Economics is the science of scarcity. It explains the behavior of different economic units (households, firms, government & the economy as a whole) & it involves the study of production, distribution and consumption of wealth in society.

Wealth: all those objects that are scarce in supply & hence command a price

Household is a basic economic unit which provides inputs that are used to produce goods & services in the economy.

Inputs are land, labour ,capital ,entrepreneurship A firm is a unit of production . It brings together inputs to

produce goods & services. A market is a place where buyers & sellers interact

The source of any economic problem is scarcity. Resources natural as well as man-made, both are scarce and are not enough to satisfy the ever-growing needs of human beings. Scarcity of resources forces economic agents to choose among alternatives to maximize returns.

Scarcity is a relative concept. It can be defined as excess demand i.e., demand more than the supply. For example, unemployment is essentially the scarcity of jobs. Therefore, an economic problem can be said to be a problem of choice and valuation of alternatives.

Economics is the study of how economic agents or societies choose to use scarce productive resources that have alternative uses to satisfy wants which are unlimited and of varying degrees of importance.

Economizing : To achieve a given objective with the fewest resources at the least cost

Efficiency : to achieve the maximum possible benefits from given resources

Rationality implies acting objectively, keeping in view the ends and means, the objectives and constraints. Economics assumes rationality on the part of consumer, producer and seller. In the Decision-making context, rational behavior implies the following:

All possible courses of action are known to you. You are able to separate all such courses of

action into two categories - feasible and unfeasible.

Based on the available information, you are in a position to assess the consequences of following a particular feasible course of action out of a given set of alternatives

You can rank the alternatives in terms of priorities. You choose that course of action, which occupies the

highest position in the order of priority. The rationality on the part of a firm is to maximize

profits or sales revenue. Rationality on the part of an investor is to maximize his return on investment. The rationality on the part of a consumer is to maximize satisfaction.

For the firm, the constraints can be productive capacity or the size of the market. For the investor, the constraint can be the level of risk acceptable. For the consumer, the constraint can be the size of his budget.

Feasibility implies the evaluation of both objectives and constraints together.

It is all about how to make optimum deecision to use scarce productive resources that have alternative uses to satisfy wants which are unlimited and of varying degrees of importance

"Managerial Economics... is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management." - Spencer and Seigelman

"Managerial Economics applies the principles and methods of economics to analyze problems faced by management of a business, or other types of organization and to help find solutions that advance the best interest of such organization". - Davis and Chang

ME is economics applied to decision making. It bridges the gap between economic theory and business practice.

Managerial economics is a special discipline which deals with application of economic theory to analyze decision making problems faced by business firms.

Provides a framework for evaluating whether resources are being efficiently allocated. Also addresses the problem of what commodity to produce, level of output, prices, choice of production techniques etc.

Gives proper insight to understand the economic environment (includes state of the economy, phases of the business cycle, competition among rivals, govt.policies) and helps the manager to respond to various economic signals

Managerial Economics is concerned with decision making of economic nature in an uncertain framework. Decision making is done with the help of estimated economic quantities and relationships.

It is both conceptual and applied (uses conceptual framework to analyze the problem & uses quantitative techniques to measure the impact of different factors)

It in pragmatic in nature i.e. it concentrates on solving day to day problems under constraints.

It is a firm's economics i.e. micro in nature as it deals with problems of an individual firm and not of the entire industry or the economy.

Managerial economics is goal oriented. Managerial economics is concerned with

normative micro economics .i.e. what ought to be

Managerial economics takes the help of macro economics also to understand the external conditions which are relevant to the business. Managers cannot ignore the environment within which they operate, they must understand and adjust to the external factors like govt. intervention in the business, inflation, business cycle fluctuation etc.

Decision making is a process of selecting a course of action out of alternative choices available to a firm to realize its objectives.

There exists a gap between theory and practice. The real economic environment is highly complex and change in an economic variable causes changes in a large no. of related variables. Also, economic theories are rather simple because they are based on certain assumptions like other things remaining the same. Managerial economics tries to deal with complex business problems and tries to find solutions by applying various economic tools and techniques. It identifies the problem, collects relevant date, processes data, draws relevant conclusions, evaluates the alternatives and finally takes decision. Decision making is the most critical part of management since it is related with selection of best course of action .

Forward planning refers to formulating plans for the future to implement the decision taken e.g. once a decision is made about a particular product or goal to be achieved then plans regarding production, pricing, technology, capital and raw material are prepared to achieve the goal.

The function of decision making and forward planning is very complex since the present world is full of risks and uncertainties. Before taking any decision management has to consider past records, current information and future predictions The major objective is to achieve ultimate efficiency in the whole business process for profit maximization.

Price and Output decision Demand estimation Choice of technique Advertising decision Long run production and

investment decision

Establishing Objectivemaximize profits, sales or growth of the firm

Defining the Problemeg: cause of declining profits of a textile company could be wrong pricing policy or bad labour management relations or use of outdated technology

Identifying possible alternative courses of actioneg : a. updating & replacing the old machinery

b. building a new plant with latest machinery Evaluation of alternative courses of action

Due consideration to legal & social environment ,financial, technological, infrastructure & input constraints

Implementing & monitoring the final decisionto ensure that expected results are obtained ,else corrective action

DM is a continuous process – any change in operating environment would necessitate corresponding changes in the course of action

The scope of managerial economics is narrower than traditional economics. It includes the following:

Demand Analysis: Managerial economics deals with demand and supply, the factors affecting them, the laws related to them, elasticity and exception of this law, forecasting.

Production & Cost analysis: To earn profits certain amt of goods need to be produced, thus certain costs have to be incurred. Since managerial economics is a firm's economics it deals with problems and issues related to cost & production like production function so that AC are minimum, laws relating to operations in the short-run and in the long-run.

Pricing practices and policies : Prices affect demand. Pricing depends on market conditions, pricing methods & policies etc.

Profit Management: A firm's activities are directed towards profit generation in the form of major or minor objective, hence managerial economics also deals with what is profit, by what factors it is influenced, how to calculate it etc.

Capital Management: Capital is the foundation of any business. This deals with selection, viability, efficiency & issues of under & over capitalization.

Environmental Issues : The management of a firm does not have any control over government policies, economic trends , foreign trade , social factors ,social organizations ,political systems etc. Therefore it needs to adjust plans ,policies etc of the firm to these factors.

In general Managerial Economics can be used by the goal oriented managers in two ways :

Principle of Management Economics provide a framework for evaluating whether resources are being allocated efficiently with a firm for e.g. it helps the manager if profit could be increased by reallocating labour from one production line to another.

Secondly these principles helps the manager to respond to various economic signal for e.g. given an increase in the price of input, the manager can decide to change the technology.

▪ Sales forecasting ▪ Industrial Market Research▪ Economic analysis of competing companies ▪ Production Programme▪ Environment forecasting ▪ Investment appraisal

▪ What should be a product mix?▪ Which production technique to be adopted?▪ Level of output▪ Price of Product▪ How to allocate an advertisement funds

between different mode

The concept of opportunity cost has been derived from alternative uses of scarce resources. The costs involved in any decision consist of the sacrifice of alternatives required by that decision.

It means opportunity cost is the cost of foregone opportunity i.e. the revenue expected to be earned if put to an alternative use

OC is nil if no sacrifice involved

Micro EconomicsMacro economics

Individual decision-making and smaller components of the economy of the economy Individual income Individual consumption Individual savings Individual investment Output of an individual firm Individual expenditure Price of any product/factor Demand/supply of any product or a factor Employment/unemployment in any industry Export or import of a given product/factor Output of an industry

Decision-making at the national level and aggregate

economic variables National income Aggregate consumption National savings Aggregate investment National output General price-level Inflation and deflation Aggregate employment or unemployment Aggregate exports and imports of a country