MODULE 1

INTRODUCTION TO ECONOMICS
Economics meaning- that time economics is originated from the Greek word "Oikonomia" which
means household. Economics is a science that deals with human wants and their satisfaction.
Definition of economics bye professor Lional Robins "a science which studies human behaviour
as a relationship between ends and scarce means which have alternative uses"
● Ends means human wants
● Means refers to resources to satisfy human wants are scarce.
Branches economics
A. Macroeconomics
B. Microeconomics

A. Macroeconomics (meaning- large)

Macroeconomics is study of the economy as a whole. Or it is the study of
aggregates and averages. Example- study of National Income, general price,
GDP(gross domestic Product) etc
Importance of macroeconomics
A. To formulate and executive economic policies
B. To understand the working of an economy
C. To evaluate performance of an economy
D. To develop microeconomics
E. To help in business decision making
B. Microeconomics
Microeconomics deals with individual units of an economy. Example-income of a consumer
Importance of microeconomics
A. Formulate economic policies
B. To explain different markets allocation of resources
C. To explain why some goods are producing more than others
D. To explain market mechanism
E. To explain conditions of efficiency in consumption and production
F. Policies for promote welfare
G. Useful for branches like public finance and international economics.

MANAGERIAL ECONOMICS
It is the application of economic theories and methods to solve business decision making
problems. The economic theories are the part of the theoretical side but managerial economics
is the practical side. In managerial economics both micro and macro economic concepts and
theories are used.
DECISION MAKING
Decision making is one of the most important functions of management. Decision making is the
process of making a choice among different alternatives. The process of decision-making arises
when there are two or more alternatives .A Businessman has to make the right decision from the
different choices available. The success of the business depends upon taking the right decision
at the right time from the different alternatives available.
IMPORTANCE OF DECISION MAKING
1. Proper utilisation of resources.
Better utilisation of resources like men, money , material, machine, methods and market
(6Ms) are possible with good decision making processes.
2. Select the best alternative
Decision making helps the business firm to evaluate different alternatives and select the
best alternatives.
3. Evaluation of managerial performance
Managerial performance can be evaluated and judged by looking the decisions taken by
a manager. If the decision taken by the manager is right then he is a qualified manager.
4. Motivation of employees
Rational decisions motivate employees. When employees are motivated it may increase
the profit level of the company.
5. Facilitate innovation
Rational decisions help to develop new ideas and new products that lead to innovation in
the firm.
6. Increase efficiency
Rational decision results in high return with low cost. This finally leads to efficiency of the
organisation.
7. Facing problems and challenges
Decision making helps the organisation to solve new problems and new challenges.
8. Indispensable elements(indispensable meaning-unavoidable)
Decision making is a crucial element in the success of an organisation. Because
managerial functions like planning, organising, staffing , directing, controlling are done by
a good decision making process.
9. Pervasiveness of decision making (pervasiveness meaning-spread)
The decision making process is spread over all the areas of organisation. Areas like
production marketing ,research and development, planning, organising etc are the result
of good decision making.

Application of Economic theory in business decisions

1.Demand theory
There are so many factors influences the demand for a product. For example price of the product,
income of the consumer, price of related goods etc. So the demand theory help the business firm
to know about consumer behaviour, factors responsible for change in demand, fluctuations in
demand etc.
2. Production theory
Production theory helps the business firm to know about how much of output can be produced
from a given level of input. Or to analyse change in output when one input is changed or all the
inputs are changed.
3. Cost Theory
Cost theory helps the business firm to know about various cost concept like short run cost, long
run cost, marginal cost etc.
4. Price theory
Price theory helps to understand about different market conditions lie perfect competition,
monopoly, monopolistic competition, oligopoly. It also helps to know how the price is fixed under
this market conditions.
5. Profit theory
Profit theory helps to know about various profit concept as well as to measure the current profit
and the future profit for the firm.
6. Theory of capital
Theory of capital helps the business firm to know about various possibilities of capital investment
for long term as well as short term investment and identify the most profitable investment
opportunity.
7. Theory of business cycle
By studying business cycle theories a manager comes to know about different strategies taken at
different levels of business cycle and the price policies taken at different phases of business cycle.

IMPORTANT ECONOMIC CONCEPT AND THEORIES APPLIED IN DECISION MAKING

1. Incremental reasoning
The use of incremental concept in business decisions is called incremental reasoning.
There are two incremental concepts – Incremental cost and Incremental revenue.
Incremental cost - is the change in total cost as a result of a change in the nature of
business activity. The change may be a change in price, introduction of a new product,
change in the distribution channel, installing a new machine, entering a new market etc.
Incremental revenue is the change in total revenue as a result of change price,
introduction of new product, change in the distribution channel, installing a new machine,
entering a new market.
2. Concept of time perspective
Economists distinguish short run and long run on the basis of time Short run - is a period
so short that the existing plant and equipment cannot be increased to produce additional
units of output. In the short run output can be increased only by increasing the variable
inputs like raw-materials, labour etc.

Long run - is a period long enough to make changes in the existing plant and equipment.
In the long run output can be increased by increasing both the fixed inputs and variable
inputs.
3. Discounting principle.
Discounting principle is based on time value of money. According to this theory the money
earned in the earlier period is more valuable than money and in the later period. This is
because money invested in the earlier period grows as a result of interest It earns. The
present value of future reading is calculated with the help of discounting principle with the
following formula

The Present Value (PV) factor of one rupee received can be calculated by using the
following formula

1 where
1/(1+r)n
 r =discounting rate
N = number of years
4. Opportunity cost principle
Opportunity costs represent the potential benefits an individual, investor, or business
misses out on when choosing one alternative over another. Opportunity cost arises when
there are alternatives.
5. Equi- marginal principle
The law of equi-marginal utility states that the consumer will distribute his money income
between the goods in such a way that the utility derived from the last rupee spend on each
good is equal. Factors of production are scarce and have alternative uses. So a business
firm should make optimum allocation of these factors to various uses. According to the
equi -marginal principle the allocation of factor inputs will be optimum when they are
allocated in such a way that the value added by the last unit is equal in all cases.
STEPS IN DECISION MAKING
1. Problem identification
2. Problem diagnosis
3. Discovering alternative
4. Evaluating alternative
5. Selecting the best alternative
6. Implementation
7. Follow up
TYPES OF BUSINESS DECISION
A. SPONTANEOUS AND RATIONAL DECISION

Spontaneous- decision taken without conscious thought and analysis. Quick decision is taken.
More possibility of error occurs in decision.
Rational- rational decision is taken by systematic and logical analysis of the matter. Study of all
the alternatives- less error in decision.
B. PROGRAMMED AND NON PROGRAMMED DECISION

Programmed- Decisions are taken in accordance with existing rules and procedures.
Programmed decisions are concerned with relatively routine and respective problems. This type
of decisions are taken by lower level management.
Non programmed decision- If the decision taken for an unusual complex problem then it is a non
programmed decision. This type of decision is taken by top level management.
C. INDIVIDUAL AND GROUP DECISION

Individual- when a decision is taken by a single individual it is called individual decision. This type
of decision is taken in a small organisation.
Group- when a decision is taken by a group of persons. Eg. Decision taken by board of directors
of committee.
D. SHORT RUN AND LONG RUN DECISION

Short run. When a decision taken for a short term period is called a short run decision. Such
decisions involve less uncertainty and risk.
Long run- when a decision taken for a long period of time it is called a long run decision. Such
decisions involve more uncertainty and risk.
E. Analytical decision

If the decision is taken on the basis of solid data and information available to the manager it is
called analytical decision. More often this type of decisions are taken when faced with complex
problems.

DECISION MAKING ENVIRONMENT

a. Decision making under certainty.

It is a condition When decision-maker has full and needed information to make a decision . Under
such conditions the decision maker knows all the information and all the other alternatives. Such
a condition exists in case of routine and respective decisions concerning the day-to-day operation
of a business.
b. Decision making under uncertainty

When the decision maker is not aware of or available alternatives, the risk associated with and
the consequences of each alternative. In such conditions managers make decisions on the basis
of certain assumptions, judgements and from the experience. Managers may not be aware of the
exact result.
c. Decision making under risk

This type of decision making manager has some good information available to him, but it is not
enough to answer all questions about the outcomes. The manager could define the nature of the
problem, possible alternatives and the probability of each alternative living to the desired result.
But the manager could not guarantee how the alternative may work.

Elements of Decision Making

A decision making process consists of the following elements.

1.Objectives of the decision
No decision is taken without an objective. Decision making is goal oriented. The objective of a
decision is to find solution to an existing problem.
2.Alternatives
There are different ways of finding a solution to a business problem and they are called
alternatives. The need for decision making arises only if there are two or more alternatives.
3. Outcome or pay off
Each alternative has its own expected outcome or pay off. It is on the basis of these outcomes
alternatives are evaluated and compared to select the best one.
4.Criteria
A decision maker can set evaluation criteria in order to ensure uniformity in the evaluation of
alternatives. Peter F Drucker has suggested the following criteria to evaluate alternatives.
a) Risk-degree of risk associated with each alternative.
b) B) Economy or effort-cost, time and effort involved in each alternative.
c) Timing – The time required for implementation of each alternative.
d) D) Limitation of resources – Physical, financial and human resources required for each
alternative.
5. The decision environment
The internal and external forces which influence the decision making process is called decision
environment. The internal environment consists of factors such as physical facilities, financial and
marketing capability, technological capability etc. The external environment consists of factors
such as government regulations, business cycle etc.
6. Limiting factor
Limiting factors are the constraints that prevent a decision maker from achieving the objectives of
a decision. For example, if availability of funds is a limiting factor then the decision maker should
consider only those investment alternatives that falls within the limit set by the top level
management.
Difference between microeconomics and macroeconomics
Microeconomics Macroeconomics

It is the study of individual It is the study of aggregates

units
The base of micro The basis of micro
economics is the price economics is national
mechanism income, employment etc
The main objective of micro Full employment
economics on the demand
side is to maximize utility
It assumes consumers are Its assumptions are based
rational on variable like aggregate
volume of output of an
economy
It is a partial equilibrium It is a general equilibrium
analysis analysis
It is considered as a static It is considered as a dynamic
analysis analysis