1 Introduction: Micro Economics for Managers

2 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.

3 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

4 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.

5 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.

6 Role of Managerial Economics in Managerial Decision 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

7 What is Macroeconomics? Macroeconomics is the study of aggregates Macroeconomics is concerned with the behaviour of the economy as a whole – with booms & recessions, economy’s 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 subject matter of Macroeconomics includes factors that determine both the level of these variables and how the variables change over time.

8 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..

9 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…

10 3 Co-ordination Tasks of a Firm/ Economy Allocation of resources refers to the society’s decisions on how 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 to produce” 3.It must decide “how much of the total output of each good to distribute to each person”

11 Economic Fundamentals - An Integrated Perspective

12 Framework FIRM’S BUSINESS ACTIVITIES Operating Activities Investment Activities Financing Activities ECONOMIC ENVIRONMENT OWN BUSINESS STRATEGY Macro economic scenario Policy/ Regulatory scenario Corporate Strategy Business Strategy

13 Framework FIRM’S 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

14 Scarcity and Choice

15 Scarcity and Choice One of the basic themes of economics is scarcity: the fact that resources are 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

16 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

17 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