mba-cm me lecture 1

7/29/2019 Mba-cm Me Lecture 1

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Introduction:

Micro Economics for Managers


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Economics & Economic Analysis

What do you mean by Economics?

A simple definition of economics: It is a science of making

decision in the presence of scarce resources.

Economic analysis evolves from basic propositions about

how individual human beings (or individual economic agents)

behave, in respect of the problem of scarcity, and reacts to

an observed change.

The purpose of economic activities is to satisfy maximum

possible ends by sacrificing minimum possible resources.


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Managerial Economics

Managerial economics is the study of how to direct resources in

the way that most efficiently achieve a managerial role.

Managerial economics deals with the concepts and analysis of

demand, cost, profit, competition and so on, that are

appropriate for decision making

Business Economics is more comprehensive and broad based

than Managerial Economics


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Business Economics

Business Economics attempts to indicate how business

policies are firmly rooted in economic principles.

It takes a pragmatic approach towards facilitating integration

between economic theory (principles) and business practices

(policies).

Business economics uses microeconomic analysis of the

business unit, and macroeconomic analysis of the business

environment. Thus, Business Economics can simply be

viewed as the application of economics for the analysis of

business.


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Economics & Business

Business is an economic activity.

Each business essentially performs the task of transforming a set of inputs

into output. This transformation is, in fact, the essence of economic

activity.

In a business, a manager is a person who directs resources to achieve

certain stated goal(s). These goals/ objectives of a manager are stated

below:

Maximization of the value of the firm (profit maximization)

Market share maximization

Maximization of sales revenue

Growth maximization

Maximization of own benefits

Maximization of shareholder value, etc.


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Role of Managerial Economics in ManagerialDecision Making

Traditional Economics:

Theory & Methodology

Business Management

Decision Problems

Decision Sciences Tools

& Techniques of analysis

Optimal Solution to

Business Problems

Managerial Economics

Application of Economic

theory & Methodology to

solve business problems


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What is Macroeconomics?

Macroeconomics is the study of aggregates

Macroeconomics is concerned with the behaviour of the economy

as a wholewith booms & recessions, economys total output of

goods & services, the growth of output, the rate of inflation &

unemployment, the balance of payments, & exchange rates

Macroeconomics deals with the long-run economic growth and

with the short-run fluctuations that constitute the business cycles

Macroeconomics is a policy-oriented part of economics. The subjectmatter of Macroeconomics includes factors that determine both thelevel of these variables and how the variables change over time.


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Focus of Macroeconomics

Macroeconomics focuses on the economic behaviour &

policies that affect

Consumption & investment

Trade balance (exports imports)

Currency & exchange rates

Determinants of changes in wages & prices

Money, interest rates & Monetary policy

Taxation, union budget, Govt. deficit, govt. debt & Fiscal policy Etc..


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Central Issues in Macroeconomics?

1. How do we explain periods of high & persistent

unemployment ?

Three central issues addressed by Macroeconomics are:

2. How do we explain periods of inflation ?

3. What determines economic growth ?

Another important issue: Should the govt. fix exchange rates or

should exchange rates be market determined ?

Non exhaustive list of macroeconomic research agenda


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3 Co-ordination Tasks of a Firm/Economy

Allocation of resources refers to the societys decisions onhow to divide up its scarce input resources among the

different outputs produced in the economy and among

different firms or other organisations that produce those

output

Society, at large, faces three sorts of decisions:

1. It must figure out how to utilise its resources efficiently

2. It must decide which of the possible combinations of goods toproduce

3. It must decide how much of the total output of each good to

distribute to each person


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Economic Fundamentals

- An Integrated Perspective


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Framework

FIRMS BUSINESS

ACTIVITIES

Operating ActivitiesInvestment Activities

Financing Activities

ECONOMIC

ENVIRONMENT

OWN BUSINESSSTRATEGY

Macro economic

scenario

Policy/

Regulatory

scenario

Corporate

Strategy

Business

Strategy


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Framework

FIRMS BUSINESS

ACTIVITIES

ECONOMIC

ENVIRONMENT

OWN BUSINESS

STRATEGY

Macro economic

scenario

Policy/Regulatory

scenario

Corporate

Strategy

Business

Strategy

International

& Domestic

National Income

Accounts

Real Sector

Monetary Sector

Financial Sector

Macro Aggregates

Inflation

Interest rate

Exchange rate

Diversification

Mergers & Acquisitions

International strategies

Vertical integration

Cost leadership

Product differentiation

Tacit collusion

Domestic macro

policy

Fiscal Policy

Monetary Policy

Industrial policy

Trade policy


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Scarcity and Choice


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Scarcity and Choice

One of the basic themes of economics is scarcity: the fact that resourcesare scarce/ limited in supply.

Choices must be made among a limited set of possibilities, implying that a

decision to have more of one thing means that we will have less of

something else.

Hence, the relevant cost of any decision is its opportunity cost the

value of the next best alternative that is given up.

The opportunity cost of any decision is the value of the next best

alternative that the decision forces the decision maker to forgo.

It does not apply only to individual consumer choices at the micro level,

but also to community choices at the macro level


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A Macro level example

The decision to produce additional cars, and therefore, to

produce fewer refrigerators. Although the production of car may cost Rs X per vehicle, its real cost

to society is the number of refrigerators that society must forgo to get an

additional car. In other words, if the labour, steel and energy needed to

manufacture a car are sufficient to make 30 refrigerators, the opportunity

cost of a car is 30 refrigerators.

Scarcity and Choice


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A Micro level example

What would I have been doing if I was not teaching before you?

I would have taken a rest, went out on a trip, hang out with friends, etc.

Instead, I am teaching here and getting paid Rs. X per hour/lecture. Therefore,

the opportunity cost of my sitting idle is Rs. X and the relevant benefits and

satisfaction.

Therefore, I have taken a rational decision in accepting the assignment!

Scarcity and Choice

mba-cm me lecture 1

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