Basic Concepts and Principles

What is Economics?
Brief history of evolution of thought
•Adam Smith (1776): (also called ‘father of economics’)
– Only economic aspects, study of wealth of nations
– All decisions governed by economic rationale
– No scope of emotions
•Alfred Marshal (1920):
– study of man and material
– Introduced normative aspects
•Lionel Robbins (1932):
– science of choice
– Resources are scarce but wants are unlimited
 What is Economics?

• Scientific study of the choices made by

individuals and/ or societies; with regard to
the alternative uses of scarce resources;
employed to satisfy human wants; while
keeping in mind the objective to achieve
equilibrium.
Fundamental economic problems
• What to produce?
• How to produce?
• For whom to produce?
• Are resources used economically?
• Are resources fully employed?
• Is the economy growing?
 Economic Units
Value

Goods and
services
Producer Exchange Consumer
Price

Value
 Managerial Economics

• Application of economic theory and the tools of analysis of

decision science to examine how an organisation can achieve
its objectives most effectively.
• Study of allocation of the limited resources available to a firm
or other unit of management among the various possible
activities of that unit.
• Application of economic principles and methodologies to the
decision-making process within the firm or organization
 Managerial Economics
Characteristics
• Basically micro analysis;
– dealing with the study of the behaviour of economic units
– Affected by macro environment
• Decisions are short run as well as long run
– Depends upon objectives
• Normative nature
– What ought to be done
• Generally, Partial equilibrium analysis
– Equilibrium of the firm or of a division of a corporate
 Basic Assumptions

• Ceteris Paribus
– Latin phrase, meaning:
– “With other things (being) the same” or
– “all other things being equal”.
– Applicable for short run decisions
• Rationality
– All economic units take rational decisions
– Consumers maximize utility subject to given money
income.
– Producers maximize profit subject to given resources or
minimize cost subject to target return.
 Economic Principles Relevant to
Managerial Decisions

• Concept of scarcity
– Unlimited human wants
– Limited resources available to satisfy such wants
– Problem of choice to ensure best use of
resources
• Prioritise wants
• Select resources
 Economic Principles Relevant to
Managerial Decisions
• Concept of opportunity cost
– Opportunity cost is the benefit forgone from the
alternative that is not selected.
– One resource may satisfy multitude of wants
• Pick the most suitable combination
– Helps in making rational choices in all aspects of
business, since resources are scarce and wants
are unlimited
 Economic Principles Relevant to
Managerial Decisions

• Concept of Margin or Increment

– Marginality: a unit increase in cost or revenue or
utility.
– Incremental: applied when the changes are in bulk,
say 10% increase in sales.
 Economic Principles Relevant to
Managerial Decisions
• Discounting Principle
– Time value of money : Value of money depreciates
with time
1
PVF = (1  r) n
where :
PVF = Present Value of Funds
n = Period (year, etc.)
r = Rate of discount : interest rate/cost of
capital/expected rate of return
 Managerial Economics and Functions of
Management
Contd…

• Financial Management
– From where to collect resources
• Equity
• Debt
– How to allocate resources
– How much profit to be retained/distributed
 Managerial Economics and Functions of
Management

• Marketing Management
– Which product
– For whom
– What price
– How to sell
 For whom to produce?
Baby Steps for Baby Food
The market for infant food in India has been showing signs of
healthy growth, with an estimated figure of 125-150 million
children under the age of four years. Demand for infant food has
been increasing with rising number of working women and
growing awareness about the importance of nutritious food for
children. These factors have been pushing dairies like Prabhat,
Danone India and Schreiber Dynamix to foray into growing infant
food products. Some of them have already established dedicated
production facilities for this segment.

•(Kulshrestha, A. Dairies take baby steps into growing infant food products, The
Economic Times, Jamshedpur-Ranchi, Monday, February 20, 2017, p. 6.)
 Managerial Economics and Functions of
Management
Contd…

• Human Resource Management

– Division of work /departmentalization
– Recruitment
– Wage and Salary
– Training and development
– Retirement
 Managerial Economics and Functions of
Management

• Operations Management
– Which technology
– Inputs
– Processing
• Information System Management
– Communication channels
– Use of information Technology
 Economic Theory
Microeconomics Quantitative Analysis
Theory of consumer behaviour (demand) Numeric and algebraic analysis
Production and cost theory (supply) Optimization
Market structure and competition Discounting and time value of money
Price theory techniques
Macroeconomics Statistical estimation and forecasting
National income and output Game theory
Business cycle and Inflation
International Business

Managerial Economics

Solutions to Managerial Decision Making

Quantity and quality of product
Price of product
Marketing Management
Financial Management
Operations management
Human Resource Management
Research and Development