Economics 1

MANAGERIAL ECONOMICS The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal. The managerial economics is the application of economics theory to the problem of management Definition Managerial economics

The integration of economics theory with business practice for the purpose of facilitating decision making and forward planning by management The managerial economics helps for decision regarding business matter eg demand forecasting of the product. Decision making is the most difficult task In such complex situation managerial economics with the help of statistics facilitates the manager to take decision .economics has developed the tools to analyses market condition, demand, supply etc Scope of managerial economics 1] Demand Analysis and Forecasting Demand analysis helps manager to take decision regarding the demand estimation in future market. As price, Income and other factor effect demand of product. Price elasticity and income elasticity of demand which was introduced by Prof.Marshall helps to future demand of product 2] Production Function According to the Adam smith resources are scarce and have alternative uses. All four factor of production should combine in such way that production should be maximum and cost should be minimum. Firms are forced to do because of cut throat competition in today’s world. 3] Cost Analysis The success of firm depends upon its profit and profit can be increases in by different ways eg cost reduction or reasonable costing of product in market, which induce sales. For reasonable costing of product it important to understand nature and types of market Eg monopoly, monopolistic market

4] Inventory Management Managerial economics plays important role in management of inventory of raw material, consumables etc in order to keep smooth line of working capital. Therefore managerial economics helps with ABC analysis methods. Managerial economics maintain production line with any hampering of line. 5] Allocation of resources The manager always tires for optimum allocation of resources .the proper allocation of resources helps in cost reduction and with rises in present factor of production new alternatives for production is develop. 6] Pricing system The one of the important function to be carried out by manager is pricing of product, while pricing product the cost of production should be taken into consideration .Even some factor such as average cost, average revenue, BEP point, elasticity of demand, competition are taken into consideration. 7] Capital budgeting Investment theory is used to examine a firm's capital purchasing decisions. Capital is scare and has some value in market .decision regarding capital need to in rational way by making budget.

SCOPE OF MANAGERIAL ECONOMICS

Demand Analysis and Forecasting capital budgeting

Production Function

Managerial economics Pricing system

Cost Analysis

Inventory Management

Allocation of resources

ECONOMIC MODEL An economic Model is a mathematical or logical statement of economic theory. It is a method of analysis, which presents an oversimplification of real world. In an economic Model, when an economist, abstracts from the real world, complex ___ the abstraction has a role to play in the model building exercise. The main purpose of an economic model is to predict and to explain behavior. An economic model of demand might be used by management to predict the effects on demand of a downturn in per capita income or descriptive mathematical model of demand might suggest to the student of corporate behavior that an economic turndown will typically result in a firm’s reducing the level of its output. Another important purpose of economic model is to generate new ideas.

TYPES OF ECONOMIC MODEL 1. PHYSICAL MODEL: These are sculptures, Photographs, or visual Presentation of certain aspect. A picture can be two dimensional or three dimensional. These are the models with which we are quite familiar but they are not much used in economics.

2. ANALOG MODEL: Under this model, one set of properties represents the other set, which the system under study processes. These models are in form of simple graphs, chart, or functions to translate a given variable into another.

3. SYMBOLIC MODEL: In this model, the inter-relationship are expressed in mathematical symbols. There are several types of symbolic models; few of them are as follows: A. Quantitative Model:- These are based on statistical data. Exregression coefficient, theory of probability etc.

B.

Allocation Model:- this model is useful for, finding optimum

solution for optimizing the profit or cost minimization under given circumstances. C. Scheduling Model:- This model are useful for determining an optimum sequence for performing certain operation with the view of minimizing overall time and cost. Eg:- CPM, D. Queuing or waiting line model. These represent the random arrival of the customers at any point of service. E. Inventory Model:- These model helps in optimizing the inventory levels. The main objective is to minimize the inventory cost such as holding and ordering cost. EG. ABC analysis and EOQ model.

INTRODUCTION TO ECONOMICS Science is systematic study of any of subject matter to accuquire the knowledge. The science which deals with human behavior is called as social science .the economics us the branch of social science it is treated as queen of social science. Adam smith called economics as science of wealth.

POSITIVE APPROACH Positive approach of economics that study concerns the description and explanation of economic phenomena. It focuses on facts and cause-andeffect relationship between two or more variables of economics through application of economic theory ". The distinction was exposited by John Neville Keynes (1891) and elaborated by Milton Friedman in an influential 1953 • Positive approach means study of subject matter as they are • Physics and chemistry are positive science History is positive because we cannot change what happened in past .in positive approach is exact

NORMATIVE APPROACH • Normative approach study the subject matter as they ought to be • Ethics and moral science is normative approach Normative economics deals heavily in value judgments and theoretical scenarios. Normative economics is a valuable way to establish goals and generate new ideas, but it is not compulsory that it should not be used as a basis for policy decisions. many economist feels that economics should be consider as normative because it provide guideline to finance minister regarding desirable result. An example of a normative economic statement would be, “We should cut taxes in half to increase disposable income levels” Economics is has both positive and normative approach The study of economics is divided by modern economists into two part such micro economics and macro economics

MICRO ECONOMICS Definition of micro economics Micro economics is the study of particular firm, particular household individual price, individual wage, and individual income, and individual industry, particular commodity By prof.k.boulding Micro means a small part the economics which study demand and supply for individual, firm in market at particular price can be treated as MICRO ECONOMICS. It also explain market mechanism produced in economy the theory helps to understand complicated business economics by constructing simplified models of behavior. Microeconomics examines how these decisions and behaviors affect the supply and demand for goods and services Micro economics basically deals with individual decision-making. The study of micro economics helps in determination of price in different market structure One of the goals of microeconomics is to analyze market mechanisms that establish relative prices amongst goods and services and allocation of limited resources amongst many alternative uses. micro economics teaches the art of economising

MACRO ECONOMICS Definition of Macro economics “Macro economics deals with economics affairs in the large. it concerns with the overall dimensions of economic life” By prof Ackley Macro economics is the study of aggregates. It explains the determination of aggregate output which is related to employment, income generation. Macro analysis ignores individual’s .macro economics plays important role in the formation of economics policies at national level, price stability, full employment, eradication of poverty exchange rate are objectives of macro economics .for achieving these objectives formulation of monetary policy, fiscal policy, industrial policy, exportimport policy is important. It considers total demand of capital goods and consumer goods.

Scope of macro economics

Theory of income &employment

Theory of consumption function

Theory of general price level and inflation

Theory of investment

Scope of business cycle

Theory of economic growth

OPTIMIZATION According to economist resource are scare and each resource has alternate use. Production of any product largely depends upon the factor of production or inputs there mainly six factor of production • • • • • •

Raw materials Machinery Labour services Capital goods Land Entrepreneur

In short run some factor of production are fixed and some are variable where as in long run all factor including labour are variable. Means Factor of production can be limiting factor in short run and "long-run", all of these factors of production can be adjusted by management Optimization means fully utilization of factor of production for getting maximum output with available technology. If output is increase without changing inputs, or in other words, the amount of "friction" or "waste" is reduced. The optimization of rescores can be done by Specialization, division of labour which increases the productivity of labour specialization means giving the work according to skill of labour Example A labour is capable of doing the job on any specific machine. Company allotted A a job of material handling and another person is doing machine work which can be done A. then there is under utilization of resource.

STATIC AND DYNAMIC ECONOMY: THE INTRODUCTION It is essential and important to differentiate between static and dynamic economic analysis. It was the classical economist J S Mill, who for the first time used this concept namely static and dynamic economic analysis. The term static and dynamic is entirely different from the concept of natural science. In natural science static is assumed as unmovable or is at rest. The term static not suppose to mean complete absence of movement in economics. On the contrary, the word static in economics, means a movement in any single direction, specific in time and extent. In static, there is no bumps and depression in movement. All static economies are based on the assumption of such a stationary state of the economy. In static economy, social, economical, technological, conditions are constant, there is no innovation in economy. On the contrary, continuous changes are the characteristics of dynamic economy. Horrod, states that continuous change in rate of production is the main feature of dynamic economy. If there is a single change, then it is referred as, ‘static economy’. In dynamic economy every factor is variable. every economy is dynamic economy. According to J.B clark profit is reward of firm it occurs due to dynamic nature in economy. factor such as technology, production, government laws are subject to change.

MARGINAL ANALYSIS Since resources are scarce and we cannot have everything that we want, tough choices must be made. The concept of opportunity cost reminds us that every time we make a choice, something else must be given up. Economics provides us with a set of tools that can help us to make better choices. Often times, the best decision is made by weighing the marginal benefits against the marginal costs. All managerial concepts are incremental concept but all incremental concept are not managerial concepts

Marginal Costs Marginal Costs are the additional costs imposed when one more unit is produced. If the cost of making 9 pieces of samosa is RS.90 and the cost of making 10 pieces is RS.110, the marginal cost of producing the tenth piece of samosa is RS.20. The table below illustrates the relationship between production, total costs, and marginal costs. Notice that total costs always rise as production increases even though marginal costs may not rise.

Quantity Total Cost Marginal Cost 0 0 -1 5 5 2 10 5 3 17 7 4 25 8 5 34 9 6 44 10 7 58 14 8 73 15 9 90 17 10 110 20

Marginal costs tend to rise as production increases. One explanation for this is that when a firm grows very large, it becomes more and more difficult to manage the organization and costs rise. Another possibility is that producing more and more of a particular product becomes more difficult due to technology or resource limitations. When trying to clean up the air, for example, the first efforts are relatively inexpensive. A law can mandate, for example, that the dirtiest cars be taken off the road. But as one tries to make the air cleaner and cleaner, more expensive technology is needed. Therefore, marginal costs rise. The rise in Marginal Costs is shown in the chart above.

Marginal Benefits Marginal Benefits are the additional benefits received when one more unit is produced. Benefits can be expressed in terms of units of utility or satisfaction, or rupees. The table below charts the marginal and total benefits from consuming pieces of samosa. The utility units are expressed in rupees terms. Quantity Total Benefits Marginal Benefits 0 0 -1 30 30 2 55 25 3 75 20 4 90 15 5 103 13 6 113 10 7 121 8 8 126 5 9 130 4 10 132 2

Marginal Benefits tend to fall as consumption of a good or service increases. Notice that the marginal benefit from the second piece of samosa is 25 units, but the marginal benefit of the tenth piece is only 2 units with each additional piece, the added benefits to the person diminish.

Generally speaking, the marginal benefits curve slopes downward because we tend to like variety and too much of the same thing gets very old. The chart of total and marginal benefits above demonstrates this concept. INTERSECTION OF MARGINAL COST AND MARGINAL BENEFIT

Equating marginal cost and marginal benefit in our samosa example occurs where the MB and MC curves intersect. This occurs at a quantity of six pieces of samosa.

30 25 marginal cost marginal benefit

20 15 10 5 0

1

2

3

4

5

6

7

8

9

10

nos of sam osa consum e

Always the rational consumer tries to equate the marginal cost with marginal benefit that’s the reasons when consumer eats 6th samosa he stops consuming because on consumption of 7th samosa he will not get benefit more than price or marginal cost of product

ASSIGNMENT OF ECONOMICS

SUBMITTED BY MUKESH A DESHMUKH MBA PART -I

K.R.S.COLLEGE OF MANAGEMENT ANJENERI,NASHIK ACADEMIC YEAR 2008-2009 ON 29 SEPTMBER 2008

QUESTION

1] What managerial economics and what is scope of managerial economics? 2] Write short notes on

     

Economic model Positive approach and normative approach Micro economics and Macro economics optimization static and dynamic economy marginal analysis