Institute of Management Technology

PGDM, Batch: 2015-17Managerial Economics

Economic & Business Way of Thinking: Value Lessons for a Manager

Submitted To:-

Dr. Gajavelli V S

Submitted by:-

Prachi Sharan

Section –“C”

2015164

Introduction:-Managerial economics is the "application of the economic concepts and economic analysis to the problems of formulating rational managerial decisions" .It is sometimes referred to as business economics and 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.

Managerial decision areas include:

assessment of investible funds selecting business area choice of product determining optimum output determining price of product determining input-combination and technology sales promotion

**Source:- https://en.wikipedia.org/wiki/Managerial_economics

Twin themes of Economics

Scarcity occurs where it's impossible to meet all unlimited the desires and needs of the people with limited resources i.e.; goods and services. Society needs to find a balance between sacrificing one resource and that will result in getting other.

Efficiency denotes the most effective use of a society's resources in satisfying people’s wants and needs. It means that the economy's resources are being used as effectively as possible to satisfy people's needs and desires.

Thus, the essence of economics is to acknowledge the reality of scarcity and then figure out how to organize society in a way which produces the most efficient use of resources.

**Source:- http://docslide.us/documents/scarcity-and-efficiency-refers-to-the-twin-themes-of-

economics.html

Micro-economics & Macro-economics

Micro-economics Macro-economics

Microeconomics is the study of particular markets, and segments of the economy. It looks at issues such as consumer behaviour, individual labour markets, and the theory of firms.

Macroeconomics is the study of the whole economy. It looks at ‘aggregate’ variables, such as aggregate demand, national output and inflation.

Micro economics is concerned with:

Supply and demand in individual markets

Individual consumer behaviour. e.g. Consumer choice theory

Individual labour markets – e.g. demand for labour, wage determination

Externalities arising from production and consumption.

Macroeconomics is concerned with

Monetary / fiscal policy. e.g. what effect does interest rates have on whole economy?

Reasons for inflation, and unemployment Economic Growth International trade and globalisation Reasons for differences in living standards

and economic growth between countries. Government borrowing

**Source:- http://www.economicshelp.org/blog/6796/economics/difference-between-microeconomics-

and-macroeconomics/

Economic Decisions:

All modern economies have certain fundamental or basic economic problems to deal with. In every single economy, including the so-called “affluent society”, resources are limited. As a result, decisions regarding the resource use have to be made together by individuals, by

business corporations, and by society. It is the social choice and community preferences which give substance to the question of macro-economic decisions.

WHAT TO PRODUCE?

Each and every economy must determine what products and services, and what volume of each, to produce. In some way, these kinds of decisions should be coordinated in every society. In a few, the govt. decides. In others, consumers and producers decisions act together to find out what the society’s scarce resources will be utilized for. In a market economy, this ‘what to produce?’ choice is made mainly by buyers, acting in their own interests to fulfil their needs. Their demands are fulfilled by organizations looking for profits. For instance, if cell phones are in demand it will pay businesses to produce and sell these. If no one desires to buy radio sets, it is not worth producing them. In case a manufacturer produces an item which buyers don’t buy in much quantity, there will likely be inadequate income. The manufacturer will have to enhance the quality and modify the product to match buyer tastes. If the item is still not preferred, the producer will most likely halt the production. In this manner, buyers get the goods they need. Customers rule the ‘what?’ decision. They ‘vote’ for certain products and services by spending money on those they like. Each and every manufacturer has to offer what buyers want so that they can compete effectively against other manufacturers. Government authorities also perform some part in making ‘what?’ decisions. For example, a law demanding all ladies to wear a helmet generates demand for helmets, and profit-seeking businesses will produce them.

HOW TO PRODUCE?

This basic economic problem is with regards to the mix of resources to use to create each good and service. These types of decisions are generally made by companies which attempt to create their products at lowest cost. By way of example, banking institutions have substituted the majority of their counter service individuals with automatic teller machines, phone banking and Net banking. These electronic ways of moving money, utilizing capital as opposed to labour resources, have decreased the banks’ production costs. In the Nineteen fifties dams were being constructed in China by countless people making use of containers

and shovels. On the other hand dams were being constructed in the united states by using huge earth moving devices. The initial approach to production, using a resource combination which includes a small capital and much labour, is labour-intensive while the second, utilizing a little labour and a lot of capital, is capital-intensive. Each one of these ‘how’ decisions were made based on lowest cost and accessible modern technology.

FOR WHOM TO PRODUCE?

This basic economic question is focused on who receives what share of the products and services which the economy produces. The portion of production which each person and family can consume is determined by their income. Income is distributed in line with the value of resources we have to sell. As an example, a top cricket player will earn far more income than a professor. A top cricket player has a resource to sell for which many people will pay a high price. Professors are not so rare, and few people pay for their services. The for whom decision can even be dependent upon skills shortages, in which case organizations will provide higher incomes to attract workers with rare skills. In the same way, high wages may be required to attract employees to rural locations.

**Source:- http://universalteacher.com/1/three-basic-economic-problems/

Types of Economies:-

Economists generally recognize three distinct types of economic system. These are

1) Command economies;

2) Market economies and

3)Traditional economies. Each of these kinds of economies answers the three basic economic questions (What to produce, how to produce it, for whom to produce it) in different ways.

In a command economy, the government decides the answers to the three basic questions. It decides what will be made, how they will be made, and who will get them. Recently, pure command economies have usually been communist countries. Good examples today would be North Korea and China.

In a market economy, consumers decide the answers to the three questions. They do this by their choices of what to buy. No one tells companies what to make -- they make whatever they think will sell. If they choose wrong, they go out of business. Most developed economies today are predominantly market economies. The US, Japan and Germany are all market economies.

In a traditional economy, the three questions get answered by referring to tradition -- you make what has always been made, in the way it has always been made, etc. There aren't really any countries whose whole economies are traditional. The closest you could get to this would be Afghanistan or Bhutan -- places where there is little connection to the global economy.

**Source:- http://www.enotes.com/homework-help/example-each-type-economic-system-provide-name-104803

Production Possibility Frontier:-

In economics, a production–possibility frontier (PPF), sometimes called a production–possibility curve, production-possibility boundary or product transformation curve, is a graph representing production trade offs of an economy given fixed resources.

In its microeconomic applications the graph shows the various combinations of amounts of two commodities that an economy can produce per unit of time (e.g., number of guns vs kilos of butter) using a fixed amount of each of the factors of production, given the production technologies available. At the macroeconomic level it can be used to depict other rivalrous trade-offs like production of fixed capital versus production of consumer goods.

A PPF (production possibility frontier) typically takes the form of the curve illustrated on the right. An economy that is operating on the PPF is said to be efficient, meaning that it would be impossible to produce more of one good without decreasing production of the other good. In contrast, if the economy is operating below the curve, it is said to be operating inefficiently because it could reallocate resources in order to produce more of both goods, or because some resources such as labour or capital are sitting idle and could be fully employed to produce more of both goods.

For example, assuming that the economy's available quantities of factors of production do not change over time and that technological does not occur, then if the economy is operating on the PPF production of guns would need to be sacrificed in order to produce more butter. If production is efficient, the economy can choose between combinations (i.e., points) on the PPF.

In the PPF, all points on the curve are points of maximum productive efficiency (i.e., no more output of any good can be achieved from the given inputs without sacrificing output of some good); all points inside the frontier can be produced but are productively inefficient; all points outside the curve cannot be produced with the given, existing resources.

**Source:- https://en.wikipedia.org/wiki/Production%E2%80%93possibility_frontier