1. WHAT IS
ECONOMICS?
1CHAPTER
© 2003 Pearson Education Canada Inc. 1-1

2. Origin of EconomicsOrigin of Economics
 Our activities to generate income are termed as
economic
activities, which are responsible for the origin and
development of Economics as a subject.
 Economy is concerned with the production, consumption,
distribution and investment of goods and services
Definitions of Economic
Wealth Definition(Adam Smith)
Welfare Definition ( Alfred Marshall)
Scarcity Definition ( L.Robbins)
Growth Definition ( Samuelson)

3. Wealth Concept :Adam Smith, who is
generally regarded as father of
economics, defined economics as “ a
science which enquires into the nature
and cause of wealth of nation”. He
emphasized the production and growth
of wealth as the subject matter of
econ

4. Welfare Concept :According to A. Marshall “Economics is aAccording to A. Marshall “Economics is a
study of mankind in the ordinary business of life; itstudy of mankind in the ordinary business of life; it
examines that part of individual and social action whichexamines that part of individual and social action which
is most closely connected with the attainment and withis most closely connected with the attainment and with
the use of material requisites of well being. Thus, it isthe use of material requisites of well being. Thus, it is
on one side a study of wealth; and on other; and moreon one side a study of wealth; and on other; and more
important side, a part of the study of man.important side, a part of the study of man.

5. Scarcity Concept : According to Lionel Robbins:
“Economics is the science which studies human behavior
as a relationship between ends and scarce means which
have alternate uses”
Characteristics of Scarcity Oriented Definition:
# Economics is a positive science.
# Unlimited ends ( wants ).
# Scarce means.
# Alternative use of means.
# Choice – study of human behavior

6. D. Growth/Development ConceptGrowth/Development Concept : According to Prof.: According to Prof.
Samuelson “Economics is the study of how men andSamuelson “Economics is the study of how men and
society choose with or without the use of money, tosociety choose with or without the use of money, to
employ the scarce productive resources which haveemploy the scarce productive resources which have
alternative uses, to produce various commodities overalternative uses, to produce various commodities over
time and distribute them for consumption now and intime and distribute them for consumption now and in
future among various people and groups of society.future among various people and groups of society.

7. Characteristics of Growth Oriented Definition:
# The definition is not merely concerned with the allocation of given
resources but also with the expansion of resources, tries to analyze
how the expansion and growth of resources to be used to cope with
increasing human wants.
# More dynamic approach.
# According to him problem of resource allocation is a universal
problem
#Definition is comprehensive in nature as it is both growth oriented
as well as future oriented.

8. 4. Economic Theory
Branches of economics:
a. Microeconomics: Concerned with the behavior of individual
entities such as markets, firms and households.
b. Macroeconomics: Concerned with the overall performance
of the economy. This concept came into being after 1935
when General Theory of Employment, Internet and Money
was published by John Maynard Keynes.
c. Econometrics: Applies the tools of statistics to economic
problems.

9. • Microeconomics is the study of individual units like
individual household, pricing of a firm, wages of a
worker, profit of an entrepreneur and so on.
• Definition: According to K.E. Boulding: “Microeconomics
is the study of particular firms, particular households,
individual prices, wages, incomes, individual industries,
particular commodities”

10. 5. Economics as Science
• Science is the relationship between causes and effects.
• Classification of Science :
a. Positive Science (What is? What was? What will be?) –
actual happenings.
Examples of Positive statements :
- India is an over-populated country.
- Prices in Indian economy are constantly rising.
b. Normative Science (What ought to be? What ought to
have been?)
Examples :
- Fundamental principle of economic development should
be the development of rural India
- Agricultural income should also be taxed.

11. Origin of Managerial Economics
 Like every other individual a manger of a business firm has to take
decisions in the face of scarcity and alternative uses of resources. In
fact success of a business firm largely depends upon the efficiency
in utilization of limited resources remaining in the disposal of the
business firm.
 managerial economics is evolved as an important tool kits which is
useful in the decision making for the manager.
 Due to wide recognition of the uses of economic theories in the
decision making of the business this subject is rich in literature in
these days.

12. Managerial economics is the discipline that deals with the application
of economic concepts, theories and methodologies to the practical
problems of businesses/firms in order to formulate rational
managerial decisions for solving those problems.
It uses the tools and techniques of Economic analysis to solve
managerial problems or to achieve the firm’s desired objective. It is
that branch of economics, which serves as a link between abstract
theories and managerial practices. It is based on economic analysis
for identifying problems, organizing information and evaluating
alternatives

13. Definition
Spencer and Seligman defined Managerial economics as
“The integration of economic theory and business
practice for the purpose of facilitating decision-making
and forward planning by management.”
Managerial economics is concerned with the ways in which managers
should make decisions in order to maximize the effectiveness or
performance of the organizations they manage.”
- Edwin Mansfield
• “Managerial economics is the application of economic
theory and methodology to business administration
practice.”
•
- Pappas and Brigham

14. From these ideas it can be concluded managerial economics
is the discipline, which deals with the application of
economic theory to business management. Thus it lies on
the borderline between economics and business
management and serves as a bridge between these two
disciplines.

15. Economics, Business Management
and Managerial Economics
Economics
Theory and
Methodology
Business
Management-
decision Problems
Managerial
Economics
-application of
economics to
solving business
problems
Optimal Solutions to
business problems

16. Distinction between Managerial Economics
and Traditional Economics
 Managerial economics concerns with the application of
economic principles to the problems of the firm but the
traditional economics deals with the body of principles
itself.
 Managerial economics is highly microeconomics in
character. It studies the problems of a firm but does
not study the macroeconomic phenomenon. But traditional
economics consist of both micro and macro economics.

17.  Traditional economics is a study of both firm and an
individual, whereas managerial economics is a study of
the problem of a firm only.
 Traditional economics studies human behavior on the
basis of certain assumptions, but these assumptions may
not be true in managerial economics because managerial
economics is concerned with practical problems.

18. Features of Managerial Economics
 Microeconomics character: - Managerial economics is
microeconomics in character because its unit of study is
firm. However, it always takes the help of
macroeconomics to understand and adjust to the
environment in which the firm operates.
 Managerial economics largely uses that body of
economic concepts and principles which is known as
Theory of the Firm

19.  Goal Oriented: - Managerial economics is goal-oriented
and prescriptive. It deals with how decisions should be
formulated by managers to achieve the organizational
goals.
 Pragmatic: - Managerial economics is more pragmatic
than traditional economics. Hence, it is called applied
microeconomics. It ignores the complex concepts of the
traditional economics

20.  Normative: - Managerial economics belongs to normative
economics rather than positive economics. Positive
economics studies economic behavior without making
judgments. Normative economics, on the other hand,
makes value judgments and prescribes what should be
done to solve economic problems.
 Macro-economics is also useful to Managerial Economics
since it provides an intelligent understanding of the
environment in which the business must operate.

21. Scope of Managerial Economics
a) Demand Analysis and Forecasting: - A major part of
managerial decision making depends on accurate
estimates of demand. Before production schedules can
be prepared and resources employed, forecast of future
sales is essential.
Demand analysis helps identify the various factors
influencing the demand for firm’s product.

22. Production and supply analysis - Production theory explains
the relationship between inputs and output. It also
explains under what conditions costs increase or
decrease; how total output behaves when use of inputs is
changed; and how can output be maximized from a given
quantity of resources. Thus, it helps the managers in
determining the size of the firm, and the amount of
capital and labour to be employed keeping in view the
objectives of the firm.

23. Market Structure and Pricing Theory: - Price theory
explains how prices of outputs and inputs are determined
under different market conditions; when price
discrimination is desirable, feasible and profitable; and
to what extent advertising can be helpful in expanding
sales in a competitive market. Hence, price theory can
be helpful in determining the price policy of the firm

24. Cost Analysis: - Estimates of cost are essential for
planning purposes. The factors determining costs are not
always known or controllable which gives rise to cost
uncertainty. Factors of production are scarce and they
have alternative uses. Factors of production may be
allocated in a particular way to get maximum output.
Thus the analysis of costs and their links to output are
also importance in managerial economics.

25. e) Profit and Capital Management (Investment Decisions):
- Profit provides the index of success of a business
firm. Profit analysis is difficult, because the
uncertainty of expectations makes realization of profit
planning and measurement difficult and these areas are
covered in the study of managerial economics.
• Capital management means planning and control of
capital expenditures. Hence, it is very important for a
firm to manage required capital through proper
investment planning. The main topics covered are: cost
of capital, types of investment decisions, and evaluation
and selections of investment projects.

26. Tools of Managerial Economics
1. Opportunity Cost Principle
2. Principle of Time Perspective
3. Discounting Principle
4. Incremental principle
5. Equi-marginal Principle

27. • What is the opportunity cost of you attending classes?
• Include all forgone options in your consideration.

28. OPPORTUNITY COST =
The Value of the Next Best Choice
(Ex: Sleeping is the opportunity cost of studying for a test)

29. If I buy a pizza… Then I can’t afford the movies
: What is the opportunity cost of buying
pizza?

30. Incremental Principle – It is closely related to the marginal
costs and marginal revenues.
Profitable decisions
 Revenue more than costs
 It decreases some costs to a greater extent than it
increases others
 It increases some revenues more than it decreases
others
 It reduces costs more than revenues

31. Discounting principle
• The time value of money refers to the fact that a rupee
received in the future is not worth a rupee today.
Equi-Marginal Principle
This principle states that a rational decision maker would
allocate the resources in such a way that it provide
equal marginal benefit per unit of cost.

32. Economics is logic of choice
It teaches the art of rational decision making. Economics is
of significant use in modern business, as decision –
making is the core of business.
Type of business decisions
1. Nature of product to be produced
2. The quantity in which it is to be produced
3. Quality of the product

33. Cost of production
5. Price and its distribution in the market
6.Diversification of business
7.Renewal of worn-out equipment and machinery
8. advertising
9. Investment
10. Demand analysis

34. • Economic Decisions for the Firm
– What: The product decision – begin or stop providing
goods and/or services.
– How: The hiring, staffing, procurement, and capital
budgeting decisions.
– For whom: The market segmentation decision –
targeting the customers most likely to purchase.

35. Economics and Managerial
Decision Making
• Relationship to other business disciplines
– Marketing: Demand, Price Elasticity
– Finance: Capital Budgeting, Break-Even
Analysis, Opportunity Cost, Economic Value
Added
– Management Science: Linear Programming,
Regression Analysis, Forecasting
– Strategy: Types of Competition, Structure-
Conduct-Performance Analysis
– Managerial Accounting: Relevant Cost,
Break-Even Analysis, Incremental Cost
Analysis, Opportunity Cost

36. Application areas of managerial
economics in business decision
making
Production and
inventory
knowledge
Human Resource
Financial
strategic
Marketing

37.  Decisions in which problem is simple and outcome has high degree
of certainty – Routine decisions
 Decisions in which the problem is simple but the outcome has a
low degree of certainty - Judgmental decisions
 Decisions in which the problem is complex but the outcome has a
high degree of certainty – Analytical
 Decisions in which the problem is complex and the outcome has a
low degree of certainty – Adaptive

38. Mohan Automobile Ltd. Is engaging in the business of
repairing of automobiles. They have about 40 workers
working in the workshop. Current practices have led to
an extreme amount of customer dissatisfaction due to
high waiting time, discourteous behaviour of workers and
high cost of repairing . As a result , the customers have
started getting their cars servicing elsewhere. The
owner is very keen to improve the situation but finds
that his people are not motivated by the spirit of
service

39. Basically because of poor wages and indifferent supervision.
This operation is located in environmentally alert
community and they have been complaining the local
municipal authority about the inconvenience caused in the
locality. The owner manager wants your help in raising
the level of productivity of the employees and
effectiveness of operations
You have to look into the operations of the company ,
analyse the whole situation and make necessary
recommendation.