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MBA502Session 1

The document outlines the fundamentals of economics, including key concepts such as scarcity, choice, and opportunity cost, as well as the different economic systems: capitalist, socialist, and mixed economies. It also discusses the challenges faced by management in achieving efficiency and effectiveness in resource utilization. The importance of the Production Possibility Frontier (PPF) is highlighted, illustrating the trade-offs and economic growth within an economy.

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12 views

MBA502Session 1

The document outlines the fundamentals of economics, including key concepts such as scarcity, choice, and opportunity cost, as well as the different economic systems: capitalist, socialist, and mixed economies. It also discusses the challenges faced by management in achieving efficiency and effectiveness in resource utilization. The importance of the Production Possibility Frontier (PPF) is highlighted, illustrating the trade-offs and economic growth within an economy.

Uploaded by

spierrejones077
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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MBA 502 Economic Analysis for

Business

Instructor : Prof. A. T. Fonseka


Session 1: Introduction to Economics (Prof. A.T.F.)

Outline
• Introduction
• Fundamental Concepts of Economics
Production Possibility Frontier (PPF)
• Basic Questions facing an Economy
• Basic Economic Systems
• Challenge facing Management
Introduction
• Economics is concerned with the day-to-day decisions we
make regarding our material well-being.

- Consumer: Ltd. income → Maximise utility


- Firm: Ltd. capital → Maximise profit
- Govt. Ltd. revenue → Maximise societal welfare
- Govt. policies: Impact on individuals & firms if
↑ in income tax
↑ corporate taxes
↑ in interest rate (↑ cost of borrowed funds)
Devaluation of Rupee
Continued
• Human beings have needs & wants to be satisfied. An economic
system provides the framework within which goods & services will
be produced to satisfy our needs & wants.
• A free market economy – Private sector undertakes production
A centrally planned economy – State makes production decisions
A mixed economy – Goods & services are produced both by the
private sector and government.
• How does the overall economy work (circular flow diagram)
Circular Flow of Income

Real flows

Money flows
Four – sector Economy
Flow of Factor Incomes

Flow of Factor Services


Households Firms

Flow of Goods & Services


Flow of Consumer Spending

Saving (s) for Investment (I)


Financial Sector
Taxes (T) Services (G)
Government
Imports (M) Exports (X)
Foreign Sector

Withdrawals / Leakages from circular flow W = S+T+ M


Injections into the circular flow J = I+G+X
Fundamental Concepts
The 3 basic concepts are:
1.Scarcity
2.Choice
3.Opportunity Cost

1. Scarcity
Human wants (or desires) are unlimited
But the resources to satisfy these wants are limited

The Economic Problem

Unlimited Wants ? Limited Resources


2. Choice

Resources are not only scarce but have alternative uses.


Hence, choices must be made between competing uses.

Paddy

Cultivation Vegetables

Flowers
Land

House

Building Row of shops

Row of Offices
3. Opportunity Cost (OC)

A decision to use a resource for one purpose


means that it is not available for another purpose
OC = cost or value of the next best alternative forgone

Opportunity Cost as Applied to the Consumer


Grapes (kg)

½ Budget Line (Consumption Possibility Line)

0
½ 1 Apples (kg)
Production Possibility Frontier (PPF)

PPF shows the maximum output an economy can produce with


- the given resources
- the given technology &
- the resources being fully employed
Combination x (units of wheat) y ( units of cloth)
a 0 10
b 1 9
c 2 7
d 3 4
e 4 0
Production Possibility Curve
Importance of PPF(PP Curve)
• Illustrates the fundamental concepts of Economics viz.
(1) scarcity (2) choice & (3) opp. cost
• Economic growth = an increase in value of output produced in
an economy.It is shown as an outward shift of PPF
• What factors cause a shift of PPF
- An outward shift of PPF
- An inward shift of PPF
Fundamental Questions Facing an Economy

• What goods to produce & in what quantities (how much of each


commodity)
• How to produce (labour intensive vs capital intensive method of
production)
• For whom to produce (‘who gets what’)
• When to produce (this year or later)
• Where to produce – location decision
Economic Systems

1.Capitalist, free enterprise economy


* Private ownership of means of production
* Motive: profit maximization
* Allocation of resources done by price mechanism

2.Socialist, centrally planned (command) economy


* State ownership of means of production
* Motive: societal welfare
* Resource allocation by a planning authority
(Answers to basic econ. questions are provided by the State)
Continued

3 Mixed economy (pvt. + public sector ownership of enterprises)


Production is undertaken by both pvt. & public sectors
Pvt. Sector – guided by profit motive
Govt. services – provided at a ‘reasonable’ price
Challenge facing Management
Managers must try to be both efficient & effective
Efficiency in utilizing resources… (↓cost, ↑ speed) &
Effectiveness means the degree of achievement of goals (results)
Productive Efficiency - it is producing a given output at the lowest
cost for that level of output; It is producing the max. output with a
given quantity of input.
X- Inefficiency - it is the inefficient use of resources. Output is
produced at a higher average cost (cost per unit)
Productivity = output ÷ input
Productivity

Productivity = Output ratio


Input

• Become Efficient: ↑in output with same input


• Downsize: same output using less input
• Breakthrough: ↑in output with ↓ in input
• Expand : both output & input increase with output rising faster

• Retrench : both output & input decrease with input decreasing faster
Assumption of Rational Behaviour

The fundamental assumption in Economics:


“ Economic agents always attempt to act in their self-interest”
(Economic Man)

Motive of consumer= maximize utility (satisfaction) derived from


consumption
Motive of firm = maximize profit
Motive of Govt : Societal welfare or vote maximisers?

“ It is not from the benevolence of the butcher, the brewer, or the baker, that we can
expect our dinner, but from their regard to their own interest” (Adam Smith)

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