Economicas for managers

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Economics for Mangers, Ten Principles of Economics, Demand and Supply.

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Economics For Managers: 

Economics For Managers Module 1

Out line. . . . .: 

Out line. . . . . Introduction Demand and supply The role of assumption The circular-flow diagram Production possibility frontier Equilibrium point Ten principle of economics

Introduction: 

Introduction Definition: Managerial economics is the science of directing scarce resources to manage cost effectively. Economics is the study of how society manages its scare resources.

Scope: 

Scope Microeconomics: The study of individual economic behavior How consumers respond to changes in prices and incomes, How businesses decide on employment, level of production and sales.

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Macroeconomics: The study of aggregate economic variables E.g., issues relating to interest and exchange rates, inflation, unemployment, import and export policies.

Need, Want And Demand: 

Need, Want And Demand Need: Is something that is ESSENTIAL for a living. A good or service that you need for survival. Examples: Shelter, clothing & clean water.

Cont. . . . .: 

Cont. . . . . Want: Is something that you would like to have but it is not essential for living. A good or a service that if you don't have it, you would still survive. Examples: Cars, laptops etc

Cont. . . . .: 

Cont. . . . . Demand: The amount of good that buyers are willing and able to purchase. Simply, it is something that you want to have plus the money for purchasing it . examples: Mobiles , a computer & or access to the internet.

Supply: 

Supply The amount of good that seller are willing to sell. Example: A seller of Laptop want to sell his laptop at the price of Rs. 30,000. there is a demand of the laptop at Rs. 30,000 then the seller is willing as well as capable of selling his product.

Positive vs. Normative statements : 

Positive vs. Normative statements Positive statements: claims that attempt to describe the world as it is. Normative statements: claims that attempt to prescribe how the world should be.

Positive vs. Normative statements : 

Positive vs. Normative statements Sanjay- minimum wage laws cause unemployment Manoj- the Govt. should raise the minimum wage . Difference between positive and normative statement Positive: can test their validity Normative: value judgment

Factors of Production: 

Factors of Production The basic resources that are available to a society are factors of production : Land Labor Capital

Circular flow diagram: 

Production is the process that transforms scarce resources into useful goods and services . Resources or factors of production are the inputs into the process of production; goods and services of value to households are the outputs of the process of production. Circular flow diagram

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Circular flow diagram

Production Possibility Frontier: 

Production Possibility Frontier The production possibilities frontier is a graph that shows the various combinations of output. An outcome is said to be efficient if the economy is getting all it can from the scarce resources it has available.

Scarcity: 

Scarcity Scarcity is the fundamental economic problem of having humans who have unlimited wants and needs in a world of limited resources. Goods (and services) that are scarce are called economic goods

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Absolute Advantage: It is the comparison among producers of a good according to their productivity. Comparative Advantage: It is the comparison among producers of a good according to their opportunity cost.

Ten Principles of Economics: 

Ten Principles of Economics How People Make Decision People face trade-offs The cost of something is what you give up to get it. Rational people think at margin People respond to incentives How people Interact Trade can make everyone better off Markets are usually a good way to organize Economic activity. Govt. can sometime improve market outcomes.

Cont. . . . . : 

Cont. . . . . How the Economy as a Whole Work A country’s standard of living is depends on its ability to produce goods and services. Prices rise when Govt. prints too much money. Society faces a short-run trade-off between inflation and unemployment

1. People face trade-offs : 

1. People face trade-offs Nothing is free Making decision require one goal against another. Example: A student can spent all his time studying economics or accounting. Or he can divide his time equally for both. The classic trade off is between “Guns and butter”.

Cont. . . . .: 

Cont. . . . . The trade-off between Efficiency and Equity. Efficiency: The society getting the maximum benefit from its scares resources. Equity: the property of distributing economic prosperity fairly among the members of society.

2. The cost of something is what you give up to get it.: 

2. The cost of something is what you give up to get it. Making decision require comparing cost and benefit of alternative courses of action. Example: Decision to go to college Opportunity cost The opportunity cost of an item is what you give up to get that item.

3.Rational people think at margin: 

3.Rational people think at margin Rational People: People who systematically and purposefully do the best they can to achieve their objectives. Marginal Changes: This are the small incremental adjustments to an existing plan of action.

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Example: An airline deciding how much to charge who fly. Suppose that flying a 200-seat plane across India costs the airline Rs.5,00,000. the average cost of each seat is Rs. 2500. Now imagine that plane is about to take off with ten empty seats and a passenger waiting at the gate will pay Rs. 1500 for a seat, Should the airline sell the ticket?

4. People respond to incentives: 

4. People respond to incentives Incentive: Incentive is something that induces a person to act. Example: Effect of price on behavior of buyers and sellers.

5. Trade can make everyone better off: 

5. Trade can make everyone better off Trade between two countries can make each country better off. Trade allows each person to specialize in the activities he or she does best.

6. Markets are usually a good way to organize Economic activity.: 

6. Markets are usually a good way to organize Economic activity. Communism In a market economy firm decide whom to hire and what to produce. Household decide which firms to work for and what to buy with their incomes. “Invisible hand”

7. Govt. can sometime improve market outcomes.: 

7. Govt. can sometime improve market outcomes. Market works only if property rights are enforced. The invisible hand does not ensure that everyone has sufficient food, decent clothing, and adequate healthcare. Market Failure is a situation in which the market on its own fails to produce an efficient allocation of resources.

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Externality is impact of one person’s action on the well being of a other. E.g. Pollution Market Power is the ability of a single person or a small group to unduly influence market prices.

8. A country’s standard of living is depends on its ability to produce goods and services.: 

8. A country’s standard of living is depends on its ability to produce goods and services. Productivity is, the amount of goods and services produced from each hour of a worker’s time. “The budget deficit was based largely on its adverse impact on productivity.”

9. Prices rise when Govt. prints too much money.: 

9. Prices rise when Govt. prints too much money. Inflation is an increase in the overall level of prices in the economy. Example: In Germany in January 1921, a daily newspaper cost 0.30 marks. Two years later, in November 1922, the same newspaper cost 70,000,000 marks.

10. Society faces a short-run trade-off between inflation and unemployment: 

10. Society faces a short-run trade-off between inflation and unemployment Phillips curve is a curve that shows the short-run tradeoff between inflation and unemployment Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 Inflation Rate 5.4 3.8 4.2 4.2 5.3 6.4 8.3 10.9 11.7 Unemployment Rate 8.8 9.5 9.2 8.9 7.8 7.2 6.8 10.7 10.8

Managerial Economics Defined: 

Managerial Economics Defined The application of economic theory and the tools of decision science to examine how an organization can achieve its aims or objectives most efficiently.

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Managerial Decision Problems Economic theory Microeconomics Macroeconomics Decision Sciences Mathematical Economics Econometrics MANAGERIAL ECONOMICS Application of economic theory and decision science tools to solve managerial decision problems OPTIMAL SOLUTIONS TO MANAGERIAL DECISION PROBLEMS

The Decision-Making Process: 

The Decision-Making Process Combines and organizes resources for the purpose of producing goods and/or services for sale. Internalizes transactions, reducing transactions costs. Primary goal is to maximize the wealth or value of the firm.

Theory of the Firm: 

Theory of the Firm Combines and organizes resources for the purpose of producing goods and/or services for sale. Internalizes transactions, reducing transactions costs. Primary goal is to maximize the wealth or value of the firm.

Value of the Firm: 

Value of the Firm The present value of all expected future profits

Alternative Theories: 

Alternative Theories Sales maximization Adequate rate of profit Management utility maximization Principle-agent problem Satisficing behavior

Definitions of Profit: 

Definitions of Profit Business Profit: Total revenue minus the explicit or accounting costs of production. Economic Profit: Total revenue minus the explicit and implicit costs of production. Opportunity Cost: Implicit value of a resource in its best alternative use.

Theories of Profit: 

Theories of Profit Risk-Bearing Theories of Profit Frictional Theory of Profit Monopoly Theory of Profit Innovation Theory of Profit Managerial Efficiency Theory of Profit

Function of Profit: 

Function of Profit Profit is a signal that guides the allocation of society’s resources. High profits in an industry are a signal that buyers want more of what the industry produces. Low (or negative) profits in an industry are a signal that buyers want less of what the industry produces.

Business Ethics: 

Business Ethics Identifies types of behavior that businesses and their employees should not engage in. Source of guidance that goes beyond enforceable laws.

The Changing Environment of Managerial Economics: 

The Changing Environment of Managerial Economics Globalization of Economic Activity Goods and Services Capital Technology Skilled Labor Technological Change Telecommunications Advances The Internet and the World Wide Web