labor, land,
and capital
Income

= Flow of inputs

and outputs

= Flow of dollars
Factors of
production
Wages, rent,
and profit




FIRMS
Produce and sell
goods and services
Hire and use factors
of production




Buy and consume
goods and services
Own and sell factors
of production
HOUSEHOLDS


Households sell
Firms buy
MARKETS
FOR
FACTORS OF PRODUCTION


Firms sell
Households buy
MARKETS
FOR
GOODS AND SERVICES
Managerial/Micro economics
It deals with
how decisions should be made by managers to
achieve the firms goals - in particular, how to
maximize profit

(Also government agencies and nonprofit institutions
benefit from knowledge of economics.)

Managerial economics is (mostly) applied
microeconomics (normative microeconomics)

Why Managerial/Micro Economics?
Micro economics organizes information
for decisions
Micro economics leads to better
understanding of a companys
environment
Micro economics deals with the role of
business in a market economy
Relationship between Managerial
Economics and Related Disciplines
Management
Decision Problems
Economic Concepts
Managerial
Economics
Optimal Solutions to Managerial
Decision Problems
Management
Decision Problems
Managerial
Economics
Optimal Solutions to Managerial
Decision Problems
Decision Sciences

1. Define the Problem
2. Determine the Objective
3. Identify Possible Solution
4. Select the Best Possible Solution
5. Implement the Decision
6. Hit the GOAL
Management Decision Problems

Tools and Techniques of Analysis
Numerical Analysis
Statistical Estimation
Forecasting
Game Theory
Optimization
Simulation
Decision Sciences
Globalization of Economic Activity
Global Demand
Global Supply
Internet
WTO

International Framework of
Managerial Economics
Demand Estimation
Demand Forecasting
Consumer Perspective & Supply
Pricing Decisions
Decisions related to Production &
Warehouse inventory
Cost Minimization & Optimum use of
Resources
Understanding Competition in various
Markets & Pricing


Some Applications