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Copyright © Amity University1

PAN African eNetwork Project

DBM Economic Analysis

Semester - I

Sonia Singh

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Copyright © Amity University

This topic deals with:

• The nature and scope of Managerial Economics as a

whole.

• The place of Managerial economics in the Economics

discipline.

• How do managers make their decisions?

Decision making process

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Economic Mysteries

• Why have aer towels

relace! hot-air han!!ryers in "#lic restrooms$

• Why do prices of some goods, like apples,

go down during months of heaiest

consumption, while others like !eachfront

cottages, go up?

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What is Economics?

Economics is the study of how economic agents

or societies choose to use scarce productive

resources that have alternative uses to satisfy

wants which are unlimited and of varyingdegrees of importance need of economics

arises because of –

a Un!imited wants

b "carce resources with a!ternative uses

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Microeconomics "

The study of the decisions of people and

!usinesses and the interaction of those

decisions in markets. The goal of

microeconomics is to e#plain the

prices and $uantities of indiidual

goods and serices.

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%ome Managerial Decisions

• #esource a!!ocation within the

organi$ation in the short% and !ong%run

• E&panding or contracting production

and distribution faci!ities

• 'eve!oping and mar(eting new

products

• Capita! e&penditures inc!uding the

possib!e ac)uisition of other firms

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Macroeconomics &

• The study of the national economy and

the glo!al economy and the way that

economic aggregates grow and

fluctuate. The goal of macroeconomics

is to e#plain aerage prices and the

total employment, income, and

production

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*acroeconomics vs+ *icroeconomics M'()*E(*+*M'( -E%T'*+ M()*E(*+*M'( -E%T'*+

,o to business schoo! or ta(e a -ob? .ow many peop!e are emp!oyed in theeconomy as a who!e?

What determines the sa!ary offered byCitiban( to/ a new Co!umbia *0A?

What determines the overa!! sa!ary !eve!spaid to wor(ers in a given year?

What determines the cost to a university orco!!ege of offering a new course?

What determines the overa!! !eve! of prices inthe economy as a who!e?

What government po!icies shou!d be adoptedto ma(e it easier for !ow%income students toattend co!!ege?

What government po!icies shou!d be adoptedto promote fu!! emp!oyment and growth in theeconomy as a who!e?

What determines whether Citiban( opens anew office in "hanghai?

What determines the overa!! trade in goods/services and financia! assets between theU+"+ and the rest of the wor!d?

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Economic heory

• *icroeconomics

– "tudy of the economic behavior of individual

decision%ma(ing units+

– #e!evance to *anageria! Economics

• *acroeconomics

– "tudy of the tota! or aggregate !eve! of output/

income/ emp!oyment/ consumption/investment/ and prices for the economy

viewed as a whole+

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Economic *ethodo!ogy

• Economic *ode!s

– Abstract from detai!s

– 2ocus on most important determinants of

economic behavior – cause and effect

• Eva!uating Economic *ode!s

– A mode! is accepted if it predicts accurate!y

and if the predictions fo!!ow !ogica!!y from theassumptions+

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'ecision "ciences

• *athematica! Economics

– E&presses and ana!y$es economic mode!s

using the too!s of mathematics+

• Econometrics

– Emp!oys statistica! methods to estimate and

test economic mode!s using empirica! data+

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*ar(et *echanism

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*anageria! Economics

• *anager – A person who directs resources to achieve a stated

goa!+

• Economics – he science of ma(ing decisions in the presence of

scare resources+

• *anageria! Economics – he study of how to direct scarce resources in the

way that most efficient!y achieves a manageria! goa!+

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Do"glas - +Managerial economics is (( the

alication of economic rinciles an!metho!ologies to the !ecision-making rocess

within the firm or organi,ation(

Paas . 'irschey - +Managerial economicsalies economic theory an! metho!s to #"siness

an! a!ministrative !ecision-making(

Salvatore - +Managerial economics refers to thealication of economic theory an! the tools of

analysis of !ecision science to e/amine how an

organisation can achieve its o#jectives most

effectively(

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%hese Definitions 0over a N"m#er of

Different Aroaches

1( Analysis #ase! on the theory of the firm

2( Analysis #ase! "on management sciences

3( Analysis #ase! "on in!"strial economics

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MANAGERIAL ECONOMICS

The application of economics’ theoriesand principles in managerial problems iththe p!rpose of optimi"ation of decisionma#ing$

%ecision ma#ing in&ol&es the acti&itiesregarding prod!ction' distrib!tion andcons!mption$

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The !se of Economic Anal(sis in

management is to ma#e b!siness decisionsin&ol&ing the best !se )allocation* ofscarce reso!rces $

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Economic Theor( helps managers tocollect the rele&ant information andprocess it in order to arri&e at the

optimal decision$Gi&en the goals of afirm' a decision is O+TIMAL if it bringsthe firm closest to its goals

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Management %ecision +roblems

•

+rod!ct +rice and O!tp!t•+rod!ction Techni,!e•Stoc# Le&els•Ad&ertising Media and intensit(•Labor hiring and firing•In&estment and -inancing

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The Process of decision-making

Identify objectives

Dene the problemIdentify possible solutions

Select the best possiblesolution

Implement the decision

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Nat!re of %ecision

•.hat goods shall firm prod!ce/•0o sho!ld firm raise the necessar( capital andhat shall be its legal form$•.hat techni,!e shall be adopted' and hat shallbe the scale of operations/•.here prod!ction is located/•0o shall its prod!ct be distrib!ted/•0o shall reso!rces be combined/

•.hat shall be the si"e of o!tp!t/•0o shall it deal ith its emplo(ees/

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T(pes of %ecision

•Organi"ational and personal decisions

•1asic and ro!tine decisions

•+rogrammed and non2programmeddecisions$

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Conditions Affecting %ecision Ma#ing

•

Certaint(

•Ris#

•3ncertaint(

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Economic Conditions

•Mar#et Str!ct!re•

S!ppl( and %emand conditions•State of Technolog(•Go&t$ Reg!lations•International %imensions•-!t!re Macroeconomic factors

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%ecision Ma#ing Model

•The Classical Model

•The Administrati&e Model

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The Classical Model

•The manager has completed information abo!t the

decision sit!ation and operations !nder a conditionof certaint($ •The problem is clearl( defined' and the decision2

ma#er has #noledge of all possible alternati&es andtheir o!tcomes$

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•Thro!gh the !se of ,!antitati&etechni,!es' rationalit(' and logic' thedecision2ma#er e&al!ates the alternati&es

and selects the optim!m alternati&e 2theone that ill ma4imi"e the decisionsit!ation b( offering the best sol!tion tothe problem$

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The Administrati&e Model•The manager has incomplete information abo!tthe decision sit!ation and operates !nder acondition of ris# or !ncertaint($

•The problem is not clearl( defined' and thedecision2ma#er has limited #noledge of possiblealternati&es and their o!tcomes$•The decision2ma#er satisfies b( choosing the

first satisfactor( alternati&e2 one that illresol&e the problem sit!ation b( offering a goodsol!tion to the problem$

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Tools of %ecision Ma#ing

•Marginal Anal(sis•

Linear +rogramming•Game Theor(•Optimi"ation•-orecasting

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*ar(et 3nteractions

• Consumer%4roducer #iva!ry – Consumers attempt to !ocate !ow prices/ whi!e

producers attempt to charge high prices+

• Consumer%Consumer #iva!ry

– "carcity of goods reduces the negotiating power ofconsumers as they compete for the right to thosegoods+

• 4roducer%4roducer #iva!ry

– "carcity of consumers causes producers tocompete with one another for the right to servicecustomers+

• he #o!e of ,overnment – 'iscip!ines the mar(et process+

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0ost-Benefit Aroach to Decision Making

• 0456 7 0ost of !oing

activity 5• B456 7 Benefit of !oing

activity 5• If B456 8 0456 then !o 5

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Theory of the Firm

!pected "alue #a!imi$ation %&ner-managers ma!imi$e short-run prots' Primary goal is long-term e!pected value

ma!imi$ation' (onstraints and the Theory of the Firm

)esource constraints' Social constraints

*imitations of the Theory of the Firm +lternative theory adds perspective' (ompetition forces e,ciency' ostile takeovers threaten ine,cient managers'

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)ole of .usiness in Society

/hy Firms !ist .usiness is useful in satisfying consumer

&ants'

.usiness contributes to social &elfare Social )esponsibility of .usiness Serve customers' Provide employment opportunities' %bey la&s and regulations'

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The role of managerial economics in managerial decision makingThe role of managerial economics in managerial decision making

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The (oncept of /usiness and the

(oncept of 0rofit/usiness

An organi$ation that provides goods or

services to earn profits

0rofits

he difference between a business5s

revenues and its e&penses

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Economic %ystems round the

World

Economic %ystem

A nation5s system fora!!ocating its resourcesamong its citi$ens

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2actors of 4roduction

)esources used in the production of

goods and serices

)esources used in the production of

goods and serices

Four traditional factors of production:

1. Natural Resources

2. Labor

3. Capital

4. Entrepreneurs

Newer perspectives include:

. !"#sical Resources

$. %nfor&ation Resources

Newer perspectives include:. !"#sical Resources

$. %nfor&ation Resources

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+atural )esources

*ateria!s supp!ied by nature 6such as !and/

water/ minera! deposits/ and trees

1a!or 2or Human )esources3

4hysica! and menta! capabi!ities of peop!e as

they contribute to economic production

(apital

2unds needed to create and operate a business

enterprise

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Entrepreneur

4erson who starts a new business or ma(es the

decisions that e&pand a sma!! business

0hysical )esources

angib!e things organi$ations use in the conduct of

their business

'nformation )esources

'ata and other information used by a business

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ypes of Economic "ystems

0lanned Economy

Centra!i$ed government contro!s a!! or most

factors of production and ma(es a!! or most

production and a!!ocation decisions

Market Economy

3ndividua!s contro! production and a!!ocation

decisions through supp!y and demand

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4!anned Economies

(ommunism

4!anned economic system in which the

government owns and operates a!! ma-or

sources of production

%ocialism

4!anned economic system in which thegovernment owns and operates se!ected

ma-or sources of production

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*ar(et EconomiesMarket

*echanism for e&change between buyers and

se!!ers of a particu!ar good or service

'nput Market

2irms buy resources from supp!ier househo!ds*utput Market

2irms supp!y goods and services in response to

demand on the part of househo!ds

(apitalism

*ar(et economy that provides for private

ownership of production and encourages

entrepreneurship by offering profits as an incentive

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74ure *ar(et Economy8

1'4

OUTPUT MARKETS

9oo!s

Services

INPUT MARKETS

*a#or0aital

Entrerene"rs

Physical :eso"rces

Information :eso"rces

HOUSEHOLDS

• Deman! ro!"cts in

o"t"t markets

• S"ly reso"rces in

in"t markets

FIRMS

• S"ly ro!"cts in

o"t"t markets

• Deman! reso"rces

in in"t markets

DEMANDDEMAND

DEMANDDEMAND SUPPLYSUPPLY

SUPPLYSUPPLY

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*i&ed *ar(et Economies

0riati4ation

4rocess of converting government enterprises

into private!y owned companies

%ocialism

4!anned economic system in which the

government owns and operates on!y se!ected

ma-or sources of production

Econo&ic s#ste& featurin( c"aracteristics

of bot" planned and &ar)et econo&ies

Econo&ic s#ste& featurin( c"aracteristicsof bot" planned and &ar)et econo&ies

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*argina! 4rincip!e

• To ma#imi4e net !enefits, themanagerial control aria!le should !eincreased up to the point where M/ 5

M(• M/ 6 M( means the last unit of the

control aria!le increased !enefits

more than it increased costs• M/ 7 M( means the last unit of thecontrol aria!le increased costs morethan it increased !enefits

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Marginal Analysis

The marginal cost of any good or

actiity is its opportunity cost

The opportunity cost is the ne#t !estalternatie gien up when a decision

is made?

What is your opportunity cost for!eing here today?

's it the same for eeryone in this

room?

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%hould you keep your !usiness openfor one additional hour? – %cenario: 8ou are managing a fast

food ham!urger restaurant.

– 8ou currently close at 9 pm eery

night, !ut are considering

e#tending your hours to 99 pm on

weekends.

– What are the releant

considerations?

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;o"r monthly rent$

)ther s"nk costs$

%he ho"rly wages yo" ay yo"r

emloyees$

)ther varia#le costs associate!

with the e/tra ho"r$

;o"r weekly reven"es$

;o"r likely reven"es for the e/tra

ho"r$

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"(i!!s re)uired for sub-ect

• 9ogica! and intuitive thin(ing

• 3nterpretation of graphs

• *athematics

he main thin(ing too!

: *;'E9"

#educe comp!e& situations

to their fundamenta!s to

deve!op genera! princip!es

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The Modern economy

• Economy & mechanism that allocates

scarce resources among alternatie

uses. This mechanism achiees fie

things: What, How, When, Where, Who.

• Decision makers & Households, ;irms,

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he 0asic 'ecision%*a(ing Units

• A firm is an organi$ation that

transforms resources 6inputs intoproducts 6outputs+ 2irms are theprimary producing units in a mar(eteconomy+

• +

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;ther important decision ma(ers

• An entrepreneur is a person who

organi$es/ manages/ and assumes the

ris(s of a firm/ ta(ing a new idea or a new

product and turning it into a successfu!business+

• Market & ny arrangement that ena!les

!uyers and sellers to get informationand to do !usiness with each other.

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%he Invisi#le 'an!

• Decentrali,e!

•

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EC;

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he Comp!e&ity of the *odern Economy• A mar(et economy is se!f%organising in the sense that when

individua!s act independent!y to pursue their own se!f%interest/responding to prices set on open mar(ets/ they produce co%ordinated and re!ative!y efficient economic activity+

#esources and "carcity• "carcity is a fundamenta! prob!em faced by a!! economies because

not enough resources % !and/ !abour/ capita!/ and entrepreneurship %are avai!ab!e to produce a!! the goods and services that peop!ewou!d !i(e to consume+

• "carcity ma(es it necessary to choose among a!ternative

possibi!ities> what products wi!! be produced and in what )uantities+

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Who *a(es the Choices and .ow• *odern economies are based on the specia!isation and

division of !abour/ which necessitate the e&change of goodsand services+

• E&change ta(es p!ace in mar(ets and is faci!itated by the use

of money+• *uch of economics is devoted to a study of how mar(ets wor(

to co%ordinate mi!!ions of individua!/ decentra!ised decisions+• hree pure types of economy can be distinguished>

traditiona!/ command and free mar(et+

• 3n practice/ a!! economies are mi&ed economies in that theireconomic behaviour responds to mi&es of tradition/government command/ and price incentives+

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•consumer soereignty he

idea that consumers u!timate!y

dictate what wi!! be produced

6or not produced by choosing

what to purchase 6and what

not to purchase+

•(onsumer %oereignty

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•Distri!ution of *utput

•he amount that any one househo!d•gets depends on its income and wea!th+

Income is the amount that a househo!d

earns each year+ 3t comes in a number of

forms> wages/ sa!aries/ interest/ and the

!i(e+•

Wealth is the amount that househo!ds

have accumu!ated out of past income

through saving or inheritance+

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uestions

According to the te&t the reason to study

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According to the te&t/ the reason to study

economics is

• A

to !earn a way of thin(ing+•

0

to understand society and g!oba! affairs+

•C

to be an informed voter+•

'

A!! of the above•

Answer>'•

Among the fundamenta! concepts in

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Among the fundamenta! concepts in

economics are

• A opportunity cost+•

0 margina!ism+•

C efficient mar(ets+•

'A!! of the above•

Answer>'

Which of the fo!!o ing is the best

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Which of the fo!!owing is the best

definition of economics?

• A he study of how individua!s and societies choose to use thescarce resources that nature and previous generations haveprovided+

•0he study of how consumers spend their income+

•C he study of how business firms decide what inputs to hire andwhat outputs to produce+

•'he study of how the federa! government a!!ocates ta& do!!ars+

• Answer> A

Whi h f th f !! i t t t

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Which of the fo!!owing statements

is

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he study of economics

• A is a very narrow endeavor+•

0is a way of ana!y$ing decision%ma(ing processes causedby scarcity+

•Cis concerned with proving that capita!ism is better thansocia!ism+

•

'focuses on how a business shou!d function+

• Answer> 0

Which of the fo!!owing is an e&amp!e of a

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Which of the fo!!owing is an e&amp!e of a

normative statement?• Ahe unemp!oyment rate is si& percent+

• 0here shou!d be no unemp!oyment in an advanced industria! society+

•C.igher prices cause consumers to buy !ess+

• 'E)ui!ibrium price imp!ies that )uantity demanded e)ua!s )uantitysupp!ied+

• Answer>

0

Which of the fo!!owing is an

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Which of the fo!!owing is an

e&amp!e of a positive statement?• A

here shou!d be no unemp!oyment in an advanced industria! society+•

0.igher prices cause consumers to purchase !ess+

•

C

Consumption shou!d be distributed fair!y in society+•

'

4eop!e shou!d po!!ute as !itt!e as possib!e+•

Answer>0

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• #esources are un!imited in a wea!thy society+•

Answer>

• rue

2a!se• A: 2

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he branch of economics that e&amines the functioning of individua!

industries and the behavior of individua! decision%ma(ing units is

• Apositive economics+

•0normative economics+

•Cmacroeconomics+

•'

microeconomics+•

Answer>'

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3nf!ation and unemp!oyment

• Aare the focus of normative economics+

•0are a focus of microeconomics+

•Care a focus of positive economics+

•'are a focus of macroeconomics

Ans: '

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#eview erms and Conceptsceteris paribus

descriptive economics

economic growth

economic theory

economicsefficiency

efficient market

empirical economics

equity

Industrial Revolution

macroeconomics

marginalism

microeconomics

model

normative economics

opportunity cost

positive economics

scarce

stability

sunk costs

variable

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The role of managerial economics in managerial decision makingThe role of managerial economics in managerial decision making

The role of managerial economics in managerial decision

The role of managerial economics in managerial decision

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The role of managerial economics in managerial decisionmakingmaking

Managerial decision pro!lems

0roduct price and output

Make or !uy

0roduction techni$ue

'nternet strategy

dertising media and intensity

'nestment and financing

Managerial decision pro!lems

0roduct price and output

Make or !uy

0roduction techni$ue

'nternet strategy

dertising media and intensity

'nestment and financing

Economic concepts

Theory of consumer !ehaiour

Theory of firm

Theory of market structures and

pricing

Economic concepts

Theory of consumer !ehaiour Theory of firm

Theory of market structures and

pricing

Decision making tools

+umerical analysis

%tatistical analysis

;orecasting

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