Introduction to Economics

Module 1:

Introduction:
Managerial economics as defined by Edwin Mansfield is "concerned with application of economic concepts and economic analysis to the problems of formulating rational managerial decision. It is sometimes referred to as business economics and is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units. As such, it bridges economic theory and economics in practice. Managerial economics to a certain degree is prescriptive in nature as it suggests course of action to a managerial problem. Problems can be related to various departments in a firm like production, finance, accounts, sales, marketing etc. Questions regarding DEMAND DECISIONS AND PRODCTION DECISIONS can be answered. Production decisions such as; What to produce? How to produce? How much to produce? For whom to produce?

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The following figure tells the primary ways in which Managerial Economics correlates to managerial decision-making.

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Managerial Economics is essentially applied economics in the field of business management. In particular, it is the study of allocation of resources available to a business firm or an organization. Managerial Economics in the true sense is the integration of economic principles with business management practices. It is also an evolutionary science, in the sense, it is a journey with continuous understanding and application of economic knowledge (theories, models, concepts) dealing with the emerging business solution and problems in a dynamic economy. Managerial Economics is a specialized discipline of management studies. This means, it pertains to the overlapping area of economics along with the tools of decision sciences such as mathematical economics, statistics and econometrics. There also exists a wide gap between theory and actual business practice. For instance, in economic theory, the firm identifies profit maximizing output by equating marginal revenue and marginal cost. But in actual practice this is not possible, because of constraints regarding resources. Thus, Managerial Economics attempts to bridge the gap between the purely analytical problems dealt within economic theory and decisions faced in real business.

Significance/Importance of ME:
Price and Output Decisions: Managerial economics plays a significant role in the price of output decisions. Using the various economic theories, cost concepts and their relation with output can be analyzed to predict the control or reduction in cost of commodities, etc. Demand Estimation: Managerial economics helps in the study of demand of the goods in the market, forecasting the demand for product launching or predicting the production and supply, etc. It also studies the elasticity of demand & plans the business strategies accordingly. Choice of a Technique of Production: Managerial Economics is concerned with the usage of scarce resources & its alternative uses so as to achieve maximum profit. Thus by using economic theories, techniques for production can be chosen for best results.

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Advertising Decision: Managerial Economics studies the demand of goods in the market, the cost of production and supply, etc. It also is aware of the price and demand elasticity of products. Using this knowledge, advertising budgets and strategies can be designed. Long Run Production decision: With the help of demand analysis and forecasting plans for long run production can be finalized. Investment Decision: Using the demand analysis and various forecasting techniques for estimation of demand and costs in the long run investment decisions can be taken.

Micro & Macro Economics:

Micro and macroeconomics are two major branches of modern economic theory. The terms were formulated by Ragnar Firsch in 1933. Derived from the Greek words, MIKROS and MAKROS which means small and large respectively. In other words, micro means individualistic and macro means aggregative.

MICROECONOMICS: Micro means a small part. Hence, the branch of economics which is concerned with the analysis of behaviour of the individual, economic units, or variables. According to Boulding, it is the study of particular firms, particular households, individual prices, wages, incomes, individual industries, particular commodities. It deals with individual decision making and the problem of resources allocation. It examines, in particular, as to how individual consumers and producers behave and how their behaviors interact. Microeconomic theory is often called the price theory or value theory. The subject matter fundamentally covers the following areas: 1. THEORY OF VALUE i.e. product and factor pricing. 2. THEORY OF ECONOMIC WELFARE.

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Importance and use of microeconomics: It explains price determination and the allocation of resources. It has direct relevance in business decision making. It serves as a guide for business/production planning. It serves as a basis for prediction. It teaches the art of economizing. It is useful in determination of economic policies of the government. It serves as the basis for welfare economics. It explains the phenomena of international trade. Limitations: Concept of marginalism. Unrealistic assumption of full employment. Over simplification. Pure capitalist model. Incomplete explanation and misleading generalization. Theories are abstract. Theories are static based on CETERIS PARIBUS i.e. assuming other things being equal. Studies only part, and not the whole economy and hence cannot explain the functioning as a whole.

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MACROECONOMICS: Macro means large. Thus, a branch of economics which deals with the aggregate behaviour of the economy as a whole. It makes the study of the economic system in general. It looks at the overall dimensions of economic affairs of a country. Hence, looking into the total size, shape and functioning of the economy as a whole. According to Marshal, macroeconomics views the forest as a whole, independently of the individual trees composing it. In macroeconomics, the study includes economy-wide variables like national income, total savings, total consumption, total investment etc
Importance: Explains the working of the economic system as a whole. Examines aggregate behaviour of macroeconomic entities like firms households and the government. Helps policy makers in formulating effective policies. Helps in the development of the country. Useful in international competition.

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Limitations: Ignores individual behavior altogether. Tendency of excessive generalization. It is not easy to get correct measures of economic aggregates, hence, lacks precision in actual practice. Macroeconomic predictions are not fully reliable when they are based to incomplete information or inaccurate measures. National income, price index are the only rough indicators. Often macro level policies may not produce the same results at micro levels.

Difference between PLANT/FIRM/INDUSTRY:

PLANT: Prof. Sargent Florence defines a plant as, a body of persons engaged in production or distribution at a given time and place, housed in contiguous buildings and controlled by a single firm. From the above definition the following characteristics can be understood: TECHNICAL UNIT: (farms/offices/shops/stores/warehouses) ENJOYS CONSIDERABLE AUTONOMY: BODY OF PERSONS WHO WORK AT A GIVEN TIME AND PLACE: CONTROLLED BY A SINGLE FIRM: THERE IS NO TECHNICAL SIMILARITY IN THE PRODUCTION PROCESSES OF GOODS PRODUCED WITHIN A PLANT:

FIRM: A FIRM MAY OWN ONE OR MORE THAN ONE PLANT: A FIRM EXERCISES A UNIFIED CONTROL OVER ITS PLANTS: A FIRM ORGANISES THE RESOURCES AND THE PLANS THEIR USES: A FIRM MAY BE UNITARY OR FEDERAL: A FIRM IS A SEPARATE LEGAL ENTITY: A FIRM IN ECONOMIC THEORY, UNDERTAKES PRODUCTION TO MAXIMISE PROFITS:

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INDUSTRY:
An industry is a group of firms, but it is not easy to decide what types of firms should be grouped together to make a particular industry. WHY??? There has to be some common factor among all the firms that make up an industry. Three such factors can be distinguished: The RAW MATERIALS used and the PRODUCTION TECHNIQUES employed are two such factors working on the supply side and the SIMILARITY AMONG THE PRODUCTS PRODUCED is a factor on the demand side. Thus, the firms making up an industry may be using the same raw materials or employing the same production process or producing similar goods. Thus, if raw material employed is taken as a criterion, then for instance a firm engaged in ship building would have to be included in the steel industry. On the other hand, if production process is taken as a criterion, a chip building firm would have to be included in the building industry. However, if similarity of goods produced is taken as a criterion, then all firms producing ships would have to be grouped together to make up a separate ship building industry. Which criterion would actually be used in practice would depend on the degree of competition among firms in each case.

Economic Growth and Economic Development:

What is the difference between the two concepts??????????? Various terms like economic growth, economic development, economic progress, economic upliftment, economic advancement etc. have are being used interchangeably, all implying a common meaning in a popular sense. In general growth and development are used synonymously, and the usage is widely accepted. However in particular, the two terms have been distinguished by different economists: To some economists, economic development refers to the process of expansion of backward economies, while economic growth relates to the that of advanced economies.

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Schumpeter, however uses the term economic development as a spontaneous and discontinuous change in the stationary state which disturbs the equilibrium state previously existing. And the term economic growth is used to denote a steady and gradual change in the long run which comes through a general increase in the rate of saving and population in a dynamic economy.
To some economic development is the outcome of conscious and deliberate efforts involved in planning. Economic growth on the other hand, signifies the progress of an economy under the stimulus of certain favorable circumstances. E.g. the progress achieved by the United Kingdom during Industrial Revolution. Economic development refers to the process of expansion which leads to a higher level of per capita real income over a long period of time. Thus, economic growth is the end result of this process.