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MICROECONOMICS NOTES

UNIT-1 NATURE OF ECONOMICS


Under this, we generally discuss whether Ecn!ics is
science r art r "th and i# it is a science whether it is a
$siti%e science r a nr!ati%e science r "th&
Ecn!ics - As a science and as an art' O#ten a (uestin
arises - whether Ecn!ics is a science r an art r "th&
)a* Ecn!ics is a science' A su"+ect is cnsidered
science i# It is a syste!atised "dy # ,nwledge which
studies the relatinshi$ "etween cause and e-ect& It is
ca$a"le # !easure!ent& It has its wn !ethdlgical
a$$aratus& It shuld ha%e the a"ility t #recast& I# we
analyse Ecn!ics, we .nd that it has all the #eatures #
science& /i,e science it studies cause and e-ect
relatinshi$ "etween ecn!ic $hen!ena& T
understand, let us ta,e the law # de!and& It e0$lains the
cause and e-ect relatinshi$ "etween $rice and de!and
#r a c!!dity& It says, gi%en ther things cnstant, as
$rice rises, the de!and #r a c!!dity #alls and %ice
%ersa& 1ere the cause is $rice and the e-ect is #all in
(uantity de!anded& Si!ilarly li,e science it is ca$a"le #
"eing !easured, the !easure!ent is in ter!s # !ney&
It has its wn !ethdlgy # study )inductin and
deductin* and it #recasts the #uture !ar,et cnditin
with the hel$ # %arius statistical and nn-statistical
tls& 2ut it is t "e nted that Ecn!ics is nt a $er#ect
science& This is "ecause Ecn!ists d nt ha%e uni#r!
$inin a"ut a $articular e%ent& The su"+ect !atter #
Ecn!ics is the ecn!ic "eha%iur # !an which is
highly un$redicta"le& Mney which is used t !easure
utc!es in Ecn!ics is itsel# a de$endent %aria"le& It is
nt $ssi"le t !a,e crrect $redictins a"ut the
"eha%iur # ecn!ic %aria"les& )"* Ecn!ics is an art'
Art is nthing "ut $ractice # ,nwledge& 3hereas science
teaches us t ,nw art teaches us t d& Unli,e science
which is theretical, art is $ractical& I# we analyse
Ecn!ics, we .nd that it has the #eatures # an art als&
Its %arius "ranches, cnsu!$tin, $rductin, $u"lic
.nance, etc& $r%ide $ractical slutins t %arius
ecn!ic $r"le!s& It hel$s in sl%ing %arius ecn!ic
$r"le!s which we #ace in ur day-t-day li#e& Thus,
Ecn!ics is "th a science and an art& It is science in its
!ethdlgy and art in its a$$licatin& Study #
une!$ly!ent $r"le! is science "ut #ra!ing suita"le
$licies #r reducing the e0tent # une!$ly!ent is an
art&
SCO4E OF MANA5ERIA/ OR 2USINESS ECONOMICS
Managerial ecn!ics is a de%el$ing science which
generates the cuntless $r"le!s t deter!ine its sc$e
in a clear-cut way& Fr! the #llwing .elds, we can
e0a!ine the sc$e # "usiness ecn!ics&
1& 6e!and analysis and #recasting&
The #re!st as$ect regarding sc$e is de!and
analysis and #recasting& A "usiness .r! is an
ecn!ic unit which trans#r!s& $rducti%e
resurces int salea"le gds& Since all ut$ut is
!eant t "e sld, accurate esti!ates # de!and hel$
a .r! in !ini!ising its csts # $rductin and
strage& A .r! !ust decide its ttal ut$ut "e#re
$re$aring its $rductin schedule and deciding n
the resurces t "e e!$lyed& 6e!and #recasts
ser%es as a guide t the !anage!ent #r
!aintaining its !ar,et share in c!$etitin with its
ri%als, there"y securing its $r.t&

7& Cst and $rductin analysis&
A .r!8s $r.ta"ility de$ends !uch n its csts
# $rductin& A wise !anager wuld $re$are cst
esti!ates # a range # ut$ut, identi#y the #actrs
causing %ariatins in csts and chse the cst-
!ini!ising ut$ut le%el, ta,ing als int
cnsideratin the degree # uncertainty in $rductin
and cst calculatins& 4rductin $rcess are under
the charge # engineers "ut the "usiness !anager
wr,s t carry ut the $rductin #unctin analysis in
rder t a%id wastages # !aterials and ti!e& Sund
$ricing $licies de$end !uch n cst cntrl& The
!ain t$ics discussed under cst and $rductin
analysis are' Cst cnce$ts, cst-ut$ut
relatinshi$s, Ecn!ies and 6isecn!ies # scale
and cst cntrl&

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:& 4ricing decisins, $licies and $ractices&
Anther tas, "e#re a "usiness !anager is the
$ricing # a $rduct& Since a .r!8s inc!e and $r.t
de$end !ainly n the $rice decisin, the $ricing
$licies and all such decisins are t "e ta,en a#ter
care#ul analysis # the nature # the !ar,et in which
the .r! $erates& The i!$rtant t$ics c%ered in
this .eld # study are ' Mar,et Structure Analysis,
4ricing 4ractices and 4rice Frecasting&
;& 4r.t !anage!ent&
Each and e%ery "usiness .r!s are tended #r
earning $r.t, it is $r.t which $r%ides the chie#
!easure # success # a .r! in the lng $erid&
Ecn!ists tells us that $r.ts are the reward #r
uncertainity "earing and ris, ta,ing& A success#ul
"usiness !anager is ne wh can #r! !re r less
crrect esti!ates # csts and re%enues at di-erent
le%els # ut$ut& The !re success#ul a !anager is in
reducing uncertainity, the higher are the $r.ts
earned "y hi!& It is there#re, $r.t-$lanning and
$r.t !easure!ent cnstitute the !st challenging
area # "usiness ecn!ics&
<& Ca$ital !anage!ent&
Still anther !st challenging $r"le! #r a
!dern "usiness !anager is # $lanning ca$ital
in%est!ent& In%est!ents are !ade in the $lant and
!achinery and "uildings which are %ery high&
There#re, ca$ital !anage!ent re(uire t$- le%el
decisins& It !eans ca$ital !anage!ent i&e&,
$lanning and cntrl # ca$ital e0$enditure& It deals
with Cst # ca$ital, Rate # Return and Selectin #
$r+ects&
=& In%entry !anage!ent'
A .r! shuld always ,ee$ an ideal(uantity #
stc,& I# the stc, is t !uch, the ca$ital
isunnecessarily lc,ed u$ in in%entries At the sa!e
ti!e i# thele%el # in%entry is lw, $rductin will "e
interru$ted due t nn-a%aila"ility # !aterials&
1ence, a .r! always $re#ers t ha%e an$ti!u!
(uantity # stc,& There#re, !anagerial ecn!ics
willuse s!e !ethds such as A2C analysis,
in%entry !dels witha %iew t !ini!ising the
in%entry cst

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This law can "e e0$lained "y ta,ing a %ery
si!$lee0a!$le& Su$$se, a !an is %ery thirsty& 1e ges
t the!ar,et and "uys ne glass # sweet water& The
glass #water gi%es hi! i!!ense $leasure r we say the
.rstglass # water has great utility #r hi!& I# he ta,es
secndglass # water a#ter that, the utility will "e less
than that #the .rst ne& It is "ecause the edge # his
thirst has "een"lunted t a great e0tent& I# he drin,s third
glass # water,the utility # the third glass will "e less
than that # secndand s n&The utility ges
n di!inishing with the cnsu!$tin #e%ery successi%e
glass water till it dr$s dwn t >er&
This is the point of satiety. It is the position of consumers
e(uili"riu! r !a0i!u! satis#actin& I# the cnsu!er
is#rced #urther t ta,e a glass # water, it leads t
disutilitycausing ttal utility t decline& The !arginal
utility will"ec!e negati%e&
Schedule # /aw # 6i!inishing Marginal Utility'

Units Ttal Utility Marginal Utility1st glass 7? 7?7nd glass
:7 17:rd glass ;? @;th glass ;7 7<th glass ;7 ?=th glass
:A -:Fr! the a"%e ta"le, it is clear that in a gi%en s$an
#ti!e, the .rst glass # water t a thirsty !an gi%es 7?
units# utility& 3hen he ta,es secnd glass # water, the
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!arginal utility ges n dwn t 17 unitsB 3hen
hecnsu!es .#th glass # water, the !arginal utility
dr$sdwn t >er and i# the cnsu!$tin # water is
#rced#urther #r! this $int, the utility changes int
disutility )-:*&Cur%e96iagra! # /aw # 6i!inishing
Marginal Utility'The law # di!inishing !arginal utility can
als "ere$resented "y a diagra!& Assu!$tins # /aw #
6i!inishing Marginal Utility'The law # di!inishing
!arginal utility is true under certainassu!$tins& These
assu!$tins are as under')i* Ratinality' In the cardinal
utility analysis , it is assu!edthat the cnsu!er is ratinal&
1e ai!s at !a0i!i>atin #utility su"+ect t a%aila"ility #
his inc!e&)ii* Cnstant !arginal utility # !ney' It is
assu!ed in thethery that the !arginal utility # !ney
"ased #r

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$urchasing gds re!ains cnstant& I# the !arginal
utility# !ney changes with the increase r decrease
ininc!e, it then cannt yield crrect !easure!ent #
the!arginal utility # the gd&)iii* 6i!inishing !arginal
utility' Anther i!$rtantassu!$tin # utility analysis is
that the utility gained #r!the successi%e units #
a c!!dity di!inishes in a gi%enti!e $erid&)i%* Utility
is additi%e' In the early %ersins # the thery #cnsu!er
"eha%ir, it was assu!ed that the utilities #di-erent
c!!dities are inde$endent& The ttal utility #each
c!!dity is additi%e&U C U
1
)D
1
* E U
7
)D
7
* E U
:
)D
:
). U
n
)D
n
*)%* Cnsu!$tin t "e cntinuus' It is assu!ed in
thislaw that the cnsu!$tin # a c!!dity shuld
"ecntinuus& I# there is inter%al "etween the
cnsu!$tin #the sa!e units # the c!!dity, the law
!ay nt hldgd& Fr instance, i# yu ta,e ne glass
# water in the!rning and the 7nd at nn, the !arginal
utility # the7nd glass # water !ay increase&)%i* Suita"le
(uantity' It is als assu!ed that thec!!dity cnsu!ed
is ta,en in suita"le and reasna"leunits& I# the units are
t s!all, then the !arginal utilityinstead # #alling !ay
increase u$ t a #ew units&)%ii* Character # the cnsu!er
des nt change' The lawhlds true i# there is n change
in the character # thecnsu!er& Fr e0a!$le, i# a
cnsu!er de%el$s a taste