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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 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
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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
Use of Quantitative Methods
Application of
Economic Concepts
and Theories in
Decision-Making
• 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)
2)
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Identifying the goals
Collection of data
Analyzing the facts
Taking out conclusions
Determining alternatives for achieving the goals
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.
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.