Economics: Concept
Economics: study of how economic agents/societies chose to use scarce productive resources that have alternative uses to satisfy wants that are unlimited and of varying degrees of importance Economic problem: identification, description, explanation and solution Problem of scarcity Job of a manager: decision making: evaluate alternatives and chose the best; one of constrained optimization
Managerial economics
Macroeconomics: study of economic system as a whole Microeconomics: focuses on behaviour of individual players like
applied microeconomics focuses on topics of greatest interest and importance to managers, like
demand, production, cost, pricing, market structure Assists in evaluating if resources are allocated efficiently and in responding to economic signals/ changes in variables Assists in decision making by evaluating alternatives and selecting optimal course of action, given the constraints, and profit maximisation objective of the firm
determine solutions to questions Command economy: govt. decides market functions/systems; govt. controls all productive resources; govt. enterprise and ownership is the rule; authoritarian methods used to determine resource use and prices; like in earlier Russia, eastern Europe economies Mixed economy: both markets and command mechanisms used, govt. may control areas like defence, roads, pensions, schooling. May also intervene in markets to control prices and correct other shortcomings
Objective of a Firm
Profit Maximization: both current and future profits Thus maximize sum of present value of all future profits (discounted
values) This equals the value of the firm Thus profit maximization same as value maximization Subject to other objectives like those of maximization of market share, revenues, salaries, social welfare etc. Thus we may talk of satisficing (satisfactory profits) rather than maximizing various management objectives Subject to constraints like legal, moral, contractual, technological etc.
predictions of decision making in business Principal-agent problem: due to possibility that owners and their managers may have different objectives: hence need to align these Invisible hand principle:
Proclaimed by Adam Smith Pursuit of self interest by players in the markets will lead to
Concept of Profit
Profit = total revenues total costs Accounting profit different from economic profit Economic profit takes care of all costs, explicit and implicit, while accounting profits take care of only explicit costs Implicit costs include opportunity costs Opportunity costs: cost of next best alternative
Externalities: Benefits: enjoyed with out paying for them; eg. increased economic activity of an area where a large industry is set up Costs: paid by those who are not using the services: eg. social costs of pollution by an industrial enterprise