1.

Three Basic Economic Problems

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.

Three Basic Economic Problems of Society

Following figure shows the 3 fundamental economic problems faced by all societies worldwide.

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 fulfill their needs. Their demands are fulfilled by
organizations looking for profits. For instance, if cellphones 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.

Read More: What to Produce?

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 was made based on lowest cost and accessible modern technology.

Read More: How to Produce Goods and Services?

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.

2.What are the roles managerial economics for a manager?

The following aspects may be said to be inclusive under managerial economics:

Demand analysis and forecasting.
Cost and production analysis.
Pricing decisions, policies and practices.
Profit management.
Capital management.
These aspects may also be defined as the Subject-Matter of Managerial Economics. In recent years,
there is a trend towards integrations of managerial economics and operations research. Hence,
techniques such as linear programming, inventory models and theory of games have also been
regarded as a part of managerial economics.

Demand Analysis and Forecasting

A business firm is an economic organization, which transforms productive resources into goods that
are to be sold in a market. A major part of managerial decision-making depends on accurate estimates
of demand. This is because before production schedules can be prepared and resources are employed,
a forecast of future sales is essential. This forecast can also guide the management in maintaining or
strengthening the market position and enlarging profits. The demand analysis helps to identify the
various factors influencing demand for a firms product and thus provides guidelines to manipulate
demand. Demand analysis and forecasting, thus, is essential for business planning and occupies a
strategic place in managerial economics. It comprises of discovering the forces determining sales and
their measurement. The chief topics covered in this are:
Demand determinants
Demand distinctions
Demand forecasting.

Cost and Production Analysis

A study of economic costs, combined with the data drawn from the firms accounting records, can
yield significant cost estimates. These estimates are useful for management decisions. The factors
causing variations in costs must be recognised and thereby should be used for taking management
decisions. This facilitates the management to arrive at cost estimates, which are significant for
planning purposes. An element of cost uncertainty exists in this because all the factors determining
costs are not always known or controllable. Therefore, it is essential to discover economic costs and
measure them for effective profit planning, cost control and sound pricing practices. Production
analysis is narrower in scope than cost analysis. The chief topics covered under cost and production
analysis are:
Cost concepts and classifications
Cost-output relationships
Economics of scale
Production functions
Cost control.

Pricing Decisions, Policies and Practices

Pricing is a very important area of managerial economics. In fact price is the origin of the revenue of a
firm. As such the success of a business firm largely depends on the accuracy of price decisions of that
firm. The important aspects dealt under area, are as follows:
Price determination in various market forms
Pricing methods
Differential pricing product-line pricing and price forecasting.

Profit Management
Business firms are generally organized with the purpose of making profits. In the long run, profits
provide the chief measure of success. In this connection, an important point worth considering is the
element of uncertainty existing about profits. This uncertainty occurs because of variations in costs
and revenues. These are caused by factors such as internal and external. If knowledge about the future
were perfect, profit analysis would have been a very easy task. However, in a world of uncertainty,
expectations are not always realized. Thus profit planning and measurement make up the difficult
area of managerial economics. The important aspects covered under this area are:
Nature and measurement of profit.
Profit policies and techniques of profit planning.

Capital Management
Among the various types and classes of business problems, the most complex and troublesome for the
business manager are those relating to the firms capital investments. Capital management implies
planning and control and capital expenditure. In this procedure, relatively large sums are involved
and the problems are so complex that their disposal not only requires considerable time and labor but
also top-level decisions. The main elements dealt with cost management are:
Cost of capital
Rate of return and selection of projects.

The various aspects outlined above represent the major uncertainties, which a business firm has to
consider viz., demand uncertainty, cost uncertainty, price uncertainty, profit uncertainty and capital
uncertainty. We can, therefore, conclude that the role of managerial economics is mainly concerned
with applying economic principles and concepts to adjust with the various uncertainties faced by a
business firm.
 3.Difference Between Micro and Macro Economics

Key Differences between Micro and Macro Economics

1. Microeconomics studies the particular market segment of the economy, whereas

Macroeconomics studies the whole economy, that covers several market segments.

2. Microeconomics deals with an individual product, firm, household, industry,

wages, prices, etc., while Macroeconomics deals with aggregates like national income,
national output, price level, etc.

3. Microeconomics covers issues like how the price of a particular commodity will
affect its quantity demanded and quantity supplied and vice versa while
Macroeconomics covers major issues of an economy like unemployment, monetary/
fiscal policies, poverty, international trade, etc.

4. Microeconomics determine the price of a particular commodity along with the

prices of complementary and the substitute goods, whereas the Macroeconomics is
helpful in maintaining the general price level.

5. While analyzing any economy, microeconomics takes a bottom-up approach,

whereas the macroeconomics takes a top-down approach into consideration.