Managerial Economics

Welcome To Managerial Economics

What we learn today         

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Economics Twin themes of Economics Microeconomics Managerial economics Problems of an Economic Organization Solving the three Problems in Economic Organization Input & Output Factors of production Production Possibility Frontier

The circular flow of Expenditure and Income between Households and Firms Opportunity cost

Economics Economics is the branch of Knowledge that deals with how the scarce resources can be used to produce valuable goods and services and distribute them efficiently among different classes of people in the society.

Twin themes of Economics

1.

Scarcity

2.

Efficiency

Scarcity This is the distinguishing characteristics of an economic good. An economic good is scarce means not that it is rare but only that it is not freely available.

Efficiency Absence of waste, or the use of economic resources that produces the maximum level of satisfaction possible with the given inputs & technology. A shorthand expression is allocative efficiency.

Microeconomics

It studies the behavior of individual decision making units such as consumers, resource owners & business firms.

Managerial economics 

Managerial economics (sometimes referred to as business economics), is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units. As such, it bridges economic theory and economics in practice.

Problems of an Economic Organization

1.

What goods are produced & what quantities?

2.

How goods are produced?

3.

For whom goods are produced?

What goods are produced what quantities?

(a) Which goods are to be produced? (b) In what quantities?

How goods are produced? Another major issue relates to the production techniques to be used in production i.e. whether the techniques should be labor or capital intensive.

For whom goods are produced? This problem relates to the distribution of the national product i.e. who should get how much. In the matter of distribution, it is necessary to provide incentives to produce more & disincentives to curb unnecessary consumption.

Solving the three Problems in Economic Organization

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Market Economy Command Economy Mixed Economy

Market economy An economy in which the what, how & for whom questions concerning resource allocation are primarily determined by supply & demand in markets.

Command economy A mode of economic organization in which the key economic functions – what, how & for whom are principally determined by government directive. Sometimes called a centrally planned economy.

Mixed economy Mixed economies rely primarily on the price system for their economic organization but use a variety of government interventions to handle macroeconomic instability & market failures.

Input & Output 

Input: Commodities or service used by firms in their production processes; also called factors of production.

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Output: The various useful goods or service that are either consumed or used in further production.

Factors of production Main four factors of production.

Land  Labor  Capital Entrepreneur ability 

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Factors of production 

Land: In classical and non classical economics one of the basic factors of production. More generally land is taken to include land used for agriculture and industrial purpose.

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Labor: Labor consists of the human time spent in production working in automobile factories, taking the land, teaching school or baking pizzas.

Factors of production 

Capital: Capital means the total amount of money subscribed by the shareholder-owners of a corporation, in return for which they receive shares of the company stock.

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Entrepreneur utility: (1) Take the initiative (2) Makes basic business policy (3) An innovation (4) Risk bearer.

Production Possibility Frontier (PPF):

PPF shows two different combinations of two commodities which can be produced by the available resources and technology.

The circular flow of Expenditure and Income between Households and Firms

Financial markets

Household

Government

Financial Markets

Rest of the world

Firms

Markets for factors of production

Production Possibility Frontier (PPF):

Opportunity cost The value of the next-best use (or opportunity) for an economic good or the value of the sacrificed alternatives.

Types of goods Final goods Intermediate goods 1.

2.

Types of goods 

Final goods : A good that is produced for final use & not for resale or further manufacture.

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Intermediate goods : Goods that have undergone some manufacturing or processing but have not yet reached the stage of becoming final products.

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