CONCEPTS IN ECONOMICS

Definition
Definition of the subject comes from the

economist Lionel Robbins, who said in 1935 that

"Economics is a social science that studies

human behaviour as a relationship between ends and scarce means which have alternative uses. That is, economics is the study of the trade-offs involved when choosing between alternate sets of decisions."

Basic economic problem

The basic economic problem is about scarcity and choice since there are only a limited amount of resources available to produce the unlimited amount of goods and services we desire.

All societies face the problem of having to decide:

What goods and services to produce How best to produce goods and services Who is to receive goods and services

Economic Systems
Traditional economy
Free market economy Planned or command economy Mixed economy

Economics

Microeconom ics

Macroeconomi cs

Microeconomics

Utility
The term utility refers to the want satisfying power or

capacity of a commodity or service., assumed by the consumer to constitute his demand for that commodity or service. Utility is a subjective term. Utility is a relative term. It depends on time and place. Utility has no moral or ethical consideration. Consumers experience diminishing utility as they increase their consumption.

Total utility and marginal utility

Production

Production refers to the output of goods and services produced by businesses within a market. This production creates the supply that allows our needs and wants to be satisfied. To simplify the idea of the production function, economists create a number of time periods for analysis.

 Short run production

The short run is a period of time when there is at

least one fixed factor input. This is usually the capital input such as plant and machinery and the stock of buildings and technology. In the short run, the output of a business expands when more variable factors of production (e.g. labour, raw materials and components) are employed.
Long run production
In the long run, all of the factors of production can

change giving a business the opportunity to increase the scale of its operations. For example a business may grow by adding extra labour and capital to the

Costs of production
Costs are defined as those expenses faced by a

business when producing a good or service for a market. Every business faces costs and these must be recouped from selling goods and services at different prices if a business is to make a profit from its activities. In the short run a firm will have fixed and variable costs of production. Total cost is made up of fixed costs and variable costs

opportunity cost

The opportunity cost of an item is

what you give up to obtain that item.

It arises due to scarcity of

resources.

Market
A market is a group of buyers and sellers of a particular good or service. The buyers as a group determine the demand for the product and the sellers as a group determine the supply of the product.
Perfect Competition Monopolistic competition

Oligopoly
Monopoly

Equilibrium
The word equilibrium means equal balance. Equilibrium denotes in economics absence of

change in movement.
When demand and supply are equal at a

particular price, it is the state of equilibrium.

Equilibrium

 Partial equilibrium: Partial equilibrium also

known microeconomic analysis is a study of the equilibrium position of an individual , a firm, an industry or a group of industries viewed in isolation General equilibrium: General equilibrium is an extensive study of a number of economic variables , their interrelationship, for understanding the working of the economic system as a whole. It helps to understand the working of the economic system.

Margin
Marginal changes are small, incremental

adjustments to an existing plan of action

Marginal changes in costs or benefits motivate

people to respond. The decision to choose one alternative over another occurs when that alternatives marginal benefits exceed its marginal costs.

Managerial economics
Managerial economics involves application of

economic principles to the future of the firm or business enterprise.

According to McNair and Meriam, Managerial

economics consists of the use of economic modes of thought to analyze business situations.

Characteristics
It is mainly a study of a business enterprise It is concerned with microeconomic concepts It is concerned with decision making of an

economic nature. It takes the help of statistical tools to find numerical values of economic parameters It is useful for prediction It uses macroeconomic factors in determining business strategies

Scope of managerial economics

1) Theory of demand and demand forecasting

2) Pricing
3) Cost analysis 4) Resource allocation 5) Profit analysis 6) Investment analysis 7) Strategic planning 8)Business Environment

Economic theory and managerial economics

1) Opportunity cost

2) Elasticity of demand
3) Revenue concepts 4) Production function 5) Demand theory 6) Fiscal and monetary policies 7) Theory of international trade 8) National income 9) Business cycles

Specific role of Managerial economist

Sales forecasting
Market research Economic analysis of competitors Pricing Capital projects Production