Institute of Management

Technology
PGDM, Batch: 2015-17
Managerial Economics

Economic & Business Way of Thinking:

Value Lessons for a Manager

Submitted To:Dr. Gajavelli V S

Submitted
by:Prachi Sharan
Section C
2015164

Introduction:Managerial economics is the "application of the economic concepts and

economic analysis to the problems of formulating rational managerial
decisions" .It is sometimes referred to as business economics and is a
branch of economics that applies microeconomic analysis to decision
methods of businesses or other management units. As such, it bridges
economic theory and economics in practice.

Managerial decision areas include:

assessment of investible funds

selecting business area

choice of product

determining optimum output

determining price of product

determining input-combination and technology

sales promotion
**Source:- https://en.wikipedia.org/wiki/Managerial_economics

Twin themes of Economics

Scarcity occurs where it's impossible to meet all unlimited the desires
and needs of the people with limited resources i.e.; goods and services.
Society needs to find a balance between sacrificing one resource and
that will result in getting other.
Efficiency denotes the most effective use of a society's resources in
satisfying peoples wants and needs. It means that the economy's
resources are being used as effectively as possible to satisfy people's
needs and desires.

Thus, the essence of economics is to acknowledge the reality of

scarcity and then figure out how to organize society in a way which
produces the most efficient use of resources.
**Source:- http://docslide.us/documents/scarcity-and-efficiency-refers-to-the-twinthemes-of-economics.html

Micro-economics & Macro-economics

Micro-economics

Microeconomics is the study of

particular markets, and segments of
the economy. It looks at issues such
as consumer behaviour, individual
labour markets, and the theory of
firms.

Micro economics is concerned with:

Supply and demand in

Macro-economics
Macroeconomics is the study of the
whole economy. It looks at
aggregate variables, such as
aggregate demand, national output
and inflation.

Macroeconomics is concerned with

Monetary / fiscal policy. e.g. what

effect does interest rates have on

whole economy?
Reasons for inflation, and

unemployment
Economic Growth
International trade and

globalisation
Reasons for differences in living

individual markets

Individual consumer behaviour.

e.g. Consumer choice theory

Individual labour markets

e.g. demand for labour, wage
determination

Externalities arising from

production and consumption.

standards and economic growth

between countries.

Government borrowing

**Source:- http://www.economicshelp.org/blog/6796/economics/difference-betweenmicroeconomics-and-macroeconomics/

Economic Decisions:
All modern economies have certain fundamental or basic economic
problems to deal with. In every single economy, including the so-called
affluent society, resources are limited. As a result, decisions regarding
the resource use have to be made together by individuals, by business
corporations, and by society. It is the social choice and community
preferences which give substance to the question of macro-economic
decisions.

WHAT TO PRODUCE?
Each and every economy must determine what products and services, and
what volume of each, to produce. In some way, these kinds of decisions
should be coordinated in every society. In a few, the govt. decides. In
others, consumers and producers decisions act together to find out what
the societys scarce resources will be utilized for. In a market economy,
this what to produce? choice is made mainly by buyers, acting in their
own interests to fulfil their needs. Their demands are fulfilled by
organizations looking for profits. For instance, if cell phones are in demand

it will pay businesses to produce and sell these. If no one desires to buy
radio sets, it is not worth producing them. In case a manufacturer
produces an item which buyers dont buy in much quantity, there will
likely be inadequate income. The manufacturer will have to enhance the
quality and modify the product to match buyer tastes. If the item is still
not preferred, the producer will most likely halt the production. In this
manner, buyers get the goods they need. Customers rule the what?
decision. They vote for certain products and services by spending money
on those they like. Each and every manufacturer has to offer what buyers
want so that they can compete effectively against other manufacturers.
Government authorities also perform some part in making what?
decisions. For example, a law demanding all ladies to wear a helmet
generates demand for helmets, and profit-seeking businesses will produce
them.

HOW TO PRODUCE?
This basic economic problem is with regards to the mix of resources to use
to create each good and service. These types of decisions are generally
made by companies which attempt to create their products at lowest cost.
By way of example, banking institutions have substituted the majority of
their counter service individuals with automatic teller machines, phone
banking and Net banking. These electronic ways of moving money,
utilizing capital as opposed to labour resources, have decreased the
banks production costs. In the Nineteen fifties dams were being
constructed in China by countless people making use of containers and
shovels. On the other hand dams were being constructed in the united
states by using huge earth moving devices. The initial approach to
production, using a resource combination which includes a small capital
and much labour, is labour-intensive while the second, utilizing a little
labour and a lot of capital, is capital-intensive. Each one of these how
decisions were made based on lowest cost and accessible modern
technology.

FOR WHOM TO PRODUCE?

This basic economic question is focused on who receives what share of
the products and services which the economy produces. The portion of
production which each person and family can consume is determined by
their income. Income is distributed in line with the value of resources we
have to sell. As an example, a top cricket player will earn far more income
than a professor. A top cricket player has a resource to sell for which many
people will pay a high price. Professors are not so rare, and few people
pay for their services. The for whom decision can even be dependent upon

skills shortages, in which case organizations will provide higher incomes to

attract workers with rare skills. In the same way, high wages may be
required to attract employees to rural locations.

**Source:- http://universalteacher.com/1/three-basic-economic-problems/

Types of Economies:Economists generally recognize three distinct types of economic system.

These are
1) Command economies;
2) Market economies and
3)Traditional economies. Each of these kinds of economies answers the
three basic economic questions (What to produce, how to produce it, for
whom to produce it) in different ways.
In a command economy, the government decides the answers to the three
basic questions. It decides what will be made, how they will be made, and
who will get them. Recently, pure command economies have usually
been communist countries. Good examples today would be North Korea
and China.
In a market economy, consumers decide the answers to the three
questions. They do this by their choices of what to buy. No one tells
companies what to make -- they make whatever they think will sell. If
they choose wrong, they go out of business. Most developed economies
today are predominantly market economies. The US, Japan and Germany
are all market economies.
In a traditional economy, the three questions get answered by referring to
tradition -- you make what has always been made, in the way it has
always been made, etc. There aren't really any countries whose whole
economies are traditional. The closest you could get to this would be
Afghanistan or Bhutan -- places where there is little connection to the
global economy.
**Source:- http://www.enotes.com/homework-help/example-each-type-economic-systemprovide-name-104803

Production Possibility Frontier:In economics, a productionpossibility frontier (PPF), sometimes called

a productionpossibility curve, production-possibility boundary or product

transformation curve, is a graph representing production trade offs of an

economy given fixed resources.
In its microeconomic applications the graph shows the various
combinations of amounts of two commodities that an economy can
produce per unit of time (e.g., number of guns vs kilos of butter) using a
fixed amount of each of the factors of production, given the
production technologies available. At the macroeconomic level it can be
used to depict other rivalrous trade-offs like production of fixed
capital versus production of consumer goods.
A PPF (production possibility frontier) typically takes the form of the curve
illustrated on the right. An economy that is operating on the PPF is said to
be efficient, meaning that it would be impossible to produce more of one
good without decreasing production of the other good. In contrast, if the
economy is operating below the curve, it is said to be operating
inefficiently because it could reallocate resources in order to produce
more of both goods, or because some resources such as labour or capital
are sitting idle and could be fully employed to produce more of both
goods.
For example, assuming that the economy's available quantities of factors
of production do not change over time and that technological does not
occur, then if the economy is operating on the PPF production of guns
would need to be sacrificed in order to produce more butter. If production
is efficient, the economy can choose between combinations (i.e., points)
on the PPF.
In the PPF, all points on the curve are points of maximum productive
efficiency (i.e., no more output of any good can be achieved from the
given inputs without sacrificing output of some good); all points inside the
frontier can be produced but are productively inefficient; all points outside
the curve cannot be produced with the given, existing resources.
**Source:- https://en.wikipedia.org/wiki/Production%E2%80%93possibility_frontier