Narsee Monjee Institute of Management Studies

NMIMS University

Introduction:
Micro Economics for Managers

Dipankar De
Mumbai, July 2007

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Economics & Economic Analysis

• What do you mean by Economics?

• A simple definition of economics: “It is a science of making
decision in the presence of scarce resources”.
• Economic analysis evolves from basic propositions about
how individual human beings (or individual economic agents)
behave, in respect of the problem of scarcity, and reacts to
an observed change.
• The purpose of economic activities is to satisfy maximum
possible ends by sacrificing minimum possible resources.

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 Managerial Economics

• Managerial economics is the study of how to direct resources in

the way that most efficiently achieve a managerial role.

• Managerial economics deals with the concepts and analysis of

demand, cost, profit, competition and so on, that are
appropriate for decision making

• Business Economics is more comprehensive and broad based

than Managerial Economics

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 Business Economics

• Business Economics attempts to indicate how business

policies are firmly rooted in economic principles.

• It takes a pragmatic approach towards facilitating integration

between economic theory (principles) and business practices
(policies).

• Business economics uses microeconomic analysis of the

business unit, and macroeconomic analysis of the business
environment. Thus, Business Economics can simply be
viewed as the application of economics for the analysis of
business.
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Economics & Business

• Business is an economic activity.

• Each business essentially performs the task of transforming a set of inputs

into output. This transformation is, in fact, the essence of economic
activity.

• In a business, a manager is a person who directs resources to achieve

certain stated goal(s). These goals/ objectives of a manager are stated
below:
–Maximization of the value of the firm (profit maximization)
–Market share maximization
–Maximization of sales revenue
–Growth maximization
–Maximization of own benefits
–Maximization of shareholder value, etc.
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Role of Managerial Economics in Managerial
Decision Making

Business Management
Decision Problems

Traditional Economics: Decision Sciences Tools

Theory & Methodology & Techniques of analysis

Managerial Economics

Application of Economic
theory & Methodology to
solve business problems

Optimal Solution to
Business Problems
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What is Macroeconomics?

• Macroeconomics is the study of aggregates

• Macroeconomics is concerned with the behaviour of the economy
as a whole – with booms & recessions, economy’s total output of
goods & services, the growth of output, the rate of inflation &
unemployment, the balance of payments, & exchange rates

• Macroeconomics deals with the long-run economic growth and

with the short-run fluctuations that constitute the business cycles

Macroeconomics is a policy-oriented part of economics. The subject

matter of Macroeconomics includes factors that determine both the
level of these variables and how the variables change over time.
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Focus of Macroeconomics

• Macroeconomics focuses on the economic behaviour &

policies that affect
– Consumption & investment
– Trade balance (exports – imports)
– Currency & exchange rates
– Determinants of changes in wages & prices
– Money, interest rates & Monetary policy
– Taxation, union budget, Govt. deficit, govt. debt & Fiscal policy
– Etc..

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Central Issues in Macroeconomics?

• Three central issues addressed by Macroeconomics are:

1. How do we explain periods of high & persistent

unemployment ?

1. How do we explain periods of inflation ?

1. What determines economic growth ?

Another important issue: Should the govt. fix exchange rates or

should exchange rates be market determined ?

Non exhaustive list of macroeconomic research 9agenda…

 3 Co-ordination Tasks of a Firm/
Economy

• Allocation of resources refers to the society’s decisions on

how to divide up its scarce input resources among the
different outputs produced in the economy and among
different firms or other organisations that produce those
output
• Society, at large, faces three sorts of decisions:

1. It must figure out “how to utilise its resources efficiently”

2. It must decide “which of the possible combinations of goods to
produce”
3. It must decide “how much of the total output of each good to
distribute to each person”
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Economic Fundamentals
- An Integrated Perspective

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Framework

Policy/
Macro economic
Regulatory
scenario ECONOMIC scenario
ENVIRONMENT

Operating Activities
FIRM’S BUSINESS Investment Activities
ACTIVITIES Financing Activities

OWN BUSINESS
STRATEGY
Corporate Business
Strategy Strategy

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Framework

Policy/
Macro economic International
Regulatory
scenario ECONOMIC & Domestic
scenario
ENVIRONMENT
National Income Domestic macro
Accounts policy
•Real Sector • Fiscal Policy
•Monetary Sector • Monetary Policy
•Financial Sector FIRM’S BUSINESS Industrial policy
ACTIVITIES
Macro Aggregates
• Inflation Trade policy
• Interest rate
• Exchange rate

OWN BUSINESS
STRATEGY
Corporate Business
Strategy Strategy

Vertical integration
Diversification
Cost leadership
Mergers & Acquisitions
Product differentiation
International strategies
Tacit collusion
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Scarcity and Choice

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Scarcity and Choice

• One of the basic themes of economics is scarcity: the fact that resources
are scarce/ limited in supply.

• Choices must be made among a limited set of possibilities, implying that a

decision to have more of one thing means that we will have less of
something else.

• Hence, the relevant cost of any decision is its opportunity cost – the
value of the next best alternative that is given up.

• The opportunity cost of any decision is the value of the next best
alternative that the decision forces the decision maker to forgo.

• It does not apply only to individual consumer choices at the micro level,
but also to community choices at the macro level
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 Scarcity and Choice

A Macro level example

• The decision to produce additional cars, and therefore, to
produce fewer refrigerators.
– Although the production of car may cost Rs X per vehicle, its real cost
to society is the number of refrigerators that society must forgo to get an
additional car. In other words, if the labour, steel and energy needed to
manufacture a car are sufficient to make 30 refrigerators, the opportunity
cost of a car is 30 refrigerators.

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 Scarcity and Choice

A Micro level example

• What would I have been doing if I was not teaching before you?
– I would have taken a rest, went out on a trip, hang out with friends, etc.
Instead, I am teaching here and getting paid Rs. X per hour/lecture. Therefore,
the opportunity cost of my sitting idle is Rs. X and the relevant benefits and
satisfaction.
–Therefore, I have taken a rational decision in accepting the assignment!

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