MANAGERIAL ECONOMICS

THEORY AND APPLICATIONS

CHAPTER-2
BASIC CONCEPTS, TOOLS AND TECHNIQUES OF ANALYSIS

Chapter 2 Basic Concepts, Tools and Techniques of Analysis

Learning Objectives
After completing this chapter, the student should be able to: 1. Differentiate between micro economics and macroeconomics. 2. Understand the graph and the nature of economic problems. 3. Know the economic meanings of firm, industry and households. 4. Show the distinction between growth and development. 5. Capture the idea of equilibrium in economic analysis. 6. Formulate variables and functions relating to business. 7. Acquire graphics, techniques and appreciate the significance of graphical curves and diagrammatic presentation in economics analysis.
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Chapter 2 Basic Concepts, Tools and Techniques of Analysis

Micro and Macro Economics

Micro economics Microeconomics studies mans economic behaviour at the level of the individual, such as buyer, a consumer, a producer, a seller and so on.

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Managerial Economics Theory and Applications Dr. D. M. Mithani

Chapter 2 Basic Concepts, Tools and Techniques of Analysis

Macro economics
Macroeconomics studies mans behaviour in the economics society on economy as a whole.

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Managerial Economics Theory and Applications Dr. D. M. Mithani

Chapter 2 Basic Concepts, Tools and Techniques of Analysis

Chart 2.1

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Managerial Economics Theory and Applications Dr. D. M. Mithani

Chapter 2 Basic Concepts, Tools and Techniques of Analysis

Importance and Uses of Microeconomics

It explains price determination and the allocation of
resources. It has direct relevance in business decision-making. It serves as a guide for business/production planning. It serves as a sasis for prediction. It teaches the art of economising. It is useful in determination of economic policies of the government. It serves as the basis for welfare economics. It explains the phenomena of international trade.
Managerial Economics Theory and Applications Dr. D. M. Mithani

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Chapter 2 Basic Concepts, Tools and Techniques of Analysis

Consumption
Consumption is the action of consumer for using the satisfaction of given wants. Consumption, however, does not imply the using up or the destruction of goods. In the consumption process, there is destruction of utility.

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Managerial Economics Theory and Applications Dr. D. M. Mithani

Chapter 2 Basic Concepts, Tools and Techniques of Analysis

Firm as a Producing Unit

The firm is a producing unit. It is a business unit which undertakes production activity. The firm buys and co-ordinates the services of productive factors such as land, labour and capital along with its organisation for producing a commodity and sells it in the market to the households.

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Managerial Economics Theory and Applications Dr. D. M. Mithani

Chapter 2 Basic Concepts, Tools and Techniques of Analysis

Firm A unit of management operating under a trade name in conducting a business activity. Industry

A set or collection of all the business firms producing a similar product. E.g., automobile, electronics, food stuffs and so on.

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Managerial Economics Theory and Applications Dr. D. M. Mithani

Chapter 2 Basic Concepts, Tools and Techniques of Analysis

Economic Growth

It refers to generation of more output from the application of given resources under a state of technology.
Economic development

It implies enhancement of capacity to pro-duce more through resource and technology development.
Equilibrium A condition of perfect balance in the opposing forces.

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Chapter 2 Basic Concepts, Tools and Techniques of Analysis

Variables and Functions

The term variable is used symbolically for the quantity or numerical characteristic of data. A variable is a quantity which varies from one individual observation to another.

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Chapter 2 Basic Concepts, Tools and Techniques of Analysis

Exogenous variable The variable interacting on a theory from the outside. Endogenous variable

The variable explained within a theory.

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Chapter 2 Basic Concepts, Tools and Techniques of Analysis

Functions
Most economic variables are interrelated and interdependent. In economic analysis, usually an attempt is made to establish relationships among variables with a view to predict how the variables will behave when one or more other variables change in values.

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Chapter 2 Basic Concepts, Tools and Techniques of Analysis

Referring to an economic function demand function

q = f (p)
where q stands for the quantity and p for the price. Since demand varies inversely with price, we must also write:

q = a bp
However, we can specify the relationship between p and q as q = 20 3p

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Chapter 2 Basic Concepts, Tools and Techniques of Analysis

To Decision-making

Microeconomics

is concerned with the behaviour and activities of specific/particular economic units such as individual consumers, firms and factors of production or resource owners. is concerned with the national, international and global economic situation economywide behaviour and changes.

Macroeconomics

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Managerial Economics Theory and Applications Dr. D. M. Mithani