Economics

Father of Economics: Adam Smith, in 1776, in his pioneer book, The Nature and Causes of Wealth of Nation, he mentioned that Economics is a subject matter of production and growth of wealth of a nation. David Ricardo: Emphasized that Economics is a subject matter of distribution of wealth. Robinson in 1931, in his book Nature and Significance of Economic Science, emphasized that economics is a subject matter of scarcity. He has emphasized on certain important points such as: Unlimited wants Scarce means Alternative use of means Proper allocation of resources

Recent Definition of Economics: Economics is a branch of social science which studies the production, consumption and distribution of goods and services in an economy. So Economics concentrates on: Production What to produce? How to produce? For whom to produce? Consumption of goods and services Distribution
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Types of Economics:
1. Positive and Normative Economics:

Positive economics concerned with explaining what it is, that is, it describes theories and laws to explain the observed economic phenomenon. On the other hand, the normative economics concerned with what should be or what ought to be. More specifically, it is a body of systematized knowledge relating to criteria of what ought to be and concerned with the ideal as distinguished from actual. Moreover, the normative economics involves value judgments or what are simply known as values. It stress upon what is good and what is 3 bad.

2. In modern economics, the subject matter of economics

is divided into two broad categories such as: Micro-Economics Macro Economics The term micro-economics derived from the Greek ward MIKROS meaning SMALL and the term macro-Economics derived from the Greek ward MACROS meaning LARGE. Thus, Micro-economics deals with the analysis of small individual units of the economy such as individual consumer, individual firms and small aggregates or group of individuals such as various industries and markets.
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Macro-economics on the other hand, is concerned with the economic activity in large. It analyses the behavior of the whole economic system in totality or entirety. It studies the behavior of the large aggregates such as total employment, the national product or income, the general price level of the economy. Therefore, macroeconomics is known as aggregate economics. Professor Boulding says, macro-economics deals not with individual quantities as such but with the aggregate of these quantities, not with individual income but with the national income, not with the individual price but with the price level, not with individual outputs but with national product.
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 Besides, we have some classification of specialized economic branches, such as: 3. Development Economics:

important traditional

This branch of economics deals with The factors that determine economic development and growth of a country, The causes of under-development, poverty in less developed countries, Problems faced by these countries, And the policies to achieve high level of economic growth and employment.
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4. Public Economics:
This branch of economics has been specialized: To underscore the economic role of the government. To find out the sources of government revenues. To look at governments fiscal policy To measure the effects of taxation and public expenditure. To evaluate the causes and consequences of budgetary and fiscal deficits. And, finally, to look after the public sector economic activities. 7

5. Monetary Economics: It studies the monetary effects of the country including demand for and supply of money, working of the money market, credit and financial system, management of monetary systems. 6. International Economics: It studies the causes and consequence of international trade in goods and services, international flow of capital, international monetary and financial institutions, balance of payments and international payment systems.
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7. Industrial Economics:
This branch is concerned with the working, growth and structure of the industrial sector (Firm and Industries) of the country. It also deals with the management and organization of the industries, and problems and prospects of the industrial growth.

8. Labour Economics:
It examines the problems faced by labour as an economic class and problems associated with labour organizations, labour productivity and wages, exploitation of labour, labour welfare schemes, and labour laws and their effects. 9

9. Econometrics:
It is a combined study of statistics and mathematical techniques applied to economic data with view to testing hypothesis. More specifically, it is study to quantify the relationship, if any, between the dependent and independent variables and to measure the effects of economic policies. 10. History of Economic Thought: It is the study of evolution and development of economic thoughts and ideas, their backgrounds, logic and flaws. It contributes to the understanding of economic science.
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11. Regional economics:

It studies: The development of various regions of the country. It looks into the causes of imbalance in regional development. It examines why growth of urban economy is faster than that of rural economy.

12. Financial Economics:

This branch is concerned with the development and working of financial sector, especially the financial institutions that cater to the financial requirement of the industries and of the capital markets. It also studies how fluctuations in the financial 11 sector effects the working and growth of industrial sector.

13. Environmental Economics: It examines how industrial growth affects, rather destroys, natural environment of the country. It also studies how world industrial growth affects the global environment and causes global worming, and hence, affects climatic conditions.
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14. Managerial Economics: Managerial economics is however, an integration of both micro economic and macro economic aspects. It is that branch of economics which serves as a link between abstract theory and managerial practice. According to Mcnair and Merian, managerial economics is the use of economic modes of thought to analyze business situation. According to Spencer and Siegelman, managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management. Hague defined managerial economics as a fundamental academic subject which seeks to understand and to analyze the problems of business decision making. 13

Basic Features of Managerial Economics: Managerial economics is concerned with decision making of economic nature. This implies that managerial economics deals with identification of economic choices and allocation of scarce resources. Managerial economics is goal oriented and perspective. It deals with how decisions should be made by managers to achieve the organizational goal. Managerial economics is pragmatic. It concerned with those analytical tools which are useful in decision making. Managerial economics is both conceptual and methodological. It provides some well developed tools and methods to verify the economic concepts, which 14 helps the managers in decision making.

 Finally, managerial economics provides a link between traditional economics and decision sciences for managerial decision making. This can be better understood by the help of following diagram:
Decision Problem
Traditional Economics

Managerial Economics

Decision Sciences (Tools and Techniques of Analysis)

Optimal Solution to Business Problem

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Nature of Managerial Economics: Managerial economics is concerned with the business firm and the economic problems that every business management need to solve. More specifically, Managerial economics is micro economic in nature, where the unit of study is firm. Managerial economics is concerned with normative micro economics rather positive micro economics. In normative micro economics, the manager should think what should happen rather what does happen to the firm. More specifically, the managerial economics tell us what objectives a business should pursue and how they should be set.
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 Managerial economics concentrate on making economic theory more application oriented. While traditional economics tries to solve the complicated theoretical issues, managerial economics tries to introduce complication s which the economist ignores by assuming them away. Hence, it is more pragmatic. Managerial economics also concentrates on macro economic aspects to understand the economy as a whole. More specifically, it tries to see how the aggregate economy or Government intervention affects the business situation.
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Chief Characteristics of Managerial Economics: The main characteristics of managerial economics are as follows: Managerial economics is micro-economic in character as it concentrates on the study of firm. Managerial economics also takes the help of macro economics to understand and adjust the environment in which the firm operates. It is normative rather than positive economics It is both conceptual and methodological. The concept of managerial economics is mainly based on the theory of firm. It is only for the analysis of profits that helps in taking of the the theory of distribution. Knowledge of managerial economics helps in making wise decisions/choices, which helps the managers to 18 allocate the scarce resources properly.

Importance of Managerial Economics: In order to make managers more competitive and efficient, the managerial economics provides a number of tools and techniques. With the help of such models/techniques, the managers can capture the essential relations builds in the economy. Managerial economics provides the important concepts such as concept of elasticity of demand, fixed and variable costs, short run and long run costs, opportunity costs, net present values etc. to understand and solve the business problems.
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 Managerial economics is helpful in making decisions like:

What should be the product-mix? What should be the production technique and input mix that is least costly? What should be the level of production and the price for the product? How to take investment decisions? What should be firms advertisement? How to allocate advertisement fund between different media? 20

Scope of Managerial Economics:

Managerial economics closely connected with the economic theory i.e. both micro and macro economics, operation research, mathematics, statistics and decision making. Managerial economics also draws together and related ideas from various functional areas of management like production, marketing, finance and accounting, project management etc. An efficient and competent managerial economist has to integrate all such concepts and ideas to understand and analyze practical managerial problems.
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As far as managerial economics is concerned, the following aspects constitute its subject matters: Objective of business firm. Demand analysis and demand forecasting. Production and costs. Competition: Perfect; Monopoly; Monopolistic and Oligopoly. Pricing and output. Profit. Investment and capital budgeting. Product policy, sales promotion and market strategy.
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Managerial Economics and Other Important Areas:

Traditionally, managerial economics drew heavily upon economic analysis for its decision making process. But lately, the development of mathematical and statistical technique for analyzing situation faced by a managerial economist have also promoted their use in decision making process. These are:

1. Managerial Economics and Traditional Economics:

It helps the managers to understand the market conditions and the general economic conditions/environment with which firm operates. To provide clues to understand and analyze the resource allocation problem. It deals with efficiency concepts such as technical efficiency, allocative efficiency and the economic efficiency as well.
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2.

Managerial Economics and Operation Research: To take effective decisions. To solve the decision related problems. Its time consuming and costly matter (negative points). 3. Managerial Economics and Mathematics: The relationship helps the managers in: Providing tools and methodologies. Provides mathematical tools/models to analyze the economic concepts such as geometry, algebra, calculus, vector and determinants, input-output 24 tables etc.

4. Managerial Economics and Statistics: To quantify the past economic activity and to predict the future course. To understand and solve the decision making problem by averages, dispersion, probabilities, index numbers etc. 5. Managerial Economics and the Theory of Decision Making: Helps to decide whether maximization of profit for the firm or maximization of utility for the consumer. To find the solution that balances the conflicting objectives. 25

Role of Managerial Economics in Business:

Managing decisions and processing informations are two primary tasks of managers. The task of organizing and processing informations and then making intelligent decisions can make two important forms, such as: Task of taking specific decisions by managers. General tasks to carry out a course of action that furthers the goal of the organization.

Specific Objectives:
Production scheduling Demand forecasting Market research

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Economic analysis of the industry Investment appraisal Security management analysis Advice on foreign exchange management Advice on trade Pricing and related decisions Analysis and forecasting environmental factors

General Tasks:
Business is influenced by two sets of decisions like: External factors Internal factors
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External Factors:
General Economic Conditions: This includes: The level and rate of growth of national income. Regional income distribution, Influence of international factors on the domestic economy,, The business cycles etc. Demand for the product: This suggests, Is there a change occurring in the purchasing power of the public in general or in some particular region? Is this change in purchasing power a result of change in population and migration or due to change in real income of the people as a result of price level change? Are fashion, taste, and preferences undergoing any change and thus affecting the demand for the products? The managerial economist tries to find their roots and advises accordingly. 28

Factors influencing the input costs of the firm:

For example: What about the cost of labour in different regions and for different operations? What about the credit conditions in the market? Is there going to be some change in the government credit policy? How different inputs can be combined to minimise the cost of production?

Market Conditions:
Here a manger has to understand the nature of the market from which the firm is buying the raw materials and of the market where it is selling its output. This understanding helps the manager to recommend the pricing policy successfully.
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Firms share in the market:

The managerial economist can also help in the expansion of the firms share in the market. He is to find out the opportunities and the policies which help in the expansion of the firms share in the local and internal markets. This, he can do by understanding the nature and trend of the demand.

Governments economic policies:

Besides, the manager has to keep in touch with the govt.s economic policies and the Central banks monetary policies, annual budget of the government etc.
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Internal Factors:
Production, sales, inventory schedules of the firm: The manager helps in deciding about the production, sales and inventory schedules of the firm. He not only provides informations regarding their present level but also forecast their future trend.

Investment decisions:
for this, the managerial economist needs to forecast the return on the investment and the cost that the firm incurs by taking up the investments. Pricing and profit policies etc.
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Case Study

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