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DBM
Economic Analysis
Semester - I

Sonia Singh
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1

This topic deals with:


The nature and scope of Managerial Economics as a
whole.
The place of Managerial economics in the Economics
discipline.
How do managers make their decisions?

Decision making process

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Economic Mysteries
Why have paper towels
replaced hot-air hand
dryers in public restrooms?
Why do prices of some goods, like apples,
go down during months of heaviest
consumption, while others like beachfront
cottages, go up?
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What is Economics?
Economics is the study of how economic agents
or societies choose to use scarce productive
resources that have alternative uses to satisfy
wants which are unlimited and of varying
degrees of importance need of economics
arises because of
a) Unlimited wants
b) Scarce resources with alternative uses

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Microeconomics
The study of the decisions of people and
businesses and the interaction of those
decisions in markets. The goal of
microeconomics is to explain the
prices and quantities of individual
goods and services.

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Some Managerial Decisions

Resource allocation within the


organization in the short- and long-run
Expanding or contracting production
and distribution facilities
Developing and marketing new
products
Capital expenditures including the
possible acquisition of other firms
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Macroeconomics The study of the national economy and


the global economy and the way that
economic aggregates grow and
fluctuate. The goal of macroeconomics
is to explain average prices and the
total employment, income, and
production

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Macroeconomics vs. Microeconomics


MICROECONOMIC QUESTION

MACROECONOMIC QUESTION

Go to business school or take a job?

How many people are employed in the


economy as a whole?

What determines the salary offered by


Citibank to, a new Columbia MBA?

What determines the overall salary levels


paid to workers in a given year?

What determines the cost to a university or


college of offering a new course?

What determines the overall level of prices in


the economy as a whole?

What government policies should be adopted


to make it easier for low-income students to
attend college?

What government policies should be adopted


to promote full employment and growth in the
economy as a whole?

What determines whether Citibank opens a


new office in Shanghai?

What determines the overall trade in goods,


services and financial assets between the
U.S. and the rest of the world?

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Economic Theory
Microeconomics
Study of the economic behavior of individual
decision-making units.
Relevance to Managerial Economics

Macroeconomics
Study of the total or aggregate level of output,
income, employment, consumption,
investment, and prices for the economy
viewed as a whole.
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Economic Methodology

Economic Models
Abstract from details
Focus on most important determinants of
economic behavior cause and effect

Evaluating Economic Models


A model is accepted if it predicts accurately
and if the predictions follow logically from the
assumptions.

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Decision Sciences
Mathematical Economics
Expresses and analyzes economic models
using the tools of mathematics.

Econometrics
Employs statistical methods to estimate and
test economic models using empirical data.

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The Use of Economic Models


Positive Economics:Derives useful theories with testable
propositions about WHAT IS.
Normative Economics:Provides the basis for value judgements on
economic outcomes.WHAT SHOULD BE

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Market Mechanism

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Managerial Economics
Manager
A person who directs resources to achieve a stated
goal.

Economics
The science of making decisions in the presence of
scare resources.

Managerial Economics
The study of how to direct scarce resources in the
way that most efficiently achieves a managerial goal.
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Douglas - Managerial economics is .. the


application of economic principles and
methodologies to the decision-making process
within the firm or organization.
Pappas & Hirschey - Managerial economics
applies economic theory and methods to business
and administrative decision-making.
Salvatore - Managerial economics refers to the
application of economic theory and the tools of
analysis of decision science to examine how an
organisation can achieve its objectives most
effectively.
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These Definitions Cover a Number of


Different Approaches
1. Analysis based on the theory of the firm
2. Analysis based upon management sciences
3. Analysis based upon industrial economics

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MANAGERIAL ECONOMICS
The application of economics theories
and principles in managerial problems with
the purpose of optimization of decision
making.
Decision making involves the activities
regarding production, distribution and
consumption.

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The use of Economic Analysis in


management is to make business decisions
involving the best use (allocation) of
scarce resources.

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Economic Theory helps managers to


collect the relevant information and
process it in order to arrive at the
optimal decision.Given the goals of a
firm, a decision is OPTIMAL if it brings
the firm closest to its goals

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Management Decision Problems


Product Price and Output
Production Technique
Stock Levels
Advertising Media and intensity
Labor hiring and firing
Investment and Financing

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The Process of decision-making


Identify objectives
Define the problem
Identify possible solutions
Select the best possible
solution
Implement the decision
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Nature of Decision
What goods shall firm produce?
How should firm raise the necessary capital and
what shall be its legal form.
What technique shall be adopted, and what shall
be the scale of operations?
Where production is located?
How shall its product be distributed?
How shall resources be combined?
What shall be the size of output?
How shall it deal with its employees?

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Types of Decision
Organizational and personal decisions
Basic and routine decisions
Programmed and non-programmed
decisions.

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Conditions Affecting Decision Making


Certainty
Risk
Uncertainty

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Economic Conditions
Market Structure
Supply and Demand conditions
State of Technology
Govt. Regulations
International Dimensions
Future Macroeconomic factors

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Decision Making Model


The Classical Model
The Administrative Model

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The Classical Model


The manager has completed information about the
decision situation and operations under a condition
of certainty.
The problem is clearly defined, and the decisionmaker has knowledge of all possible alternatives and
their outcomes.

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Through the use of quantitative


techniques, rationality, and logic, the
decision-maker evaluates the alternatives
and selects the optimum alternative -the
one that will maximize the decision
situation by offering the best solution to
the problem.

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The Administrative Model


The manager has incomplete information about
the decision situation and operates under a
condition of risk or uncertainty.
The problem is not clearly defined, and the
decision-maker has limited knowledge of possible
alternatives and their outcomes.
The decision-maker satisfies by choosing the
first satisfactory alternative- one that will
resolve the problem situation by offering a good
solution to the problem.

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Tools of Decision Making


Marginal Analysis
Linear Programming
Game Theory
Optimization
Forecasting

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Market Interactions
Consumer-Producer Rivalry
Consumers attempt to locate low prices, while
producers attempt to charge high prices.

Consumer-Consumer Rivalry
Scarcity of goods reduces the negotiating power of
consumers as they compete for the right to those
goods.

Producer-Producer Rivalry
Scarcity of consumers causes producers to
compete with one another for the right to service
customers.

The Role of Government


Disciplines the market process.
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Cost-Benefit Approach to Decision Making

C(X) = Cost of doing


activity X
B(X) = Benefit of doing
activity X
If B(X) > C(X) then do X
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Theory of the Firm

Expected Value Maximization

Constraints and the Theory of the Firm

Owner-managers maximize short-run profits.


Primary goal is long-term expected value
maximization.
Resource constraints.
Social constraints

Limitations of the Theory of the Firm

Alternative theory adds perspective.


Competition forces efficiency.
Hostile takeovers threaten inefficient managers.

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Role of Business in Society

Why Firms Exist

Business is useful in satisfying consumer


wants.
Business contributes to social welfare

Social Responsibility of Business

Serve customers.
Provide employment opportunities.
Obey laws and regulations.

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The
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making

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The Concept of Business and the


Concept of Profit

Business
An organization that provides goods or
services to earn profits

Profits
The difference between a businesss
revenues and its expenses
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Economic Systems Around the


World

Economic System
A nations system for
allocating its resources
among its citizens

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Factors of Production
Resources
Resources used
used in
in the
the production
production of
of
goods
goods and
and services
services

Four traditional factors of production:


1. Natural Resources
2. Labor
3. Capital
4. Entrepreneurs

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Newer
Newer perspectives
perspectives include:
include:
5.
5. Physical
Physical Resources
Resources
6.
6. Information
Information Resources
Resources

Factors of Production
Natural Resources
Materials supplied by nature (such as land,
water, mineral deposits, and trees)

Labor (or Human Resources)


Physical and mental capabilities of people as
they contribute to economic production

Capital
Funds needed to create and operate a business
enterprise
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Factors of Production
Entrepreneur
Person who starts a new business or makes the
decisions that expand a small business

Physical Resources
Tangible things organizations use in the conduct of
their business

Information Resources
Data and other information used by a business
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Types of Economic Systems


Planned Economy
Centralized government controls all or most
factors of production and makes all or most
production and allocation decisions

Market Economy
Individuals control production and allocation
decisions through supply and demand

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Planned Economies
Communism
Planned economic system in which the
government owns and operates all major
sources of production

Socialism
Planned economic system in which the
government owns and operates selected
major sources of production
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Market Economies
Market
Mechanism for exchange between buyers and
sellers of a particular good or service

Input Market
Firms buy resources from supplier households

Output Market
Firms supply goods and services in response to
demand on the part of households

Capitalism
Market economy that provides for private
ownership of production and encourages
entrepreneurship by offering profits as an incentive
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Pure Market Economy


SUPPLY

OUTPUT MARKETS

DEMAND

Goods
Services

FIRMS
Supply products in
output markets
Demand resources
in input markets

DEMAND

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HOUSEHOLDS

INPUT MARKETS
Labor
Capital
Entrepreneurs
Physical Resources
Information Resources

Demand products in
output markets
Supply resources in
input markets

SUPPLY

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Mixed Market Economies


Economic
Economic system
system featuring
featuring characteristics
characteristics
of
of both
both planned
planned and
and market
market economies
economies
Privatization
Process of converting government enterprises
into privately owned companies

Socialism
Planned economic system in which the
government owns and operates only selected
major sources of production
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Marginal Principle
To maximize net benefits, the
managerial control variable should be
increased up to the point where MB =
MC
MB > MC means the last unit of the
control variable increased benefits
more than it increased costs
MB < MC means the last unit of the
control variable increased costs more
than it increased benefits
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Marginal Analysis
The

marginal cost of any good or


activity is its opportunity cost
The opportunity cost is the next best
alternative given up when a decision
is made?
What is your opportunity cost for
being here today?
Is it the same for everyone in this
room?
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Should
youYou
keep
your
business
open
Scenario:
are
managing
a fast
forfood
one additional
hamburgerhour?
restaurant.
You currently close at 10 pm every
night, but are considering
extending your hours to 11 pm on
weekends.
What are the relevant
considerations?
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Your

monthly rent?

Other

sunk costs?

The

hourly wages you pay your


employees?
Other

variable costs associated


with the extra hour?
Your

weekly revenues?

Your

likely revenues for the extra

hour?
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Skills required for subject


Logical and intuitive thinking
The main thinking tool
Interpretation of graphs
= MODELS
Mathematics
Reduce complex situations
to their fundamentals to
develop general principles

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The Modern economy

Economy - A mechanism that allocates


scarce resources among alternative
uses. This mechanism achieves five
things: What, How, When, Where, Who.
Decision makers - Households, Firms,
Governments.

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The Basic Decision-Making Units

A firm is an organization that


transforms resources (inputs) into
products (outputs). Firms are the
primary producing units in a market
economy.
.

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Households are the consuming units in an


economy
Firm : A many-layered organization that sets
laws and rules, operates a law-enforcement
mechanism, taxes households and firms, and
provides public goods and services such as
national defense, public health,
transportation, and education.

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Other important decision makers


An entrepreneur is a person who
organizes, manages, and assumes the
risks of a firm, taking a new idea or a new
product and turning it into a successful
business.
Market - Any arrangement that enables
buyers and sellers to get information
and to do business with each other.
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The Invisible Hand


Decentralized
Freedom
Self-interest
Motivated by incentives
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ECONOMIC SYSTEMS
LAISSEZ-FAIRE ECONOMIES:
THE FREE MARKET
laissez-faire economy
Literally from the French:
allow [them] to do. An
economy in which individual
people and firms pursue their
own self-interests without any
central direction or regulation.
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The Complexity of the Modern Economy

A market economy is self-organising in the sense that when


individuals act independently to pursue their own self-interest,
responding to prices set on open markets, they produce coordinated and relatively efficient economic activity.

Resources and Scarcity

Scarcity is a fundamental problem faced by all economies because


not enough resources - land, labour, capital, and entrepreneurship are available to produce all the goods and services that people
would like to consume.
Scarcity makes it necessary to choose among alternative
possibilities: what products will be produced and in what quantities.

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Who Makes the Choices and How


Modern economies are based on the specialisation and
division of labour, which necessitate the exchange of goods
and services.
Exchange takes place in markets and is facilitated by the use
of money.
Much of economics is devoted to a study of how markets work
to co-ordinate millions of individual, decentralised decisions.
Three pure types of economy can be distinguished:
traditional, command and free market.
In practice, all economies are mixed economies in that their
economic behaviour responds to mixes of tradition,
government command, and price incentives.

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Consumer Sovereignty
consumer sovereignty The
idea that consumers ultimately
dictate what will be produced
(or not produced) by choosing
what to purchase (and what
not to purchase).

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Distribution of Output
The amount that any one household
gets depends on its income and wealth.
Income is the amount that a household
earns each year. It comes in a number of
forms: wages, salaries, interest, and the
like.

Wealth is the amount that households


have accumulated out of past income
through saving or inheritance.

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Questions

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According to the text, the reason to study


economics is

A)
to learn a way of thinking.

B)
to understand society and global affairs.

C)
to be an informed voter.

D)
All of the above

Answer:D

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Among the fundamental concepts in


economics are

A) opportunity cost.
B) marginalism.
C) efficient markets.
D)All of the above
Answer:
D

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Which of the following is the best


definition of economics?

A) The study of how individuals and societies choose to use the


scarce resources that nature and previous generations have
provided.
B)The study of how consumers spend their income.
C) The study of how business firms decide what inputs to hire and
what outputs to produce.
D)
The study of how the federal government allocates tax dollars.
Answer:
A

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Which of the following statements


is NOT correct?
A)Economics is a behavioral science.

B)
In large measure, economics is the study of how people
make choices.

C) If poverty were eliminated there would be no reason to


study economics.

D) Economic analysis can be used to explain how both


individuals and societies make decisions.

Answer:
C
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The study of economics


A) is a very narrow endeavor.

B)
is a way of analyzing decision-making processes caused
by scarcity.

C)
is concerned with proving that capitalism is better than
socialism.

D)
focuses on how a business should function.

Answer: B
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Which of the following is an example of a


A)
normative statement?
The unemployment rate is six percent.

B)
There should be no unemployment in an advanced industrial society.
C)
Higher prices cause consumers to buy less.
D)
Equilibrium price implies that quantity demanded equals quantity
supplied.
Answer:
B

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Which of the following is an


example of a positive statement?
A)
There should be no unemployment in an advanced industrial society.

B)
Higher prices cause consumers to purchase less.

C)
Consumption should be distributed fairly in society.

D)
People should pollute as little as possible.

Answer:
B

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Resources are unlimited in a wealthy society.

Answer:
True
False

A= F

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The branch of economics that examines the functioning of individual


industries and the behavior of individual decision-making units is

A)
positive economics.

B)
normative economics.

C)
macroeconomics.

D)
microeconomics.

Answer:
D
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Inflation and unemployment


A)
are the focus of normative economics.

B)
are a focus of microeconomics.

C)
are a focus of positive economics.

D)
are a focus of macroeconomics
Ans
=D

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Review Terms and Concepts


ceteris paribus

marginalism

descriptive economics

microeconomics

economic growth

model

economic theory

normative economics

economics
efficiency

opportunity cost

efficient market

positive economics

empirical economics

scarce

equity

stability
sunk costs

Industrial Revolution
macroeconomics
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variable

The
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making

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The
Therole
roleofofmanagerial
managerialeconomics
economicsininmanagerial
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decision
making
making
Managerial
decision
Managerial decisionproblems
problems
Product
Productprice
priceand
andoutput
output
Make
or
buy
Make or buy
Production
Productiontechnique
technique
Internet
Internetstrategy
strategy

Advertising
Advertisingmedia
mediaand
andintensity
intensity
Investment
Investmentand
andfinancing
financing
Economic
Economicconcepts
concepts
Theory
Theoryofofconsumer
consumerbehaviour
behaviour

Decision
Decisionmaking
makingtools
tools
Numerical
Numericalanalysis
analysis

Theory
Theoryofoffirm
firm
Theory
Theoryofofmarket
marketstructures
structuresand
and
pricing
pricing

Statistical
Statisticalanalysis
analysis
Forecasting
Forecasting
Game
Gametheory
theory
Optimisation
Optimisation

Managerial
ManagerialEconomics
Economics
Use
of
economics
Use of economicsconcepts
conceptsand
and
decision
making
tools
to
solve
decision making tools to solve
managerial
managerialdecision
decisionproblems
problems
Optimal
Optimalsolutions
solutions
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Thank You
Please forward your query
To: sonia23singh@gmail.com
CC:
manoj.amity@panafnet.com
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