ECONOMICS LESSON 1 POWERPOINT, Lecture notes of Economics

Download ECONOMICS LESSON 1 POWERPOINT and more Lecture notes Economics in PDF only on Docsity! Lesson 1 Introducton to Managerial Economics Economy. . . . . . The word economy comes from a Greek word Oikonomos which means “one who manages a household.” Economics comes from the Greek word Oikonomia. – Oikos(means a household) + Nomos(means managemnet). So, it means household management. Aristotle described economics as a household management that means the problems of food, shelter, clothing, education, treatment etc. for family members and the process of solving these problems by earning money. The Diverse Fields of Economics Examples of microeconomic and macroeconomic concerns Production Prices Income Employment Microeconomics Production/Output in Individual Industries and Businesses   How much steel How many offices How many cars Price of Individual Goods and Services   Price of medical care Price of gasoline Food prices Apartment rents Distribution of Income and Wealth   Wages in the auto industry Minimum wages Executive salaries Poverty Employment by Individual Businesses & Industries Jobs in the steel industry Number of employees in a firm Macroeconomics National Production/Output   Total Industrial Output Gross Domestic Product Growth of Output Aggregate Price Level   Consumer prices Producer Prices Rate of Inflation National Income Total wages and salaries   Total corporate profits Employment and Unemployment in the Economy   Total number of jobs Unemployment rate POSITIVE VERSUS NORMATIVE ANALYSIS• Positive Statements are statements that attempt to describe the world as it is. Positive economics studies economic behavior without making judgments. It describes what exists and how it works. – Called Descriptive Analysis • Normative Statements are statements about how the world should be. Normative economics, also called policy economics, analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action. – Called Prescriptive Analysis • Positive or Normative Statements? – An increase in the minimum wage will cause a decrease in employment among the least- skilled. POSITIVE – Higher federal budget deficits will cause interest rates to increase. POSITIVE ? ? POSITIVE VERSUS NORMATIVE ANALYSIS ? • In a command economy the extreme opposite happens where the government takes all decision about the economy. • Mixed economy consists of the elements of command and market. Most prevalent one. • Society can not have everything. In must decide through Input-Output relationship. It must choose the technology. Inputs: land, labor, capital, and entrepreneurship. Out is the commodity produced by these inputs. Economic System Lionel Robbins Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses. What is Economics? • Let us have some idea of some economists and the main idea of economics. INTRODUCTION OF MANAGERIAL ECONOMICS Concept of Managerial Economics (contd.) Following diagram shows how does the managerial economics provide the link between traditional economics and decision sciences Management Problems Economic Theory Decision Sciences Managerial Economics Economic Methodology: Descriptive Model Prescriptive Model Study of Functional Areas: Accounting, Finance, and Marketing Optimal Decision 15 Managerial Decision Problems Economic theory Microeconomics Macroeconomics Decision Sciences Mathematical Economics Econometrics MANAGERIAL ECONOMICS Application of economic theory and decision science tools to solve managerial decision problems OPTIMAL SOLUTIONS TO MANAGERIAL DECISION PROBLEMS What is Managerial Economics (contd.) • Howard Davies and Pun-Lee Lam - • “It is the application of economic analysis to business problems; it has its origin in theoretical microeconomics.” From these ideas it can be concluded managerial economics is the discipline, which deals with the application of economic theory to business management. Thus it lies on the borderline between economics and business management and serves as a bridge between these two disciplines. What is Managerial Economics (contd.) It is an application of that part of microeconomics that focuses on Risk Demand Production Cost Pricing, and Market Structure. It helps rational decision making through MODEL BUILDING INTRODUCTION OF MANAGERIAL ECONOMICS Scope of Managerial Economics (contd.) Microeconomics Applied to Operational Issues: Operational issues of firms are of internal nature. Internal issues include all those problems which arise within the business organization and fall within the control of the management. Some of the basic internal issues are: a) Choice of business and the nature of products, that is, what to produce, b) Choice of size of the firm, that is, how much to produce, c) Choice of technology, that is, choosing the factor-combination (technique of production) d) Choice of price, that is, how to price the commodity, e) How to promote sales, f) How to face competition, g) How to decide on new investments, h) How to manage profit and capital, i) How to manage an inventory, that is, stock of both finished goods and raw materials. 21 INTRODUCTION OF MANAGERIAL ECONOMICS Scope of Managerial Economics (contd.) Microeconomics deals with such questions confronted by managers. The following microeconomic theories deal with most of these questions. Microeconomics Applied to Operational Issues: a) Demand Analysis and Forecasting: - An understanding of the forces behind demand is a powerful tool for managers. Such knowledge provides the background needed to make pricing decisions, forecast sales and formulate marketing strategies. A forecast of future sales is essential before employing resources. b) Theory of Production and Production Decisions: - Production theory explains the relationship between inputs and output. It also explains under what conditions costs increase or decrease; how total output behaves when use of inputs is changed; and how can output be maximized from a given quantity of resources. Thus, it helps the managers in determining the size of the firm, and the amount of capital and labour to be employed keeping in view the objectives of the firm.22 INTRODUCTION OF MANAGERIAL ECONOMICS Scope of Managerial Economics (contd.) Microeconomics Applied to Operational Issues: f) Inventory Management: - Inventory refers to a stock of raw materials or finished goods which a firm keeps. Management of inventory is very important for a firm to keep intact of its current production and supply capacity and to meet the challenges arising from change in market and other conditions. In this regard, a major question that arises is: how much of the inventory is the ideal stock? If it is high, capital is unproductively tied up, and that might be useful for other productive purposes if the stock of inventory is reduced. On the other hand, if the level of inventory is low, production will be hampered. Hence, managerial economics uses different methods which are helpful in minimizing the inventory cost. 25 Stories of Four Great Economists  Adam Smith (1723 – 1790) was a Scottish Economist.  He is said FATHER OF ECONOMICS  He is also FATHER OF CAPITALISM  His Book: WEALTH OF NATIONS  We want to talk about POVERTY not wealth.  His main theory is “There is an invisible hand that determine everything – Don’t disturb it”  What is the invisible hand? P S D Q Invisible hands – demand and supply – determines quantity and price Thomas Robert Malthus • Thomas Robert Malthus, (1766-1834), English economist and demographer. Malthus • He was a Church Priest. • Once he noted he had never seen a dead bird. (except bats and crows). • He searched the reasons. • Bird die on a flowing stream and the body is taken away by the water. • Birds commit suicide when food is not available. – A tragic case – God cannot do this. • He investigated further and studied economics – especially Ricardo Population Theory His theory: population growth will always tend to outrun the food supply, * There will be hunger, famine, war, disasters, * Population Control is needed. * This is called Malthusianism Lord Keynes (continued) • Went to stock market, • Dominated stock market, • Became rich, • Became Lord, • Married, • Divided economics into Macro and Micro, • An interview of his wife. • He successfully introduced mathematics in economics The Process of Model-building • The economics ‘method’ • The steps: the hypothetical-deductive approach – make assumptions about behaviour – work out the consequences of those assumptions – make predictions – test the predictions against the evidence – PREDICTIONS SUPPORTED? The model is accepted as a good explanation (for the moment) – PREDICTIONS REFUTED? Go back and re-work the whole process 37 Definitions & assumptions Predictions If predictions not supported by data, model is amended or discarded If predictions borne out by data, the model is valid, for the moment Theoretical analysis Predictions tested against data Figure 1 The Circular Flow Copyright © 2004 South-Western Spending Goods and services bought Revenue Goods and services sold Labor, land, and capital Income = Flow of inputs and outputs = Flow of Taka Factors of production Wages, rent, and profit FIRMS • Produce and sell goods and services • Hire and use factors of production • Buy and consume goods and services • Own and sell factors of production HOUSEHOLDS • Households sell • Firms buy MARKETS FOR FACTORS OF PRODUCTION • Firms sell • Households buy MARKETS FOR GOODS AND SERVICES MARKETS FOR FACTORS OF PRODUCTIO N MARKETS FOR GOODS AND SERVICES FIRMS HOUSEHOLDS Good and services bought Good and services sold Revenue (=GDP) Spending (=GDP) Inputs for Production Land, labor and capital Wages, rent, interest and profit (=GDP) Flow of goods & services Flow of money: Taka Income (=GDP) THE CIRCULAR FLOW DIAGRAM Assumptions Assumption: The economy composed of households and firms only Households: own factors of production, consume goods and service Firms: hire factors of production to produce goods and services The Production Possibilities FrontierModel: The Production Possibilities Frontier The Production Possibilities Frontier (PPF)is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology. Figure 2 The Production Possibilities Frontier Production possibilities frontier A B C Quantity of Rice Produced 2,200 600 1,000 3000 700 2,000 3,000 1,000 Quantity of Garments Produced D Figure 3 The Production Possibilities Frontier Production possibilities frontier A B C Quantity of Rice Produced 2,200 600 1,000 3000 700 2,000 3,000 1,000 Quantity of Garments Produced D Suppliers Management Customers Investors Employees Profit Measurement • Business Versus Economic Profit –Business (accounting) profit reflects explicit costs and revenues. –Economic profit. • Profit above a risk-adjusted normal return. • Considers cash and noncash items. • Variability of Business Profits –Business profits vary widely. Why Do Profits Vary Among Firms? • Disequilibrium Profit Theories –Rapid growth in revenues. –Rapid decline in costs. • Compensatory Profit Theories –Better, faster, or cheaper than the competition is profitable. Reading Between the Lines • A line is a continuous string of points, or sets of (X,Y) values on the Cartesian plane. • The relationship between X and Y on this graph is negative. An increase in the value of X leads to a decrease in the value of Y, and vice versa. Positive and Negative Relationships A downward-sloping line describes a negative relationship between X and Y. An upward-sloping line describes a positive relationship between X and Y. Different Slope Values b   5 1 0 0 5. b     7 1 0 0 7. b   0 1 0 0 b    1 0 0