Chapter 1 Introduction to Managerial Economics.ppt
- 1. MANAGERIAL ECONOMICS MANAGERIAL ECONOMICS By By DR. JONARDAN KONER DR. JONARDAN KONER PROFESSOR PROFESSOR Dean - CAREER SERVICES, INTERNATIONAL AFFAIRS & ALUMNI RELATIONS Dean - CAREER SERVICES, INTERNATIONAL AFFAIRS & ALUMNI RELATIONS NICMAR UNIVERSITY, PUNE. NICMAR UNIVERSITY, PUNE.
- 2. INTRODUCTION INTRODUCTION • Economics is the study of how economic agents or societies choose to use scarce productive resources that have alternative uses to satisfy wants which are unlimited and of varying degrees of importance. • The main concern of economics is economic problem: its identification, description, explanation and solution. • The source of any economic problem is scarcity. • Scarcity of resources forces economic agents to choose among alternatives. • Therefore, economic problem can be said to be a problem of choice and valuation of alternatives. • The problem of choice arises because limited resources with alternative uses are to be utilized to satisfy unlimited wants, which are of varying degrees of importance.
- 3. INTRODUCTION INTRODUCTION • Scarcity is a relative concept. • It can be define as excess demand, i.e., demand more than the supply. • For example, unemployment is essentially the scarcity of jobs. Inflation is essentially scarcity of goods. • Economics is essentially the study of logic, tools and techniques of making optimum use of the available resources to achieve the ends. • Economics thus provides analytical tools and techniques that managers need to achieve the goals of the organization they manage. • The job of any efficient manager is of economic one.
- 4. INTRODUCTION INTRODUCTION • Decision-making is the main job of management. • Decision-making involves evaluating various alternatives and choosing the best among them. • For example, a marketing manager is to allocate his / her advertising budget among various media in such a way so as to maximize the reach. • Managers are essentially practicing economists. • In performing his/her functions, a manager has to take a number of decisions in conformity with the goals of the firm. • Many business decisions are taken under the condition of uncertainty and risk.
- 5. INTRODUCTION INTRODUCTION • Uncertainty and risk arise mainly due to uncertain behavior of the market forces, changing business environment, emergence of complexity of the modern business world, external influence on the domestic market, social and political changes in the country. • The complexity of the modern business world adds complexity to business decision-making. • However, the degree of uncertainty and risk can be greatly reduced if market conditions are predicted with a high degree of reality. • With the growing complexity of business environment, the usefulness of economic theory as a tool of analysis and its contribution to the process of decision-making has been widely recognized.
- 6. BRANCHES OF ECONOMICS BRANCHES OF ECONOMICS • MICROECONOMICS • Adam Smith is the founder of the field of Microeconomics, the branch of economics which today is considered with the behavior of individual entities such as markets, firms and households. • In ‘The Wealth of Nations’ (1776), Smith considered how individual prices are set, studied the determination of price of land, labor, and capital, and enquired into the strengths and weakness of the market mechanism. • He identified the most important efficiency properties of markets and saw that economic benefit comes from the self- interested actions of individuals. These remain important issues today also.
- 7. • MACROECONOMICS • Macroeconomics started its journey when John Maynard Keynes published his revolutionary ‘General Theory of Employment, Interest and Money’ (1936). • It studies of the overall performance of the economy. • At the time, England and USA were still stuck in the Great Depression of the 1930s, with over one-quarter of the American labor force unemployed. • In his new theory, Keynes developed an analysis of what causes business cycles, with alternative spells of high unemployment and high inflation. • Now, macroeconomics examines a wide variety of areas, such as how total investment and consumption are determined, how central banks manage money and interest rates, what causes international financial crisis, and why some nations grow rapidly while others stagnate. BRANCHES OF ECONOMICS BRANCHES OF ECONOMICS
- 8. BASIC BASIC CONCEPTS CONCEPTS • Every economy faces three fundamental questions in its functioning. These are: • What goods and services are to produce and in what quantity? • How to produce those goods and services? i.e., how the scarce resources are optimally allocated? • How the goods and services so produced are distributed among the households? • The nature of an economic system depends on how the above questions are resolved and who coordinates the decisions of millions of economic agents. • At the two extremes are the Market and Command Economies. • In between lies the widely prevalent Mixed Economy, which is a mixed of command and Market Economies.
- 9. • Market Economy: • In a market economy, demand determines what goods and services are to be produced and how much of each good and services to be produced. • Consumers are assumed to act in a rational manner so as to maximize their economic welfare. • They spend their income on various products in such a way so as to maximize their economic welfare. • Demand as given condition, the firms decide how to produce the required goods and services in a most efficient manner so as to maximize their profits. • This results in optimum allocation of scarce resources. • After that, the firms finalized that how the goods and services are distributed for resolving the ownership pattern of factor inputs and factor prices. TYPES OF ECONOMY TYPES OF ECONOMY
- 10. TYPES OF ECONOMY TYPES OF ECONOMY • Command Economy: • A command mechanism is a method of determining what, how, when, where and for whom goods and services are produced, using a hierarchical organization structure in which people carry out the instructions given to them. • The best example of a hierarchical organization structure is the military in India. • Commanders make decisions requiring actions that are passed down a chain of command. • Soldiers and mariners on the front line take the actions they are ordered. • The examples of command economies are the former Soviet Union and the former communist nations of Eastern Europe. • A command economy differs from a market economy in two important ways.
- 11. TYPES OF ECONOMY TYPES OF ECONOMY • Firstly, in a command economy the state owns all the productive resources, like land, factories, financial institutions, retail stores, and the bulk of the housing stock. • Government enterprises and government ownership of resources are the rule rather than the exception in a command economy. • Secondly, in a command economy, authoritarian methods are used to determined resource use and prices. • A centrally planned economy is one in which politically appointed committees plan production by setting target outputs for factory and enterprise managers are manage the economy to achieve political objectives.
- 12. TYPES OF ECONOMY TYPES OF ECONOMY • Mixed Economy: • Most of the real world economies are mixed economy. • It is an economy that follows both the market and command mechanism. • In most of the modern countries, governments control many resources and criteria other than personal gain and business profit are used to decide how resources will be employed. • Most of modern nations have a government firms as well as private enterprises to provide goods and services for the country. • In such a country, government provides roads, defense, pensions and sometimes education. • In modern mixed economies, governments intervene the markets to control prices and correct the shortcomings of a system in which prices and the pursuit of personal gain influence resource use and incomes.
- 13. BASIC CONCEPTS AND PRINCIPLES BASIC CONCEPTS AND PRINCIPLES • MARGINALISM • The root cause of all economic problems is scarcity. So, all should be careful about the utilization of each and every additional unit of resources. • In order to decide whether to use an additional unit of resource you need to know the additional output expected there from. • Economists use the term marginal for such additional magnitude of output. • Marginalism concept will help to know the additional output expected from an additional unit of resource. • Therefore, marginal output of labor is the output produced by the last unit of labor.
- 14. BASIC CONCEPTS AND PRINCIPLES • OPPORTUNITY COST • Economic decision is choosing the best alternative among available alternatives. • Before choosing best alternative you rank them all based on their priority and probable return. • This choice implies sacrificing the other alternatives. • The cost of this choice can be evaluated in terms of the sacrificed alternatives. • If the best alternative was not chosen then you could have chosen the second best alternative. • So, the cost of this particular best choice is the benefit of the next best alternative foregone. • This is called Opportunity Cost.