Key terms by Rahul Jain

What is Economics? Economics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Greek for oikos (house) and nomos (custom or law), hence "rules of the house(hold).“  Managerial Economics  Managerial Economics can be defined as the study of economic theories, logic and tools of economic analysis that are used in the process of business decision- making.  “It is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management” – Spencer and Seigelman

Managerial Decisions Areas Assessment of investible funds Selecting business area Choice of Product Determining Optimum Output Determining Price of the Product Determining Input-Combination and technology Sales Promotion Application of Economic Concepts and Theories in Decision-Making Use of Quantitative Methods Mathematical tools Statistical tools Econometrics Managerial Economics Application of Economic Concepts, Theories and Analytical Tools to find Optimum Business Problems

How Economics Contributes To Managerial Task Of Decision Making  Building Analytical models to help recognize the structure of managerial problems.  Economic theory contributes to the business analysis.  Economic theories to clarify various concepts used in business to avoid conceptual pitfalls. The process of Business Decision-Making comprises of four phases:  Defining the objective to achieve  Collections and analysis of business related data (economic,social,political and technological environment)  Taking possible course of actions and;  Selecting from the available alternatives.

Microeconomics is a branch of economics that studies how individuals, households and firms make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold. Micro-Economics Applied to Operational Issues The issues that arise within the business are operational issues, and the following are the theories applied: Theory of Demand Theory of Production and Production Decisions Analysis of Market-Structure and Pricing Theory Profit Analysis and Profit Management Theory of Capital and Investment Decisions

Macroeconomics, on the other hand, involves the "sum total of economic activity, dealing with the issues of growth, inflation and unemployment and with national economic policies relating to these issues" and the effects of government actions (such as changing taxation levels) on them. Macro-Economics applied to Business Environment The issues that pertain to the business environment in planning and formulation of the future strategy under these three categories: Issues related to Macroeconomic trends in the Economy Issues related to Foreign Trade Issues related to Government Policies

Tools Of Managerial Economics Mathematical Tools Statistics Operations Research Management Theory and Accountancy

Gap Between Theory And Practice and the Role of Managerial Economics It is known that there is a gap between theory and practice. Theory which appears logically sound may not be directly applicable in practice. Example: Small business thinking to expand uses lots of resources and man power but cant get the same results as he expected. Objective of economic analysis is not to provide a machine or method which will instantly fit the problem and furnish a solution but to provide ourselves with an organized and orderly method of thinking out a particular problem

Managerial Economics Bridges The Gap Managerial economics applies economic logic and analytical tools to sift wheat from the chaff. The economic logic and tools of analysis guide them in ; 1) Identifying the goals 2) Collection of data 3) Analyzing the facts 4) Taking out conclusions 5) Determining alternatives for achieving the goals 6) Taking the final decision

OPPURTUNITY COSTS  Scarcity and alternative uses of the resources gives rise to the concept of Oppurtunity cost.  Oppurtunity cost of availing an oppurtunity is the foregone income Expected from the second best oppurtunity of using the resources. For example there are three firms and have to make a decision for the Disposal of 100 million rupees and there are three alternatives. 1.Expansion of the firm 2.Setting up a new unit of production 3.Buying shares in another firm Annual return of these three alternatives is 1.20 million 2.18 million 3.16million The decision would be to invest in the alternative one.The manager will have to sacrifice the annual return from the next best alternative that is alternative two.

ACCOUNTING PROFIT = TOTAL REVENUE – TOTAL COST ECONOMIC PROFIT= ECONOMIC REVENUE - ECONOMIC COST ECONOMIC COST = ACCOUNTING COST +IMPLICIT COST

Actual earnings – opportunity cost = economic gain or economic profit. This concept can be applied to all kinds of resources.

Population Population means- A group of individuals or items that share one or more characteristics from which data can be gathered and analyzed.

What is Macroeconomics? Macroeconomics is the study of the economy as a whole.

Samuelson defined it as, “Macroeconomics is the study of the behaviour of the economy as a whole. It examines the overall levels of a nation’s output, employment, prices and money ”

Importance of macroeconomics The importance of macroeconomics lies in providing a theoretical framework for finding solutions to three problems:- Problems of economic growth, Unemployment, and Inflation.

More Key terms Stock and Flow Variables Stock – Quantity of variable given at a point in time. For example Stock of Capital, money, inventory Flow- Expressed per unit of time E.g.- GDP, consumption, investments

Importance of Macro Economics Study of Economic growth Monetary Policy Study of Fiscal Policy Solving Important problems of Macro Economics Formulation of Economic Policies

Limitation of Macro May Ignore structural changes Lag Approximation