UNIT-1

INTRODUCTION TO ECONOMICS
Economics starts from the word Scarcity. To better understand the meaning of Economics it is required to
understand the meaning of Scarcity.
Scarcity: The situation in which unlimited wants exceeds the limited resources available to fulfill those wants.
MEANING OF ECONOMICS:
The study of the choices people make to attain their goals, given their scarce resources.
Economics is the social science that analyzes the production, distribution, and consumption of goods and
services. The term economics comes from the Ancient Greek word oikonomia, which means "management of a
household, administration" (from oikos, "house" + nomos, "custom" or "law", hence "rules of the household").
Current economic models emerged from the broader field of political economy in the late 19th century. A
primary stimulus for the development of modern economics was the desire to use an empirical approach more
akin to the physical sciences.
Wealth and Welfare Definition:
The Classical View: The classical economists beginning with Adam Smith defined economics as science of
wealth. Adam Smith defined it as the nature and cause of wealth of nations, whereby it proposes to enrich
both the people and sovereign. His follower J.B. Say in France defined economics as the study of the laws
which governs wealth. Other followers of classical view like Nassau Senior, F.A. Walker, J.S. Mill, and J.E.
Cairnes also defined economics as a matter of wealth.
The Neo-Classical View: Marshalls Definition: Alfred Marshall laid emphasized on man and his welfare.
Wealth was regarded as the source of human welfare, not an end in itself but a means to an end. According to
Marshall in his book entitled Principles of Economics, Political Economy or Economics is the study of
mankind in the ordinary business of life; it examines that part of individual and social action which is most
closely connected with attainment and with the use of material requisites of well being. Thus it is on the one
side a study of wealth; and on the other, and more important side, a part of the study of man.
Scarcity Definition of Robbins: In the publication Nature and Significance of Economic Science in 1932
Robbins defined, Economics is the science which studies human behavior as a relationship between ends
and scarce means which have alternative uses. This definition is based on the following related postulates:
1. Economics is related to one aspect of human behavior, of maximizing satisfaction from scarce resources.
2. Ends and wants are scarce. When a particular want is satisfied other crop up to take place.
3. The obvious reason for the non satisfaction of unlimited wants is the scarcity of means of the disposal of
mankind. The time and means available for satisfying these ends are scarce or limited.
4. The scarce means are capable of alternative use. At a time, the use of a scarce resource for one end
prevents its use for any other purpose.
5. Economics is related to all kinds of behavior that involve the problem of choice.
Growth oriented Definition: Prof. Samuelsons View: Modern age is age of economic growth. Its main
objective is to increase social welfare and improve the standard of living of the people by removing poverty,
unemployment, inequality of income and wealth etc. of nation. Prof. Samuelson has given a definition of
economics based on growth aspects. According to him:

Economics is the study of how people and society end up choosing, with or without the using of money, to
employ scarce productive resources that could have alternative uses to produce various commodities, over
time and distribute them for consumption, now or in the future, among various persons or groups in society.
Economics analyses the costs and the benefits of improving patterns of resource use.
SCOPE OF ECONOMICS
A discussion about the true scope of economics includes the subject matter of economics, whether economics is
a science or an art, or is a positive or a normative science.
ECONOMICS AS A SCIENCE: A science is a systematized body of knowledge ascertainable by observation
and experimentation. It is body of generalizations, principles, theories or laws which traces out a causal
relationship between cause and effects. For any discipline to be a science
1.
2.
3.
4.
5.
6.

It must be systematized bodies of knowledge;

Have its own laws or theories;
Which can be tasted by observation and experimentation;
Can make predictions;
Be self-corrective;
Have universal validity.

If these features of a science are applied to economics, it can be said that economics is a science.
Economics is also a science because its laws possess universal validity such as the law of diminishing returns,
the law of diminishing marginal utility, the law of demand etc. Again economics is a science because of its selfcorrective nature. It goes on revising its conclusions in the light of new facts based on observations.
ECONOMICS AS AN ART:
Art is the practical application of scientific principles. Science lays down certain principles while art puts these
principles into practical use. To analyze the causes and effects of poverty falls within the purview of science and
to lay down principles for the removal of poverty is art. Art facilitates the verification of economic theories.
Economics is thus both a science and an art in this sense.
ECONOMICS AS A POSITIVE SCIENCE:
A positive science may be defined as a body of systematized knowledge concerning what is. Thus positive
economics is concern with what is.
ECONOMICS AS A NORMATIVE SCIENCE:
Economics is a normative science of what ought to be. As a normative science, economics is concerned with
the evaluation of economic events from the ethical viewpoint. Marshall, Pigou and few other economists do not
agree that economics is only a positive science. They argue that economics is a social science which involves
value judgments and value judgments cannot be verified to be true or false. It is not an objective science like
natural sciences.
MICROECONOMICS: Microeconomics is the study of the economic actions of individuals and small groups
of individuals. This includes the study of particular firms, particular households, individual prices, wages,
income, individual industries and particular commodities.

 Microeconomics is the study of how households and firms make choices, how they interact in the
markets, and how government influences their choices.
Microeconomic issues include explaining how consumers react to changes in product prices and how
firms decide what prices to charge.
It also involves policy issues such as analyzing the most efficient way to reduce teenage smoking,
analyzing the costs and benefits of approving the sale of a new prescription drug, and analyzing the most
efficient way to reduce air pollution.
THREE BIG QUESTIONS OF MICROECONOMICS
1. What to produce and how much?
The answer of this question tells about the nature of the business and size of the product.
2. How to produce?
The answer of this question tells about the choice of technology and factors of production
3. For whom?
The answer of this question tells about the customers.
Importance / Advantages of Microeconomics:
1. Individual Behaviour Analysis
2. Resource Allocation
3. Price Mechanization
4. Helps in Economic Policy formulation
5. Free Enterprise Economy
6. Helpful in Public Finance management
7. Helpful in Foreign Trade
8. Social Welfare
SCOPE OF MICROECONOMICS

MACROECONOMICS: Macroeconomics is that branch of economic theory which deals with the study of the
economy in the aggregates with specific focus on unemployment, inflation, unemployment, business cycles,
growth, monetary and physical policies.
It is the study of the economy as a whole, including topics such as inflation, unemployment, economic
growth.
Metronomic issues include explaining why economies experience periods of recession and increasing
unemployment and why over the long run some economies have grown much faster than others.
It also involves policy issues such as whether Government intervention is capable of reducing the
severity of recession
THREE BIG QUESTIONS OF MACRECONOMICS
1. What determines the standard of living?
GDP
Per Capita Income=
Population
2. What determines the cost of living?
In India the cost of living is determined by Whole Sale Price Index (WPI)
3. Why our economy does fluctuate?
Scope of Macroeconomics:
1. Theory of National Income
2. Theory of Employments
3. Theory of Money
4. Theory of General Price Level
5. Theory of Economic Growth
6. Theory of International Trade
7. Macro Theory of Distribution
8. Theory of Trade Cycles
Importance / Advantages of Microeconomics:
1. To understand the working of economy
2. Helpful in formulation of economic policies
3. Helpful in controlling economic fluctuations
4. Helpful in international comparisons
5. National Income
6. Helpful in Understanding the Functioning of the Economy
Disadvantages / Limitations of Macroeconomics:
1. Dependence on the Individual Units
2. Heterogeneous Units
3. Misleading Aggregates
4. The Aggregates which compose a System may not be Significant
5. Micro Changes sometimes are More Important than Macro Changes

DISTINCTION BETWEEN MICROECONOMICS AND MACROECONOMICS

Microeconomics

Macroeconomics

1- Microeconomics is generally the study of 1- Macroeconomics looks at higher up country and

individuals and business decisions.
government decisions.
2- Microeconomics is the study of decisions that 2- Macroeconomics, on the other hand, is the field
people and businesses make regarding the of economics that studies the behavior of the
allocation of resources and prices of goods and economy as a whole and not just on specific
services.
companies, but entire industries and economies.
3- Microeconomics focuses on supply and demand
and other forces that determine the price levels
seen
in
the
economy.
For
example,
microeconomics would look at how a specific
company could maximize its production and
capacity so it could lower prices and better
compete in its industry.

3- This looks at economy-wide phenomena, such

as Gross Domestic Product (GDP) and how it is
affected by changes in unemployment, national
income, rate of growth, and price levels. For
example, macroeconomics would look at how an
increase/decrease in net exports would affect a
nation's capital account or how GDP would be
affected by unemployment rate.

4- The bottom line is that microeconomics takes a 4- Macroeconomics takes a top-down approach.
bottoms-up approach to analyzing the economy

MANAGERIAL ECONOMICS
Managerial economics refers to the application of economic theory and the tools of analysis of decision science
to examine how an organization can achieve its aims or objectives most efficiently.
Managerial economics helps in decision-making as it involves logical thinking. Moreover, by studying simple
models, managers can deal with more complex and practical situations.
Basically managerial economics concentrates on decision process, decision models and decision variables.
This can be explained by the following schematic chart:

SOME DEFINITIONS
Managerial Economics is economics applied in decision-making. It is a special branch of economics bridging
the gap between the economic theory and managerial practice. Its stress is on the use of the tools of economic
analysis in clarifying problems in organizing and evaluating information and in comparing alternative courses
of action.
-W. W. Haynes
Managerial Economics is the integration of economic theory with business practice for the purpose of
facilitating decision-making and forward planning by management.
- Spencer & Siegelman
The purpose of Managerial Economics is to show how economic analysis can be used in formulating business
policies.
-Joel Dean
CHARACTERISTICS OF MANAGERIAL ECONOMICS

It involves an application of Economic theory especially, micro economic analysis to practical

problem solving in real business life. It is essentially applied micro economics.
It is a science as well as art facilitating better managerial discipline. It explores and enhances economic
mindfulness and awareness of business problems and managerial decisions.
It is concerned with firms behavior in optimum allocation of resources. It provides tools to help in
identifying the best course among the alternatives and competing activities in any productive sector
whether private or public.

SCOPE OF MANAGERIAL ECONOMICS

Managerial Economics is a developing subject. The scope of managerial economics refers to its area of study.
Economics has two major branches Microeconomics and Macroeconomics. Both micro and macro economics
are applied to business analysis and decision making - directly or indirectly. Managerial economics comprises,
therefore both micro and macro economic theories.
The areas of business issues to which managerial economics can be applied are:
1. Demand Analysis & Forecasting
A major part of managerial decision making depends on accurate estimates of demand. When demand is
estimated, the manager does not stop at the stage of assessing the current demand but estimates future
demand as well. This is what is called by demand forecasting. Demand analysis helps in identifying the
various factors influencing the demand for a firms product and provides guide lines to manipulate demand.
2. Cost and Production analysis
In decision making, cost estimates are very essential. The determinants of estimating costs, the relationship
between cost and output, the forecast of cast and profit are vital to a firm.
3. Inventory Management
An inventory refers to a stock of raw materials which a firm keeps. Managerial will use such methods as
Economic order Quantity (EOQ) approach.
4. Advertising
To produce a commodity is one thing and to market it is another. Expenditure on advertising and related
types of promotional activities is called selling costs by economists.
Methods of Advertising:

Percentage of Sales Approach

All You can Afford Approach
Competitive Parity Approach
Objective and task Approach
Return on Investment Approach

5. Pricing decision, Policies & Practices

When pricing a commodity, the cost of production has to be taken into account. Business decisions are
greatly influenced by pervading market structure and the structure of markets that has been evolved by the
nature of competition existing in the market. Pricing is actually guided by consideration of cost plan pricing
and the policies of public enterprises.
6. Profit Management
In appraising a company, we must first understand how profits arise. The concept of profit maximization is
very useful in selecting the alternatives in making a decision at the firm level. Profit forecasting is an
essential function of any management. Managerial economics tries to find out the cause and effect
relationship by factual study and logical reasoning. For example, the statement that profits are maximum
when marginal revenue is equal to marginal cost, a substantial of economic analysis of this deductive
proposition attempts specific conclusions about what should be done.
7. Capital Management
Planning and control of capital expenditure is the basic executive function. The capital budgeting process
takes different forms in different industries. It involves the equimarginal principle. The objective is to assure
the most profitable use of funds, which means that funds must not be applied when the marginal returns are
less than in other uses.
Gap between Theory and Practice
There is undeniably a gap between economic theory and the real economic world. But, at the same time, it is
also a mistaken view that economic theories can be directly applied to business decision making. As already
mentioned, economic theories do not offer a custom-made or readymade solution to business problems. What
economic theories actually do is to provide a framework for logical economic thinking and analysis.
Managerial economics provides such tools necessary for business decisions. Managerial economics answers the
five fundamental problems of decision making. These problem are : (a) what should be the product mix (b)
which is the least cost production technique and input mix (c) what should be the level of output and price of
the product (d) how to take investment decisions (e) how much should be the selling cost. In order to solve the
problems of decision- making, data are to be collected and analysed in the light of business objectives. Business
economics supplies such data to the business economist.
As pointed out by Joel Dean "The purpose of managerial economics is to show how economic analysis can be
used in formulating business policies" The basic objective of managerial economics is to analyse economic
problems of business and suggest solutions and help the managers in decision-making. The objectives of
business economics are outlined as below:
1. To integrate economic theory with business practice.
2. To apply economic concepts: and principles to solve business problems.
3. To employ the most modern instruments and tools to solve business problems.
4. To allocate the scarce resources in the optimal manner.
5. To make overall development of a firm.
6. To help achieve other objectives of a firm like attaining industry leadership, expansion of the market share
etc.

7. To minimise risk and uncertainty

8. To help in demand and sales forecasting.
9. To help in operation of firm by helping in planning, organising, controlling etc.
10. To help in formulating business policies.
11. To help in profit maximisation.
Business economics is useful because: (i) It provides tools and techniques for managerial decisions, (ii) It gives
answers to the basic problems of business management, (iii) It supplies data for analysis and forecasting, (iv) It
provides tools for demand forecasting and profit planning, (v) It guides the managerial economist. - Thus,
Business economics offers a number of benefits to business managers. It is also useful to individuals, society
and government.
RELATIONSHIP BETWEEN MANAGERIAL ECONOMICS AND OTHER SUBJECTS
After studying the above you will be able to distinguish managerial economics with its related subjects.
Managerial economic is not something which is related to economics only, but there are other areas also to
which managerial economic is related. Other related subjects of managerial economics are:
Economics
Mathematics
Statistics
Accounting
Operation Research
Computers
Management
Before knowing the relationship between managerial economics and other related fields it is customary to
divide economics into positive and normative economics. Economists make a distinction between positive
and normative that closely parallels poppers line of demarcation.
Positive Economics: It deals with description and explanation of economic behavior, Economics and
Managerial economics. Managerial economics draws on positive economics by utilizing the relevant theories as
a basis for prescribing choices. A positive statement is a statement about what is and which contains no
indication of approval or disapproval. Its not like that positive statement is always right, positive statement can
be wrong. Positive statement is a statement about what exists.
Normative Economics: It is concerned with prescription or what ought to be done. In normative economics, it
is inevitable that value judgment are made as to what should and what should not be done. Managerial
economics is a part of normative economics as it focus is more on prescribing choice and action and less on
explaining what has happened. It expresses a judgment about whether a situation is desirable or undesirable.
The primary task of Managerial economics is to fit relevant data to this framework of logical analysis so as to
reach valid conclusion as a basis for action. Another branch of economics which is normative like managerial is
public policies analysis which is concerned with the problems of managing the government of a country.
Economic and Managerial Economics: Economics contributes a great deal towards the performance of
managerial duties and responsibilities. Just as the biology contributes to the medical profession and physics to
engineering, economics contributes to the managerial profession. All other qualifications being same, managers
with working knowledge of economics can perform their function more efficiently than those without it.
Mathematics and Managerial Economics: Mathematics in Managerial Economics has an important role to
play. Businessmen deal primarily with concepts that are essentially quantitative in nature e.g. demand, price,
cost, wages etc. The use of mathematical logic in the analysis of economic variable provides not only clarity of
concepts but also a logical and systematical framework.
Statistics and Managerial Economics: Statistical tools are a great aid in business decision making. Statistical
techniques are used in collecting processing and analyzing business data, testing and validity of economics laws

with the real economic phenomenon before they are applied to business analysis. The statistical tools for e.g.
theory of probability, forecasting techniques, and regression analysis help the decision makers in predicting the
future course of economic events and probable outcome of their business decision. Statistics is important to
managerial economics in several ways. Managerial Economics calls for marshalling of quantitative data and
reaching useful measures of appropriate relationship involves in decision making. Let me explain it through an
example: In order to base its price decision on demand and cost consideration, a firm should have statistically
derived or calculated demand and cost function.
Operation Research and Managerial Economics: Its an inter-disciplinary solution finding techniques. It
combines economics, mathematics, and statistics to build models for solving specific business problems. Linear
programming and goal programming are two widely used Operational Research in business decision making. It
has influenced Managerial Economics through its new concepts and model for dealing with risks. Though
economic theory has always recognized these factors to decision making in the real world, the frame work for
taking them into account in the context of actual problem has been operationalized. The significant relationship
between Managerial Economics and Operational Research can be highlighted with reference to certain
important problems of Managerial Economics which are solved with the help of Operational Research
techniques, like allocation problem, competitive problem, waiting line problem, and inventory problem.
Management Theory and Managerial Economics: As the definition of management says that its an art of
getting things done through others. Bet now a day we can define management as doing right things, at the right
time, with the help of right people so that organizational goals can be achieved. Management theory helps a lot
in making decisions. ME has also been influenced by the developments in the management theory. The central
concept in the theory of firm in micro economic is the maximization of profits. ME should take note of changes
concepts of managerial principles, concepts, and changing view of enterprises goals.
Accounting and Managerial Economics: There exits a very close link between Managerial Economics and the
concepts and practices of accounting. Accounting data and statement constitute the language of business. Gone
are the days when accounting was treated as just bookkeeping. Now its far more behind bookkeeping. Cost and
revenue information and their classification are influenced considerably by the accounting profession. As a
student of MBA you should be familiar with generation, interpretation, and use of accounting data. The focus of
accounting within the enterprise is fast changing from the concept of bookkeeping to that of managerial
decision making. Mathematics is closely related to Managerial Economics, certain mathematical tools such as
logarithm and exponential, vectors, determinants and matrix algebra and calculus etc.
Computers and Managerial Economics: You all know that todays age is known as computer age. Every one
of us is totally dependent on computers. These computers have affected each one of us in every field. Managers
also have to depend on computers for decision making. Computer helps a lot in decision making. Through
computers data which are presented in such a nice manner that its really very easy to take decisions. There are
so many sites which help us in giving knowledge of various things, and in a way helps us in updating our
knowledge.
.