Module 1

Economics
The term “economics” has been derived from a Greek Word “Oikonomia” which means
“household”. Economics is a social science. It is called “social” because it studies mankind
of society. It deals with aspects of human behaviour. It is called science since it studies
social problems from a scientific point of view.
Definition of Economics
“Business Economics (Managerial Economics) is the integration of economic theory with
business practice for the purpose of facilitating decision making and forward planning by
management.” – Spencer and Seegelman.
A. Wealth Definition,
B. Welfare Definition,
C. Scarcity Definition and
D. Growth Definition
 A. Wealth Definition
In 1776, when Adam Smith published his famous book “An Enquiry into the Nature
and Cause of Wealth of Nation”, he defined economics as the study of the nature and
cause of national wealth. According to him, economics is the study of wealth- How
wealth is produced and distributed. He is called as “father of economics” and his
definition is popularly called “Wealth definition”. But this definition was severely
criticized by highlighting the points like;
Too much emphasis on wealth,
Restricted meaning of wealth,
No consideration for human feelings,
No mention for man’s welfare
Silent about economic problem etc
 Welfare Definition
It was Alfred Marshall in his classic work “Principles of Economics”, published in 1890,
shifted the emphasis from wealth to human welfare. According to him wealth is simply
a means to an end in all activities, the end being human welfare. He adds, that
economics “is on the one side a study of the wealth; and the other and more important
side, a part of the study of man”. Marshall gave primary importance to man and
secondary importance to wealth. But this definition also criticized on the grounds that
welfare cannot be measured correctly and it was ignored the valuable services like
teachers, lawyers, singers etc., (non-material welfare)
 C. Scarcity Definition
After Alfred Marshall, Lionel Robbins formulated his own conception of economics in his book
“The Nature and Significance of Economic Science” in 1932. According to him, “Economics is the
science which studies human behavior as a relationship between ends and scares means which
have alternative uses”.
The merits of scarcity definition are;
This definition is analytical,
Universal in application,
A positive study and considering the concept of opportunity cost.
Criticisms are;
It is too narrow and too wide,
It offers only light but not fruit, confined to micro analysis and
Ignores Growth economics etc.
He gave importance to four fundamental characters of human existence such as;
1. Unlimited wants - In his definition “ends” refers to human wants which are
boundless or unlimited.
2. Scarcity of means (Limited Resources) – the resources (time and money) at the
disposal of a person to satisfy his wants are limited.
3. Alternate uses of Scares means – Economic resources not only scarce but have
alternate uses also. So one has to make choice of uses.
4. The Economic Problem – when wants are unlimited, means are scarce and have
alternate uses, the economic problem arises. Hence we need to arrange wants in the
order of urgency.
 Nature of Managerial Economics
Managerial economics- Positive or Normative: Positive economics is descriptive in nature. It use
to describe economic activities as they are. Prof. Lionel Robbins says that economics is a positive
science. While normative economics ensures judgments of value. Managerial economics draws from
descriptive economics and tries to pass judgments of value in the context of the firm. Managerial
economics is mainly normative in nature.
Pragmatic and Realistic: Managerial economics is pragmatic and realistic in nature. The principles
of managerial economics are made use of to find the optimal solution to the problems faced by the
manager in due course of business which may be related to the choice and allocation of resources.
Goal Oriented : Managerial economics is goal oriented, It aims to achieve the objectives to the best
possible extent. Right from the very first activity undertaken by the organization it focus on the
ultimate goal of the organization, be it the profit maximization, wealth maximization or the sales
maximization.
Applied science: Managerial economics attempts to solve the business problem by identifying
the cause and effect relationship between the variables. Managerial economics also analyses the
effect of change in one variable on the other.
Related to other Disciplines: It makes use of the services of many other related sciences like
mathematics, statistics, engineering, accounting, operation research and psychology etc to find
solutions to business and management problems.
Applied Economic Theory: Managerial economics is economics which is applied in decision-
making process. Managerial economics attempts to links abstract theory with managerial
practice. Economics is also concerned with the problem of allocating limited resources among
unlimited wants. It involves the practical application of economic theory and methodology to
decision making problems faced by the various private, public and non-profit making
organizations. It helps in optimal decision making.
 Economic Decision Making
Decision making is the process of identifying alternative courses of action and selecting
an appropriate alternative in a given decision situation. So it has two important parts:
1. Identifying alternative courses of action means that an ideal solution may not exist
or might not be identifiable.
2. Selecting an appropriate alternative implies that there may be a number of
appropriate alternatives and that inappropriate alternatives are to be evaluated and
rejected. Thus, judgment is fundamental to decision making
Economic decision making refers to the process of making choices about how to use
resources in order to achieve the best possible outcome. It's about weighing the costs
and benefits of different options and choosing the one that provides the highest net
benefit. It refers to the process of making business decisions involving money.
Economic decision makers are either internal or external. Internal decision makers are
individuals within a company who make decisions on behalf of the company, while
external decision makers are individuals or organizations outside a company who make
decisions that affect the company eg. Banks, Creditors, Investors, etc.
The primary function of management in a business organization is decision making and
forward planning.
▪ Decision making and forward planning go hand in hand with each other. Decision
making means the process of selecting one action from two or more alternative courses
of action. Forward planning means establishing plans for the future to carry out the
decision so taken.
▪ The problem of choice arises because resources at the disposal of business unit are
limited and the firm has to make the most profitable use of these resources.
▪ The decision making function is that of the business executive, it takes the decision
which will ensure the most efficient means of attaining a desired objective, say profit
maximization. After taking the decision about the particular output, pricing, capital, raw
material etc. are prepared.
 Steps of Decision-making Process
Identifying the Problem: The decision-making process begins by recognizing a
problem that requires resolution. This problem may arise due to a gap between the
present state and the desired state of affairs or as a result of environmental changes
presenting threats or opportunities.
Diagnosing the Problem: Diagnosing the real problem involves analyzing its
elements, magnitude, urgency, causes, and its relation with other problems. Managers
must gather all relevant facts and analyze them carefully to diagnose the problem
accurately.
Discover Alternatives:Developing alternatives is a creative process that necessitates
research and imagination. The goal is to keep the number of alternatives manageable
while considering time and cost constraints.
Evaluate Alternatives: This process involves measuring the positive and negative
consequences of each option, considering costs and benefits. Judgement
and knowledge are vital in assessing the net benefit of each alternative.
Select the Best Alternative: After evaluating the alternatives, the optimal choice is
selected. The optimum alternative maximizes results under the given conditions. Past
experience, experimentation, research, and analysis contribute to selecting the best
alternative.
Implementation and Follow-up: After making a decision, the implementation process
begins with communication and obtaining feedback. Procedures, time frames, and
necessary resources are established for implementation. Continuous monitoring
ensures progress and desired outcomes.
 Forward planning
A forward plan is tactical planning that helps identify, schedule and prioritise actions
to achieve specific objectives over a defined period. It is more focused than a business
plan and typically covers a shorter time frame, often one year or less.
The primary purpose of such a plan is to ensure that the organisation stays on track in
meeting its goals and objectives. It often includes specific goals, timelines, action
items, resource allocation and accountability.
When preparing for a forward plan, there are several factors to take into mind:
Time scale: When setting project timelines, be realistic and allow sufficient time to deliver the
project. This includes factoring in unexpected delays that may arise during the project.
Budget: Proper budget planning is crucial to the success of any project. Ensure that quotes and
supply prices are locked in and that any potential cost overruns are anticipated and accounted
for.
Workforce: Adequate staffing levels and contingency planning should be considered,
especially during high employee absenteeism, such as holidays or peak work periods.
Time management: It’s important to properly allocate resources to ensure that workloads are
managed effectively and employees are not waiting for resources while on the job.
Unforeseeable adverse circumstances: Contingency planning addresses unforeseen events
that could disrupt the project timeline. Identifying critical aspects of the project and adding
additional time or resources as needed can help mitigate these risks.
Basic Economic Tools in Managerial Economics