Some Concepts of Economics, Relevant to Business Human wants are the starting point of all economic activities. They refer to the lack of satisfaction, a state of discomfort which every individual desires to eliminate. They can be Necessities, Comforts or Luxuries. Wants are unlimited. Recurring in nature. Cannot be satisfied either simultaneously or fully. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business Human wants are the starting point of all economic activities. They refer to the lack of satisfaction, a state of discomfort which every individual desires to eliminate. Lionel Robbins indicated that Wants are unlimited while means or resources available to satisfy them are limited or scarce. Resources have alternative uses. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business UTILITY is the capacity of a good to satisfy a human want . Total utility is the aggregate of utilities derived by the consumer from all the units of the commodity consumed. Marginal utility is addition to total utility made by the consumption of an additional unit of the commodity Chapter Two Managerial Economics

TUn = MU1st + MU2nd + MU3rd ……..+ MUnth Some Concepts of Economics, Relevant to Business UTILITY Thus Total Utility TUn = MU1st + MU2nd + MU3rd ……..+ MUnth therefore TU = ∑ MUs Whereas marginal utility is MUnth = TUn – TUn-1 Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business DEMAND Demand = Desire to buy + Ability to pay + Willingness to pay See the chapter Three on Demand Analysis Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business SUPPLY supply of any commodity refers to various amounts of commodity which the sellers are willing to sell at a different possible prices at any given time. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business PRODUCTION ► Commonly understood, production refers to creation of something which can be used to satisfy human want. ► In Economics , the process of addition of utilities to the existing matter *by changing its form, place and keeping it over time is referred to as production**. Technically in production inputs* are transferred to output** using Land, Labour, Capital & Organization - termed Factors of Production. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business DISTRIBUTION ► The term refers to the sharing of the wealth produced in the community among various factors of production. Land gets Rent Labour gets Wages Capital gets Interest & Organization gets Profits. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business DISTRIBUTION ► The term refers to the sharing of the wealth produced in the community among various factors of production. however, in general, the term distribution is loosely used to denote the process by which the goods & services produced, are made to reach, through different stages, to the final consumers. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business CONSUMPTION ► in Economics, implies destruction or use of utilities for satisfying human wants. however, as the consumer goes on consuming more and more units of the commodity , the total utility from the commodity increases, although the marginal utility from the additional unit of commodity consumed goes on diminishing. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business CONSUMPTION ► in Economics, implies destruction or use of utilities for satisfying human wants. ► however as the consumer goes on consuming more and more units of the commodity , the total utility from the commodity increases, although the marginal utility from the additional unit of commodity consumed goes on diminishing. If the price of the commodity is to be considered the consumer will go on buying commodity until Marginal Utility of X = Price of X. or MUx = Px Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business CONSUMPTION If the price of the commodity is to be considered the consumer will go on buying commodity until Marginal Utility (MU) of X = Price (P) of X. Since the consumer consumes a combination of commodities The Law of equi - MU indicates that MUx = MUy = MUz Px Py Pz Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business CONSUMPTION FUNCTION The psychological law of consumption as given by Keynes indicates that as income (Y) goes on increasing consumption (C) also increases, but at a rate less than increase in income; in such way that the savings (S) will also be increasing with the increase in income. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business CONSUMPTION FUNCTION Thus C = f(Y) and S = f(Y) Average Propensity to Consume is the ratio of consumption to income i.e. APC = C ÷Y. Marginal Propensity to Consume is the ratio of change in consumption to change in income i.e. MPC = ΔC ÷ ΔY. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business CONSUMPTION FUNCTION Thus C = f(Y) and S = f(Y) Average Propensity to Save is the ratio of savings to income i.e. APS = S ÷Y. Marginal Propensity to Save is the ratio of change in savings to change in income i.e. MPS = ΔS ÷ ΔY. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business CONSUMPTION FUNCTION Average Propensity to Consume & Save Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business Marginal Propensity to Consume and Save. CONSUMPTION FUNCTION Note how the graph indicates that as income increases consumption increases at a lesser rate but savings at higher rate. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business COST Production involves cost. it is aggregate of the expenditure incurred by the producer in the process of production. it is also the valuation placed on the use of resources We have several concepts of costs like fixed, variable, average, marginal, money, real, private, social costs etc. We study them later. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business PRICE The value of anything expressed in terms of money is the ‘Price’ of that thing. Market price is the price which actually prevails in the market at a given point of time. Normal price is that price which is normally expected to prevail in the long run. Market price is influenced by demand, as in a short period, supply is inelastic. Normal price is influenced by supply as in a long period , supply is expected to adjust itself to demand. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business MONOPOLY ► Monopoly is that market category in which there is a single seller. ► It occurs when there is only one producer of a commodity for which there is no substitute. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business PROFIT ► is a reward which goes to the organization ( entrepreneur ) as a factor of production for its participation in the process of production. ► In common terminology profit is excess of revenue over its cost. Gross Profit = Revenue less explicit costs & Net Profit = Gross Profit less Depreciation & Taxes. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business OPTIMIZATION ‘ making best possible use of available resources to obtain the maximum possible desirable quality of output.’ Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business AVERAGE & MARGINAL The concepts are applicable to both revenue as well as cost. Total cost (TC) Average cost (AC) = Units of Output Produced While marginal cost (MC) is additional cost for producing additional unit of output. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business AVERAGE & MARGINAL Either MCnth = TCn - TCn-1 Or ΔTC MC = ΔQ Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business ELASTICITY ► By elasticity we mean degree of responsiveness of change in one variable brought about by change in some other variable. ► The degree of responsiveness of quantity demanded of X to the change in price of X, is called as Price Elasticity of Demand. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business MICRO & MACRO ECONOMICS - Distinction MICRO Macro Unit of Study Individual Aggregate Method Slicing Lumping Subject Matter Study of product & Study of National Factor pricing etc. income, general level of prices, trade cycles etc. 4. Basis Based on Independence Based on inter- dependence 5. Advocated by Alfred Marshall J M Keynes 6. Vision Worm’s eye view. Bird’s eye view. Study of a tree. Study of a forest. Chapter Two Managerial Economics

Some Concepts of Economics, Relevant to Business Concepts Studied Wants Utility Demand Supply Production Consumption & Consumption Function Cost Price Monopoly Profit Optimization Average & Marginal Elasticity Macro & Micro Economics We will be using and expanding on them in the rest of the course. bye for now, get going! Chapter Two Managerial Economics