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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