Key terms by Rahul Jain

What is Economics? Economics is the social science that studies the production,

distribution, and consumption of goods and services. The term economics comes from the Greek for oikos (house) and nomos (custom or law), hence "rules of the house(hold).“

Managerial Economics Managerial Economics can be defined as the study of economic theories, logic and tools of economic analysis that are used in the process of business decision- making.

“It is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management” – Spencer and Seigelman

How Economics Contributes To Managerial Task Of Decision Making

Building Analytical models to help recognize the structure of managerial problems.

Economic theory contributes to the business analysis. Economic theories to clarify various concepts used in

business to avoid conceptual pitfalls.

The process of Business Decision-Making comprises of

four phases: Defining the objective to achieve Collections and analysis of business related data

(economic,social,political and technological environment)

Taking possible course of actions and; Selecting from the available alternatives.

Microeconomics is a branch of economics that studies how individuals, households and firms make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold.

Micro-Economics Applied to Operational Issues

The issues that arise within the business are operational issues, and the following are the theories applied:

Theory of DemandTheory of Production and Production DecisionsAnalysis of Market-Structure and Pricing TheoryProfit Analysis and Profit ManagementTheory of Capital and Investment Decisions

Macroeconomics, on the other hand, involves the "sum total of economic activity, dealing with the issues of growth, inflation and unemployment and with national economic policies relating to these issues" and the effects of government actions (such as changing taxation levels) on them.

Macro-Economics applied to Business Environment

The issues that pertain to the business environment in planning

and formulation of the future strategy under these three categories:

Issues related to Macroeconomic trends in the Economy

Issues related to Foreign Trade Issues related to Government Policies

Tools Of Managerial Economics Mathematical ToolsStatisticsOperations ResearchManagement Theory and Accountancy

Gap Between Theory And Practice and the Role of Managerial EconomicsIt is known that there is a gap between theory

and practice. Theory which appears logically sound may not be directly applicable in practice.

Example: Small business thinking to expand uses lots of resources and man power but cant get the same results as he expected .

Objective of economic analysis is not to provide a machine or method which will instantly fit the problem and furnish a solution but to provide ourselves with an organized and orderly method of thinking out a particular problem

Managerial Economics Bridges The Gap Managerial economics applies economic logic

and analytical tools to sift wheat from the chaff. The economic logic and tools of analysis guide

them in ;

1)Identifying the goals 2)Collection of data 3)Analyzing the facts4)Taking out conclusions5)Determining alternatives for achieving the goals6)Taking the final decision

OPPURTUNITY COSTS

Scarcity and alternative uses of the resources gives rise to the concept of Oppurtunity cost.

Oppurtunity cost of availing an oppurtunity is the foregone income Expected from the second best oppurtunity of using the resources.

For example there are three firms and have to make a decision for the Disposal of 100 million rupees and there are three alternatives.1.Expansion of the firm2.Setting up a new unit of production3.Buying shares in another firmAnnual return of these three alternatives is 1.20 million2.18 million3.16millionThe decision would be to invest in the alternative one.The manager will have to sacrifice the annual return from the next best alternative that is alternative two.

ACCOUNTING PROFIT =TOTAL REVENUE – TOTAL COST

ECONOMIC PROFIT= ECONOMIC REVENUE - ECONOMIC COST

ECONOMIC COST = ACCOUNTING COST +IMPLICIT COST

Actual earnings – opportunity cost = economic gain or economic profit.

This concept can be applied to all kinds of resources.

What is Macroeconomics?

Macroeconomics is the study of the economy as a

whole.

Samuelson defined it as ,“Macroeconomics is the study of the behaviour of the economy as a whole. It examines the overall levels of a nation’s output, employment, prices and money ”

Importance of macroeconomics

The importance of macroeconomics lies in providing a theoretical framework for finding solutions to three problems:-

Problems of economic growth,

Unemployment, and

Inflation.