Microeconomics Macroeconomics

Study of the behaviour of an Study of the economy as a whole

individual economic unit
Tools: Aggregate Demand and
Tools:Demand and Supply Aggregate Supply
Aimsat determining the price of a Aims at determining the income and
commodity or factors of production employment level of the economy
Limited Aggregation Degree Highest Aggregation Degree
Gemples: Individual Output,
Tndvidual Income
Examples: National Output,National
Income
 with business practice
According to Spencer and Siegelman, "Managerial economics is the integration of economic theory
management".
for the purpose of facilitating decision-making and forward planning by
economic modes of thought to analy se business
According to Mc Nair and Meriam, "Managerial economics is the use of
situation".
to how economic analysis can be used in formulating
According to Jeal Dean, *The purpose of managerial economics is
policies".
economic
concerned with application of economic concepts and
According to Mansfield, "Managerial economics is
managerial decision'".
analysis to the problems of formulating rational
Economics or Economics for
Managerial economics is often called as Business Economic Business
Theory Management
Firms.
use economics and economic logic in
Thus, managerial economics is an attempt to knowledge, which is used Managerial Economics
economic
formulating business policies. It isthat body ofappropriate business decisions, and Figure 1.1: Managerial Economics
in analysing business problems for
taking
formulating forwardplans.
 Problems
1.1.15.1. Reasons Behind Economic
problems are:
Three principal reasons behind economic unlimited. No individual can fullysatisfy his wants. Wants of all the members of a
1) Unlimited Wants: Human wants are reality,
out. A
human wants have been multiplying day in and day coming
society cannot be fully satisfied in a given time. In In the
in India. Now, every household is keen to buy it.
few years back there was no demand for colour T.V. VCR, éxpensive cars,
consumer goods as video cameras,
years, there is great possibility of the rise in demand for suchbe said that at any given time there do exist innumerable
computers, calculators, mobile phones, etc. It can therefore,
unsatisfied wants in acommunity.
satisfying human wants are scarce or limited. These goods
2) Limited or Scarce Means: Most of the goods and services
supply, i.e.,
and services are called scarce because their demand is more than
D>S

It means that demand (D) is more than (>)supply (S)

Choice/Alternative Uses of Means: An important feature of the means is that they have alternative uses. For example,
wood may be used for making items of furniture or sports goods, or doors and windows, or railway coaches or any other
goods. Alternative uses of the means give rise to the problem of choice. This problem of choice is, indeed, economic
problem.
Since, an economy cannot produce all the goods and services that it needs, i.e., it cannot produce each and everything for
every individual, so it is confronted with some basic problems. It is in respect of these problems that it has to make a
choice. These very problems are called the basic problems of the economy.
 havebeen gone and ß

Tooks of Automatic
Stabilisers
automatic stabilisers will help to reduce the growth rate. With
period of high economic growth, income tax (note the
) High Growth: In a more tax revenues - people earn more and so pay
more
there will also be a fall in unempioyment so
government will receive
higher growth, the higher). With higher growth,
becomes
tax rate does not change, the %justunemployment benefits.
the govemment willspend less on It is the
designed to expand a country's output and curb the effects of deflation. growth
monetary policy, economic
2) Reflation: A fiscal or through a monetary action by a government. In a recession, theincomes people pay
intentional reversal of deflation stabilisers will help to limit the fall in growth.
With lower
becomes negative. However, automatic
government spending on unemployment benefits willincrease.
less tax. and
stabiliser. When an economy goes into recession the tax revenue
3) Tax System: It is the most
important automatic
economic activity. Alternatively when the economy expands,
automatically falls as most of the taxes
are related to
money than they otherwise would have and slows the
which gives individuals less
income tax revenues increase,
expansion. unemployment. When the
method used by government to slowdown the high rate ofwhich provides income for
) Unemployment Insurance: It isa unemployment insurance increases,
government spending on
economy falls into arecession,
unemployed individuals and keeps them spending.
 1.3.2. Role of Markets as follows:
government to act in ways that benefits the business activities. These are the roles of market business in
Market tries to force the households and
Money: The flow of goods and services between
1) Transaction of Product, Services and exchange for them, i.e., exchange of final goods and services. It is the
market balanced by the flow of paymnents made in
money from one toanother.
mechanism for exchanges of goods and services with respect to their
for the satisfaction of their wants and the sellers also get
2) Provide Place for Market: The buyers can get their goods actual, virtual or metaphorical, in which a market
market for their merchandising operations. A marketplace is the space,
consumers. In the absence of any market, the goods
operates. The goods are produced for marketing. i.e., selling to themanufacturers to produce the goods.
cannot be sold. The existence of a market provides incentive to the
services in a market call for the
3) Generation of Employment: The activities of repeated buying and selling of goods and
services to be rendered by different people. This way a market creates opportunities of employment to people in various
capacities like dealers and agents, etc. Employment growth is aprimary economic development goal of most small
communities. More jobs generally mean more residents, more spending at local businesses in market, and more tax
revenues for local governments. Thus job growth permits the expansion and improvement of public goods and services,
leading to an improved local qualityof life and enhanced prospects for future employment growth.
4) Index of Economic Situation: The economic condition of a country can be gauged by the presence of a market. A
country possessing an international or global market for its products and/or services is considered as an economically
advanced one in the world of business. Economic indicators like growth, foreign investment and inflation show huge
impact onthe market; therefore. knowing how to interpret and analyse them is important for all investors.
5) Supply versus Demand Adjustment: The existence of a market creates demand for goods and services. Certain raw
materials like cotton, jute, etc., have seasonal supplies but their demands are regular and continuous. An organised
market tor them ensures adjustments between the demand and supplies and stabilisation of prices over a long period.
New products and technologies are constantly being discovered and developed. Income, prices of related goods, resource
pnces, and intormation change over time. Factors like these will effect demand and supply, and thereby disrupt
cquilibrum in various markets. Markets will adjust to various changes that alter demand and supply.
 Managerial Economist
1.1.8. Responsibilities of of a managerial economist: essential and his
Following are the main
responsibilities
Empioyed: He must have strong conviction that profits are firm. He should
) To Make Reasonable
Profitson Capital capital invested by the
the management in earning reasonable profits on profits. If he fails to discharge this
main obligation is to assist to earn
enhance the capacity of the firmbusiness skill will be of no use to the firm.
always help the management to( and
knowledge, experience, expertise
responsibility, then his academic making indepth
for the managerial economist to make successful forecasts by firm. He must
necessary of the
2) Successful Forecasts: It is factors that may have influence over the profitability orthe workingresponsibility to alert
study of internal and external uncertainties. It is his major
eliminating the risk involved in management can make
aim at lessening if not fully time incase he discovers an error in his forecast, so that the
management at the earliest possible
policies and programmes of the firm.
necessary changes and adjustment in the maintain close
Informations: A managerial economist should establish and
3) Knowledge of Sources of
Economic
the relevant and valuable
information in the field.
in order to collect quickly
contacts with specialists and data sources the field. He should
he should develop personal relation with those having specialised knowledge of quickly he gathers
For this purpose active part in their activities. His success depends
on how
also join professional associations and take interest of the firm.
additional informations to serve best the
because only then he can be
economist must earn full status in the business team
4) His Status in the Firm: A managerial business policies. He should be ready and evenoffer
himself
successful
really helpful to the management in formulating support for his professional ideas by performing his functions
to take up special assignments. He is to win continuing
widely sought and used. He should express his ideas and
efficiently in an atmosphere where his resources and advice are
of technical words, while communicating with his
suggestions in simple and understandable language with minimum use
management executives.
 SION at the ight ime.

1.1.6. Limitations of Managerial Economics

Although managerialeconomics has done acommendable job in the field of business and provided a praiseworthy tool to the
business community, it has also played vital role in decision-making, resource mobilisation, business planning, demand
torecasting. minimisation of uncertainties and risks, cost control, etc., yet the other side of the picture cannot be ignored. Its
main limitations are as follows:
1) Emergence of Monopolies: Managerial economics has led to the emergence of monopolies in the free market economies for
the production of some important products or services, e.g., electricity producing and distributing companies, telephone
service, railways, etc., have been exploiting the consumers by charging high prices and making excessive profits.
 Introduction to Economic Analysis (Unit 1) 15

) Emergence of Oligopoly: It has also led to the emergence of oligopoly, whereby few producers or fims formally
collude with eachother or form acartel, and thus charge high price and restrict output.
3) Exploitation of Workers: There is an exploitation of workers by the undesirable activity of the private business, due to
unequal bargaining power of employers and workers. Child labour and women are employed at a very low wages while a
lot of work is obtained from them.
4) Cut-Throat Competition: Multinational corporations have given rise to cut-throat competition whereby closing the
future prospects of small business enterprises.
5) Limited Focus: Focus only on firm's internal management.