MODULE - 1

INTRODUCTION TO ECONOMICS
•Economics is a social science concerned with the production,
distribution, and consumption of goods and services. It studies how
individuals, businesses, governments, and nations make choices about
how to allocate resources.

•Economics is the study of how people allocate scarce resources for

production, distribution, and consumption, both individually and
collectively.
What is Microeconomics and
Macroeconomics?
Ragnor Frisch : Micro means “ Small” and Macro means “Large”

Microeconomics deals with the study of individual behavior. It deals with

the equilibrium of an individual consumer, producer, firm or industry.

Macroeconomics on the other hand, deals with economy wide aggregates.

Determination of National Income Output, Employment, Changes in
Aggregate economic activity, known as Business Cycles, Changes in general
price level , known as inflation, deflation, Policy measures to correct
disequilibrium in the economy, Monetary policy and Fiscal policy
 INTRODUCTION TO MANAGERIAL ECONOMICS
DEFINITION
Managerial Economics is economics applied in decision making. It is a special
branch of economics bridging the gap between abstract theory and
managerial practice” – Willian Warren Haynes, V.L. Mote, Samuel Paul
“Integration of economic theory with business practice for the purpose of
facilitating decision-making and forward planning” - Milton H. Spencer
MEANING
Managerial economics is a branch of economics which deals with the
application of the economic concepts, theories, tools, and methodologies to
solve practical problems in a business.
Nature of Managerial Economics
• Art and Science: Managerial economics requires a lot of logical thinking and
creative skills for decision making or problem-solving.
• It is also a science as it involves the application of different economic
principles, techniques and methods, to solve business problems.
• Micro Economics: In managerial economics, managers generally deal with
the problems related to a particular organization instead of the whole
economy. Therefore it is considered to be a part of microeconomics.
• Uses Macro Economics: A business functions in an external environment,
i.e. market, which is a part of the economy.
• Therefore, it is essential for managers to analyze the different factors of
macroeconomics such as market conditions, economic reforms,
government policies, etc. and their impact on the organization.
• Multi-disciplinary: It uses many tools and principles belonging to various
disciplines such as accounting, finance, statistics, mathematics, production,
operation research, human resource, marketing, etc.
• Prescriptive / Normative Discipline: It aims at goal achievement and deals
with practical situations or problems by implementing corrective measures.
• Management Oriented: It acts as a tool in the hands of managers to deal
with business-related problems and uncertainties appropriately.
• It also provides for goal establishment, policy formulation and effective
decision making.
• Pragmatic: It is a practical and logical approach towards the day to day
business problems.
SCOPE OF MANAGERIAL ECONOMICS
• Micro-Economics Applied to Operational Issues
• To resolve the organization's internal issues arising in business operations, the
various theories or principles of microeconomics applied are as follows:
• Theory of Demand: The demand theory emphasizes on the consumer’s
behavior towards a product or service. It takes into consideration the needs,
wants, preferences and requirement of the consumers to enhance the
production process.
• Theory of Production and Production Decisions: This theory is majorly
concerned with the volume of production, process, capital and labor
required, cost involved, etc. It aims at maximizing the output to meet the
customer’s demand.
• Pricing Theory and Analysis of Market Structure: It focuses on the price
determination of a product keeping in mind the competitors, market
conditions, cost of production, maximizing sales volume, etc.
• Profit Analysis and Management: The organizations work for a profit.
Therefore they always aim at profit maximization.
• It depends upon the market demand, cost of input, competition level,
etc.

• Theory of Capital and Investment Decisions: Capital is the most critical

factor of business.
• This theory prevails the proper allocation of the organization's capital
and making investments in profitable projects or venture to improve
organizational efficiency.
• Macro-Economics Applied to Business Environment
• Any organization is much affected by the environment it operates in. The
business environment can be classified as follows:
• Economic Environment: The economic conditions of a country, GDP,
economic policies, etc. indirectly impacts the business and its operations.
• Social Environment: The society in which the organization functions also
affects it like employment conditions, trade unions, consumer cooperatives,
etc.
• Political Environment: The political structure of a country, whether
authoritarian or democratic; political stability; and attitude towards the
private sector, influence organizational growth and development.
• Managerial economics provides an essential tool for determining the
business goals and targets, the actual position of the organization, and what
the management should do fill the gap between the two.
 Significance of Managerial Economics
• Business Planning: Managerial economics assists business organizations in
formulating plans and better decision making. It helps in analyzing the demand and
forecasting future business activities.
• Cost Control: Controlling the cost is another important role played by managerial
economics. It properly analyses and decides production activities and the cost
associated with them.
• Managerial economics ensure that all resources are efficiently utilized which
reduces the overall cost.
• Price Determination: Setting the right price is one of the key decisions to be taken by
every business organization. Managerial economics supplies all relevant data to
managers for deciding the right prices for products.
• Business Prediction: Managerial economics through the application of various
economic tools and theories helps managers in predicting various future
uncertainties.
• Timely detection of uncertainties helps in taking all possible steps to avoid them.
• Profit Planning and Control: Managerial economics enables in planning and
managing the profit of the business.
• It makes an accurate estimate of all cost and revenue which helps in earning the
desired profit.
• Inventory Management: Proper management of inventory is a must for ensuring
the continuity of business activities.
• It helps in analyzing the demand and accordingly, production activities are
performed.
• Managers can arrange and ensure that the proper quantity of inventory is always
available within the business organization.
• Manages Capital: Managerial economics helps in taking all decisions relating to
the firm’s capital.
• It properly analyses investment avenues before investing any amount into it to
ensure the profitability of an investment.
Uses of Managerial Economics in Business Decision Making
Role and responsibilities of Managerial Economist
• A managerial economist helps the management by using his analytical skills
and highly developed techniques in solving complex issues of successful
decision-making and future advanced planning.

• The role of managerial economist can be summarized as follows:

1.He studies the economic patterns at macro-level and analysis it’s

significance to the specific firm he is working in.
2.He has to consistently examine the probabilities of transforming an
ever-changing economic environment into profitable business avenues.
3.He assists the business planning process of a firm.
4.He also carries cost-benefit analysis.
5.He assists the management in the decisions pertaining to internal
functioning of a firm such as changes in price, investment plans, type of
goods /services to be produced, inputs to be used, techniques of
production to be employed, expansion/ contraction of firm, allocation of
capital, location of new plants, quantity of output to be produced,
replacement of plant equipment, sales forecasting, inventory forecasting,
etc.
6.In addition, a managerial economist has to analyze changes in macro-
economic indicators such as national income, population, business cycles,
and their possible effect on the firm’s functioning.
7.He is also involved in advising the management on public relations,
foreign exchange, and trade.
He guides the firm on the likely impact of changes in monetary and fiscal
policy on the firm’s functioning.
8.He also makes an economic analysis of the firms in competition. He has to
collect economic data and examine all crucial information about the
environment in which the firm operates.
9.The most significant function of a managerial economist is to conduct a
detailed research on industrial market.
10.In order to perform all these roles, a managerial economist has to conduct
an elaborate statistical analysis.
11.He must be vigilant and must have ability to cope up with the pressures.
12.He also provides management with economic information such as tax
rates, competitor’s price and product, etc. They give their valuable advice to
government authorities as well.
13.At times, a managerial economist has to prepare speeches for top
management.
 Definition of Firm
1. Firm is a unit of production that employs factors of production (or inputs) to
produce goods & services under given state of technology.
2. It is an independently administered business unit – Hanson.
3. It is a center of control where the decisions about what to produce & how to
produce are taken.
4. It is a business unit which hires productive resources for the purpose of
producing goods & services.
EXAMPLE
 INDUSTRY
• Industry is a group of related firms. The relationship between the firms may
be either based upon product or process criterion, e.g. dairy industry or
food processing industry etc. The concept of industry is helpful to
government and businessmen to formulate their policies.
• EXAMPLE
FAST FOOD RETAIL FOOD SERVICE
FAST FOOD RESTAURANT CHAIN
Burger King KFC (Kentucky Fried Chicken)
Starbucks and Dunkin Donuts

MOTOR VEHICLES INDUSTRY

Ford Motor Company General Motors (GM)
BYD Company Ltd. Rivian
BMW Group Tata Motors
Hyundai Kia

DEPARTMENT STORE AND GENERAL MERCHANDISE INDUSTRIES

Amazon Costco
Target The Kroger Co
• There are four different types of industries
• Genetic Industry: It involves activities in reproducing and multiplying certain
species of plants and animals for the sake of earning profit from their sale. Fish
culture, cattle breeding, goatery and piggery are included in genetic industries.
• Extractive Industry: The industries engaged with the discovery or extracting
natural resources like minerals soil, water and forests are called extractive
industries. Mining, agriculture and fishing are best examples of extractive
industries.
• Manufacturing Industries: The industries engaged in the conversion of raw
material into finished products are called manufacturing industries. Cotton
textile, sugar, iron and steel are the best examples of manufacturing industries.
• Construction Industry: The industries in the construction of infrastructure like
building, dams, roads, bridges and canals are called construction industries.
 DISTINGISH BETWEEN FIRM AND INDUSTRY

FIRM INDUSTRY
Firm is a part of an industry. Industry is a group of firms.
It is an individual unit of an industry.
There will be the existence of one firm.
There can be many firms in one
It is a sub-sector of a business. industry.
It is a sub-sector of an economy.
No separate rules and regulations are Rules and regulations are made for an
formulated for a firm. industry.
FORMS OF OWNERSHIP
OBJECTIVES OF FIRM

1. CONVENTIONAL OBJECTIVE OF FIRM

• PROFIT MAXIMISATION:
2. ALTERNATIVE OBJECTIVE OF BUSINESS FIRMS
• BAUMOL'S THEORY OF SALES REVENUE MAXIMISATION
• MARRIS’S GROWTH MAXIMIZATION MODEL / MARISS’S HYPOTHESIS
THEORY
• WILLIAMSON’S MANAGERIAL DISCRETIONARY THEORY/ WILLIAMSON’S
HYPOTHESIS OF MAXIMISATION OF MANAGERIAL UTILITY FUNCTION
 PROFIT MAXIMISATION
• In the conventional theory of the firm, the principal objective of a business
firm is profit maximization.
• The assumptions are
• Tastes and technology is given
• Price is given under perfect competition market
• The firm is supposed to act as one of a large number of producers which
cannot influence the market price of the product.
• A firm is the price-taker and quantity-adjuster. Thus the demand and cost
conditions for the product of the firm are determined by factors external to
the firm. It is the amount left with the entrepreneur after he has made
payments to all factors of production, including his wages of management.
• The rules for profit maximisation are
(1) MC = MR
(2) MC should cut MR from below.
 ALTERNATIVE OBJECTIVES OF BUSINESS FIRMS
• BAUMOL'S THEORY OF SALES REVENUE MAXIMISATION
• In the words of Baumoul, 'The sales maximisation goal says that managers of
firms seek to maximize their sales revenue subject to the constraint of
earning a satisfactory profit."
• According to him, sales volumes, and not profit volumes, determine market
leadership in competition.
• He further stressed that in large organisations, management is separate
from owners. Hence there would always be a dichotomy of managers' goals
and owners' goals.
• Manager's salary and other benefits are largely linked with sales volumes,
rather than profits.
• Baumol hypothesised that managers often attach their personal prestige to
the company's revenue or sales; therefore, they would rather attempt to
maximise the firm's total revenue, instead of profits.
• Moreover, sales volumes are better indicator of firm's position in the
market, and growing sales strengthen the competitive spirit of the firm.
• Since operations of the firm are in the hands of managers, and managers'
performance is measured in terms of achieving sales targets, therefore it
follows that management is more interested in maximising sales, with a
constraint of minimum profit.
• Hence the objective is not to maximise profit, but to maximise sales
revenue, along with which, firms need to maintain a minimum level of
profit to keep shareholder satisfied. This minimum level of profit is
regarded as the profit constraint.
Arguments in favour of Maximisation of Sales Goal
• Following arguments are given in favor of maximization of sales goal:
• More Realistic: Goal of maximization of sales is a more realistic goal- In fact,
firms accord more importance to the goal of sales maximization than profit
maximization. It is so because success of a firm is generally judged from its
total sales.
• More Practical: Revenue maximization thesis of Baumol is more practical. It
is so because goal of revenue (Sales) maximization leads to more
production which, in turn, leads to fall in price
• More Availability of Loans: At the time of sanctioning loan to a firm,
financial institutions mainly consider its sales. Prospects of loans are bright
for such firms as have large total sales.
• Strong position in the Market: Maximum sales of a firm symbolize its
strong position in the market. Sales of a firm will be large only in that
situation when consumers like its production, firm has more
competitive power and has been expanding. All these features are
indicative of the progress of the firm.
• More Advantageous to the Managers: sales maximisation has a
favourable effect on their wages. Firm is in a position to offer higher
wages to the employees. Consequently, employer-employee relations
become more cordial.
MARRIS’S GROWTH MAXIMIZATION MODEL / MARISS’S HYPOTHESIS THEORY

• Working on the principle of segregation of managers from owners, Marris

proposed that owners (shareholders) aim at profits and market share,
whereas managers aim at better salary, job security and growth.
• These two sets of goals can be achieved by maximising balanced growth of
the firm (G), which is dependent on the growth rate of demand for the
firm's products (GD) and growth rate of capital supply to the firm (GC).
• Hence growth rate of the firm is balanced when the demand for its product
and the capital supply to the firm grow at the same rate.
• Marris further said that firms face two constraints in the objective of
maximisation of balanced growth, which are explained below:
• i. Managerial Constraint
• ii. Financial Constraint
• i. Managerial Constraint
• Among managerial constraints, Marris stressed on the importance of
the role of human resource in achieving organizational objectives.
• According to him, skills, expertise, efficiency and sincerity of team
managers are vital to the growth of the firm.
• Non availability of managerial skill sets in required size creates
constraints for growth: organizations on their high levels of growth
may face constraint of skill ceiling among the existing employees.
• New recruitments may be used to increase the size of the managerial
pool with desired skills; however new recruits lack experience to make
quick decisions, which may pose as another constraint.
• ii. Financial Constraint
• This relates to the prudence needed in managing financial resources.
Marris suggested that a prudent financial policy will be based on at
least three financial ratios, which in turn set the limit for the growth
of the firm.
• In order to prove their discretion managers will normally create a
trade-off and prefer a moderate debt equity ratio (r1), moderate
liquidity ratio (r2) and moderate retained profit ratio (r3).
Williamson’s Managerial Discretionary Theory/ Williamson’s
Hypothesis of Maximisation of managerial Utility Function

• Williamson argues that managers have discretion to pursue objectives

other than profit maximisation.
• The managers seek to maximise their own utility function subject to a
minimum level of profit.
• Manager’s Utility function (U) is expressed as: U = f (S, M. ID)
• (Here, U = managerial utility; S = additional expenditure on staff; M =
managerial emoluments and ID = discretionary investment).
• i. Expansion of Staff: The manager will like to increase the quality and
number of staff reporting to him.
• This will lead to an increase in the salary of the staff.
• More staff are valued because they lead to the manager getting more
salary, more prestige and more security.

• ii. Increase in Managerial Emoluments: Managerial Utility also depends

on managerial emoluments.
• It includes facilities like entertainment allowance, luxurious office, staff
car, company phone, etc.
• Expenditure of this nature reflects to a large extent the prestige, power
and status of the manager.
• iii. Discretionary Power of Investment: Managerial utility also depends on the
discretion of the manager to undertake investment beyond those required for
normal operations.
• The manager is in a position to invest in advanced technology and modem plants.
• Such investments may or may not be economically efficient. These investments
may be undertaken for the self-satisfaction of the manager.

• At last, Williamson’s managerial discretion theory shows the utility function of a

manager.
• In this theory, the firm will try to get maximum returns or maximum profit where
as manager try to maximum utility satisfying function.
• They are in equilibrium when the utility has maximum amount.