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Shaila Srivastava

ME

Shaila Srivastava

SL EC 501

Society and Scarce Resources: :


The management of societys resources is important because resources are scarce. Scarcity implies choice and choice implies cost. Scarcity . . . . . . means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Economics is the study of how society manages its scarce resources.

ME

Shaila Srivastava

SL EC 501

Introduction :
The word Economics is derived from the Greek words

OKIOS NEMEIN meaning household management .

Man is bundle of desires.


Goods and services which satisfy these wants are scarce. To produce goods land, labour, capital and organization

are needed. Economic problem arises because of scarcity. Economics is a study of economic problems. Wants are motive force for economic activity. Wants leads to efforts. Efforts secures satisfaction.

ME

Shaila Srivastava

SL EC 501

Economics Definitions :
Wealth Definition:
Welfare Definition: Scarcity Definition: Growth Definition:

Adam Smith
Alfred Marshall Lionel Robbins Paul Samuelson

ME

Shaila Srivastava

SL EC 501

1.Wealth Definition. : Father of Economics Adam Smith in his book Wealth of Nations 1776 defined Economics is the study of wealth. In this definition wealth is given first place, man has given second place

2. Welfare definition. : Alfred Marshall in his book


Principles of Economic Science-1890 defined Economics is the study of man kind in the ordinary business of life.Economics is one side a study of wealth; and on the other side more important side a part of study of man. He made economics is a science of human welfare. First place to man, second place to wealth. It studies man not in isolation but a member of a social group. Definition considered only material welfare, ignored immaterial welfare.
ME Shaila Srivastava SL EC 501

3. Scarcity Definition. :
Lionel Robbins in his book Nature and Significance of Economic Science-1932 given scarcity definition. Economic is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses. Scarcity Definition-main Points : Unlimited wants, but gradable. Scarce means, which have alternative uses.
Superiority of scarcity definition : Robbins included material and non material goods ,widens the scope of economics. He made economics a positive science. His definition is universal.

ME

Shaila Srivastava

SL EC 501

Followings are some of the attributes of Robbins definition:


1. Multiplicity of Ends - unlimited. Thus it is the unlimitedness of a

person wants that never stops him from working and keeps him engaged in the work of earning money for the satisfaction of his wants. 2. Scarcity of Means - limited resources due to which economic problems arise.. But it should be noted that the means are scare with respect to their demand. 3. Selection / Urgency of Wants. Naturally, we go to satisfy our urgent needs / wants first and then the remaining ones. If all the wants are same there would be no urgency to fulfill then and hence no economic problem would arise. 4. Alternative Uses - Scars means are capable of alternative uses i.e. they can be put to a number of uses e.g water can be used for drinking as well as for cooking. The main problem arises that where the utilization should be made first. 5. Human Science - Economics is the study of human behavior as a whole both with in and out side the society. It does not restrict the subject matter within specific limits.
ME Shaila Srivastava SL EC 501

4. Growth definition : Noble prize winner (1970) Paul


Samuelson proposes a dynamic definition in his book Economics(1948) Economics is the study of how people and society end up choosing with or without money to employ scarce productive resources that could have alternative uses to produce various commodities and distribute them for consumption, now or in the future among various persons and groups in society. Economic analysis the cost and benefits of improving patterns of resources use.
Scarcity : Unlimited wants ,scarcity of resources and alternative uses.

Dynamism: The importance of time is brought in the definition.


Economic growth: His definition gave importance to economic growth Wide scope: Economic choice exist not only in a monetary economy but

also in a barter economy.


Problem of choice: Definition explains problem of choice in present and

future in dynamic conditions.


ME Shaila Srivastava SL EC 501

Economics and Managerial Decision Making


Management is the discipline of organizing and

allocating a firms scarce resources to achieve its desired objectives. Involves the ability to organize and administer various tasks in pursuit of certain objectives. Managerial economics is the use of economic analysis to make business decisions involving the best use (allocation) of an organizations scarce resources.

Why Study Managerial Economics ?


Business decision process is becoming more & more complex due to a. Change in ownership pattern b.Change in scale of operation c. Change in business environment

Making appropriate business decision requires clear understanding of market conditions of product, inputs & financial markets which require application of economic concepts, theories & tools.

How Is Managerial Economics Useful?


Evaluating Choice Alternatives
Identify ways to efficiently achieve goals.

Specify pricing and production strategies.


Spell out production and marketing rules to maximize

profits.

Making the Best Decision


Managerial economics helps meet management

objectives efficiently. Managerial economics shows the logic of consumer, and government decisions.

What is Managerial
Douglas - Managerial economics is .. the application

of economic principles and methodologies to the decision-making process within the firm or organization.
Pappas & Hirschey - Managerial economics applies

economic theory and methods to business and administrative decision-making.


Salvatore - Managerial economics refers to the

application of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objectives most Shaila Srivastava SL EC 501 effectively. ME

What is Managerial
Howard Davies and Pun-Lee Lam It is the application of economic analysis to business problems; it has its origin in

theoretical microeconomics.

ME

Shaila Srivastava

SL EC 501

ME

Shaila Srivastava

SL EC 501

How Can Managerial Economics Assist Decision-Making? 1. Adopt a general perspective, not a sample of one

2. Simple models provide stepping stone to more complexity and realism


3. Thinking logically has value itself and can expose sloppy thinking

ME

Shaila Srivastava

SL EC 501

Why Managerial Economics?


A powerful analytical engine. A broader perspective on the firm.

what is a firm? what are the firms overall objectives? what pressures drive the firm towards profit and away from profit

The basis for some of the more rigorous analysis of issues in Marketing and Strategic Management.
ME Shaila Srivastava SL EC 501

Why study Economics . . .


How people make economic decisions.

How people interact with each other. The forces and trends that affect the economy as a whole.

Choices & Decision


Economics is all about making choices and

decisions i.e. using scarce resources for achieving targets.


Scarce resources Time, Money, Capital, Land, Labour, Natural Resources etc. Scarcity is the most important term. It has geographical implication and is a relative term.
ME Shaila Srivastava SL EC 501

Society and Scarce Resources:


What are economic decisions?
Economic decisions refer to decisions involving transactions in terms of cash or kind. The resources are scarce relative to their needs with alternative uses. Therefore, the management of societys resources is important. Scarcity . . . . means that society has limited resources

and therefore cannot produce all the goods and services people wish to have. It is relative to needs/ends.

In Economics:
Trade off Choosing one thing to give up other that

give rise to opportunity cost (Next best alternative use of resources). Example PPC
Efficiency and Productivity How well we use

scarce resources in order to get maximum output. Productivity - relation of inputs & output.
Utility Power of economic goods to satisfy human

wants. It is subjective benefit.


ME Shaila Srivastava SL EC 501

Economics is
Science or Arts? Science systematic body of knowledge that explain the relationship betweens causes and effects. Arts deals with wants, needs and demand of human being. Pure Economics or Applied Economics? Nature of economics Positive or Normative? Positive- What is. Normative How things ought to be.
ME Shaila Srivastava SL EC 501

Economic Activities :
Consumption: Extracting utility from goods and

services. Production: Production of goods and services which posses utility. Exchange: means buying and selling of goods and services. It is link between consumer and producer. Distribution: Sharing of income by the four factors of production.

ME

Shaila Srivastava

SL EC 501

Micro- Macro Economics :


Economics noble prize winner (1969), Ragner

Frisch was the first to use the terms micro and macro in economics in 1933.
The terms micro and macro derived from Greek. Mikros (small) and makros (large). Micro means individualistic and macro aggregative.

ME

Shaila Srivastava

SL EC 501

Where micro economics explain a tree in the forest, macro economics explains all the trees in the forest.
Micro economics
Is the study of particular

Macro economics

Is the study of economic

firms, households, individual prices and particular commodity. Popularized by David Ricardo, Marshall, J.B Say and J.S Mill. Micro economics called as Price Theory.
Assumption - full employment and ceteris paribus (other things remain constant).
ME Shaila Srivastava

system as a whole. studies aggregates values like National Income, National output, general price level, total consumption, saving and investment of a country. J.M Keynes popularized macro Economics Macro economics is called Income and Employment theory.
SL EC 501

Economics: Base of Mgt. Studies


Micro Economics

1.Theory of Demand & Supply


Market Research Supply chain mgt 2.Theory of Consumer Behaviour Advertising Consumer behaviour 3.Theory of Production Prod & operation mgt Prod. Planning 4.Theory of Cost Cost Management 5.Theory of Markets, Price & Distribution Marketing

Economics: Base of Mgt. Studies


1. 2. 3. 1. 2. 1. 2.

Macro Economics Income & Employment theory Theory of Consumption Theory of Savings & Investment Business Environment Theory of D & S of Money Theory of Growth & Development Money & Capital market; Corporate Finance Theory of Exchange Theory of Public Finance International Business Mgt

A household and an economy face many economic decisions:


Who will work? What goods and how many of them should be produced? What resources should be used in production? At what price should the goods be sold? Cond. .

Basic Qs Pertaning to Economy (Because Resources are Scarce)


What to produce? How much to produce How to produce? For whom to produce?

Where to produce
Thus Economics is about how society allocates its scarce

resources, how the economy works, how business and government make decisions and how these decisions affect the individuals. How the prices of labour, capital, and land are set in the economy, and how these prices are used to allocate resources.
ME Shaila Srivastava SL EC 501

Problem of Resource Allocation


Which goods and services should be produced with

societys resources?

Where on the PPF should economy operate?

How should they be produced? No capital at all Small amount of capital More capital Who should get them? How do we distribute these products among the different groups and individuals in our society?

ME

Shaila Srivastava

SL EC 501

The Concept of Opportunity Cost


Opportunity cost of any choice
What we forego when we make that choice, or the best

alternative opportunity which is gone.


Most accurate and complete concept of cost. Direct money

cost of a choice may only be a part of opportunity cost of that choice Opportunity cost of a choice includes both explicit costs and implicit costs Explicit costdollars actually paid out for a choice Implicit costvalue of something sacrificed when no direct payment is made
ME Shaila Srivastava SL EC 501

Opportunity Cost and Society


All production carries an opportunity cost
To produce more of one thing, must shift resources

away from producing something else

The Principle of Opportunity Cost


The concept of opportunity cost sheds light on virtually

every problem that economists study, whether it be explaining the behavior of consumers or business firms or understanding important social problems like problems like poverty or racial discrimination.

Basic Principle
All economic decisions made by individuals or society are costly The correct way to measure the cost of a choice is its opportunity

costthat which is given up to make the choice


ME Shaila Srivastava SL EC 501

The Production Possibilities Frontier


Quantity of All Other Goods per Period
1,000,000 950,000 850,000
700,000

At point A, all resources are used for "other goods." A B C

Moving from point A to point B requires shifting resources out of other goods and into health care.
D

500,000 400,000

At point F. all resources are used for health care.

F
100,000 200,000 300,000 400,000 500,000 Number of Lives

Saved per Period


ME Shaila Srivastava SL EC 501

Increasing Opportunity Cost


According to law of increasing

opportunity cost
The more of something we produce

The greater the opportunity cost of producing even more of it

This principle applies to all of societys

production choices
ME Shaila Srivastava SL EC 501

Figure 2: Production and Unemployment


Military Goods per Period 1. Before WWII the United States operated inside its PPF . . .

2. then moved to the PPF during the war. Both military and civilian production increased.

Civilian Goods per Period


ME Shaila Srivastava SL EC 501

Economic Growth
If economy is already operating on its PPF
Cannot exploit opportunity to have more of everything by moving to it

But what if the PPF itself were to change? Couldnt we then

produce more of everything?

This happens when an economys productive capacity grows

Many factors contribute to economic growth, but they can be

divided into two categories

Quantities of available resourcesespecially capitalcan increase

An increase in physical capital enables economy to produce more of everything that uses these tools

More factories, office buildings, tractors, or high-tech medical equipment Skills of doctors, engineers, construction workers, software writers, etc.

Same is true for an increase in human capital

Technological change enables us to produce more from a given

quantity of resources
ME

Shaila Srivastava

SL EC 501

Economic Growth
Increases in capital and technological change often go

hand in hand For instance, PET body scanners will enable us to save even more lives than our current set of resources
Moving horizontal intercept of PPF rightward, from F to F Impact of PET scanners stretches PPF outward along horizontal axis

How can a technological change in lifesaving enable us to

produce more goods in other areas of the economy?


Society can choose to use some of increased lifesaving potential to

shift other resources out of medical care and into production of other things

Because of technological advance and new capital, we can shift resources without sacrificing lives

ME

Shaila Srivastava

SL EC 501

Economic Growth
If we can produce more of the things that we value, without having to produce less of anything else,

have we escaped from paying an opportunity cost?


Yes . . . and no Figure 3 tells only part of story Leaves out steps needed to create this shift in the PPF For example, technological innovation doesnt just happen resources must be used to create it

Mostly by research and development (R&D) departments of large corporations

In order to produce more goods and services in the

future, we must shift resources toward R&D and capital production


Away from production of things wed enjoy right now
ME Shaila Srivastava SL EC 501

Figure 3: The Effect of a New Medical Technology


Quantity of All Other Goods per Period
1,000,000

2. But not its vertical intercept. A

4. or more lives saved and greater production of other goods. 3. The economy can end up with more lives saved and un-changed production of other goods . . .

J
700,000

D 1. A technological advance in saving lives increases this PPF's horizontal intercept . . .


300,000

F'

500,000 600,000

Number of Lives Saved per Period


ME Shaila Srivastava SL EC 501

What is Economic Analysis


Economic problem : Economic problem arises due

to limited means having alternative uses to satisfy unlimited wants. Scarcity of resources

Economic activity : matching ends to means Economic (optimal) decision making : Act of optimal choice considering constraint & objectives

Types of Economic Analysis :


a.Micro vs Macro analysis b.Partial vs General Equilibrium analysis c.Positive vs Normative Analysis

ME is primarily micro, partial eqm, and

positive in approach

Role of Business in Society


Why Firms Exist
Businesses help satisfy consumer wants. Businesses contributes to social welfare

Social Responsibility of Business


Serve customers. Provide employment opportunities. Obey laws and regulations.

Business Environment
It consists of two factors Internal environment firm's resources, business strategy, value system, objectives, mgt structure External environment business opportunities & threats to business Business environment consists of: economic, legal, social & political environment.

Economic Environment
Core of all external environments. Economic

strengths & weaknesses important for determining legal, social & political environment Economic policies, domestic & international environment. Important to determine business environment. It includes a. Nature of economy (rich/poor) b. Structure of economy(composition of NI) c. Economic policies(industrial, trade, foreign exchange, investment, fiscal, monetary, etc. d. Economic conditions(domestic & international

Political Environment: Politics can often determine


economic & business policies. It includes a. Political structure b. Economic systems c. Economic roles of Govt. d. Domestic & international trends Legal Environment: Political & economic environment governs legal environment. It influences business environment a. Laws to control investment b. Laws to regulate the conduct of business- standards, packaging, ethics, etc. c. Laws to protect consumer interest

Micro & Macro Environment


Micro env immediate environment which includes

suppliers, marketing intermediaries, competitors, customers & the public. Macro- demographic, economic, technical, political & cultural environment. Macro environments is more uncontrollable than micro.

Three Basic Economic Questions

ME

Shaila Srivastava

SL EC 501

Basic Qs Pertaining to Economy


(Because Resources are Scarce)
What to produce?
How to produce? For whom to produce? Thus Economics is about how society

allocates its scarce resources, how the economy works, how business & government make decisions and how these decisions affect the individuals.
ME Shaila Srivastava SL EC 501

Economic System
An economic system is a nations plan for

answering the key economic questions. Governments (democratic, socialist, communist) take differing approaches to how they allow their economic systems to operate. However, no systems operate in a pure form.
ME Shaila Srivastava SL EC 501

Types of Economic Systems


An economic system is composed of

two features
Mechanism for allocating resources

Market Command Private State


ME Shaila Srivastava SL EC 501

Mode of resource ownership


Three Methods of Resources Allocation


Command Economy (Centrally-Planned) Resources are allocated according to explicit instructions from a central authority Market Economy Resources are allocated through individual decision making
Mixed Economy
ME Shaila Srivastava SL EC 501

Market Economy
Individuals decide by buying and selling in a market. No one tells consumers what to buy and no one tells businesses what to make and sell Consumers and businesses make their own decisions based on their interests. Profit is the motivator Market forces demand & supply Examples of this economy

ME

Shaila Srivastava

SL EC 501

Directed or Command Economy

(Centrally-Planned)
Economic questions are answered by the

owners of the resources. Resources are controlled by the government They decide how much of each item is to be produced Use military to enforce these decisions People have little say in price or supply Examples of this economy?
ME Shaila Srivastava SL EC 501

Mixed Economic Systems


Most countries have mixed economies Decisions are based on cost-benefit analysis Some private ownership and some public ownership of property Some government intervention in the economy

Redistribution of income high taxes on the rich to

provide lots of government services


Examples of government programs

How is our economy a mixed economy?


ME Shaila Srivastava SL EC 501

Resource Allocation in the India


Numerous cases of resource allocation outside the market
Such as families

Various levels of government collect about onethird of our incomes as taxes


Enables government to allocate resources by

command

Government uses regulations of various types to impose constraints on our individual choice The market is the dominant method of resource allocation in India
However, it is not a pure market
ME Shaila Srivastava SL EC 501

Five Major Features of our Economy


Private Enterprise - Choose what you want to do,

May succeed or fail Private Property - Own, use, and dispose of things Profit - Money from sales after costs Competition - Rivalry among businesses to sell their goods and services to buyers, Allows consumers to make choices, Keeps prices reasonable Freedom of Choice - You can buy what you want (if its legal), Enter into a business or career of your choice
ME Shaila Srivastava SL EC 501

Economic System Changes


What countries have changed economic systems

recently (within a decade or two)?

ME

Shaila Srivastava

SL EC 501

ME

Shaila Srivastava

SL EC 501

ME

Shaila Srivastava

SL EC 501

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