Welcome

To
Managerial Economics
What we learn today
 Economics
 Twin themes of Economics
 Microeconomics
 Managerial economics
 Problems of an Economic Organization
 Solving the three Problems in Economic
Organization
 Input & Output
 Factors of production
 Production Possibility Frontier
 The circular flow of Expenditure and Income between
Households and Firms
 Opportunity cost
 Economics

Economics is the branch of

Knowledge that deals with how
the scarce resources can be used
to produce valuable goods and
services and distribute them
efficiently among different classes
of people in the society.
Twin themes of Economics

1. Scarcity

2. Efficiency
Scarcity

This is the distinguishing

characteristics of an economic
good. An economic good is
scarce means not that it is rare
but only that it is not freely
available.
Efficiency

Absence of waste, or the use of economic resources

that produces the maximum level of satisfaction
possible with the given inputs & technology. A
shorthand expression is allocative efficiency.
Microeconomics

It studies the behavior of

individual decision making units
such as consumers, resource
owners & business firms.
Managerial economics
 Managerial economics (sometimes
referred to as business economics), is
a branch of economics that applies
microeconomic analysis to decision
methods of businesses or other
management units. As such, it
bridges economic theory and
economics in practice.
Problems of an Economic
Organization

1. What goods are produced & what quantities?

2. How goods are produced?

3. For whom goods are produced?

What goods are produced what
quantities?

(a) Which goods are to be produced?

(b) In what quantities?

How goods are produced?
Another major issue relates to
the production techniques to be
used in production i.e. whether
the techniques should be labor
or capital intensive.
For whom goods are produced?
This problem relates to the
distribution of the national product
i.e. who should get how much. In
the matter of distribution, it is
necessary to provide incentives to
produce more & disincentives to
curb unnecessary consumption.
Solving the three Problems in
Economic Organization

 Market Economy
 Command Economy
 Mixed Economy
Market economy

An economy in which the what,

how & for whom questions
concerning resource allocation
are primarily determined by
supply & demand in markets.
Command economy

A mode of economic organization in

which the key economic functions –
what, how & for whom are
principally determined by
government directive. Sometimes
called a centrally planned
economy.
Mixed economy
Mixed economies rely primarily
on the price system for their
economic organization but use
a variety of government
interventions to handle
macroeconomic instability &
market failures.
Input & Output

 Input:  Output:
Commodities or The various useful
service used by firms goods or service that
in their production are either consumed or
processes; also called used in further
factors of production. production.
Factors of production
Main four factors of production.

Land


 Labor

 Capital

 Entrepreneur ability
Factors of production
 Land:  Labor:
In classical and non
classical economics
one of the basic
factors of production.
More generally land is
taken to include land
used for agriculture
and industrial purpose.
Labor consists of the
human time spent in
production working in
automobile factories,
taking the land,
teaching school or
baking pizzas.
Factors of production
 Capital:  Entrepreneur
Capital means the total utility:
amount of money (1) Take the initiative
subscribed by the (2) Makes basic
shareholder-owners of business policy
a corporation, in
return for which they (3) An innovation
receive shares of the (4) Risk bearer.
company stock.
Production Possibility Frontier
(PPF):

PPF shows two different

combinations of two
commodities
which can be produced by the
available resources and
technology.
The circular flow of Expenditure and Income
between Households and Firms

Financial
markets
 Household

Government
Financial Markets for
Markets factors of
production

Rest of the
world

Firms
Production Possibility Frontier
(PPF):
Opportunity cost
The value of the next-best use
(or opportunity) for an
economic good or the value of
the sacrificed alternatives.
Types of goods

1. Final goods
2. Intermediate goods
 Types of goods

 Final goods :  Intermediate goods :

A good that is Goods that have

produced for final use undergone some
& not for resale or manufacturing or
further manufacture. processing but have not
yet reached the stage of
becoming final products.
Thank you