Economics

• Economics


  The study of how scarce resources will be allocated to satisfy the needs of human beings
• Scarcity concept has existed as early as the existence of men. This is due to the reality that human beings have endless needs contrary to the limited resources available
• Manager


  Has to harness the limited resources of an organization to achieve certain goals, subject to both internal and external constraints
• Managerial economics


  Concerned with the application of economic concepts and economic analysis to the problems of formulating rational managerial decisions
• Macroeconomics


  Deals with the performance, structure, and behavior of an economy as a whole
• Macroeconomic factors a consumer considers

  • Forces behind inflation
  • Structures of interest rates
  • Workings of the foreign exchange market
• Microeconomics


  Studies the actions of individual consumers and firms
• Economic theory and economic analysis are used to solve the problems of managerial economics
• All the economic theories, tools, and concepts are covered under the scope of managerial economics to analyze the business environment
• Scope of managerial economics

  • Demand analysis and forecasting
  • Profit management
  • Capital management
• Business decision making


  1. Identify the problem

  2. Determine the objectives

  3. Discover the alternatives

  4. Forecast the consequences

  5. Make a choice

  6. Sensitivity analysis
• Managerial economics is a discipline that combines economic theory with managerial practice. It helps in covering the gap between the problems of logic and the problems of policy
• The most important function in managerial economics is decision making. It involves the complete course of selecting the most suitable action from two or more alternatives
• A close interrelationship between management and economics had led to the development of managerial economics
• Economic analysis is required for various concepts such as demand, profit, cost, and competition. In this way, managerial economics is considered as economics applied to "problems of choice'' or alternatives and allocation of scarce resources by the firms
• Primary function of managerial economics

  To make the most profitable use of resources which are limited such as labor, capital, land etc.
• Role of a manager

  Very careful while taking decisions as the future is uncertain; he ensures that the best possible plans are made in the most effective manner to achieve the desired objective which is profit maximization
• When supply levels were higher than demand, prices were significantly reduced, lowering the profits realized by merchants. When merchants made less money, they could not afford to pay workers, resulting in high unemployment
• John Locke: '"The price of any commodity rises or falls, by the proportion of the number of buyers and sellers."'
• Adam Smith's concept of supply and demand

  An "invisible hand" that naturally guides the economy. Smith described a society where bakers and butchers provide products that individuals need and want, providing a supply that meets demand and developing an economy that benefits everyone
• Alfred Marshall developed a supply-and-demand curve that is still used to demonstrate the point at which the market is in equilibrium
• Demand


  The behavior of people with regard to their willingness and ability to buy products at given prices
• Without the willingness or their ability to buy (called purchasing power), the needs and wants of consumers cannot be considered their demand
• Quantity demanded


  The amount of goods and services people are willing to buy and consume
• Law of demand


  When the price of the commodity increases, quantity demand decreases, and as the price of commodity decreases, quantity demand increases

  
• The law of demand only applies when all other things that might affect the relationship between the price and quantity demanded are held constant (ceteris paribus)
• Ceteris paribus assumption


  Assuming other things constant, price and quantity demanded are inversely proportional
• Demand shifters


  • Changes in income
  • Changes in population
  • Change in consumer preferences
  • Buyers' expectations (speculations)
  • Change in prices of related products
  • Type of product: Normal or inferior goods?

  
• Demand and buyer's expectations

  If a buyer expects the price of a good to go down in the future, they hold off buying it today, so the demand for that good today decreases. If a buyer expects the price to go up in the future, the demand for the good today increases
• Complementary goods


  Goods that are consumed together
• Substitute goods


  Goods where you can consume one in place of the other
• Direct substitute goods


  • Pepsi to Coke
  • Starbucks to Costa Coffee
  • Domino's Pizza to Pizza Hut
• Indirect substitute goods


  • Bowling to games
  • Banana to donuts
• When the price of a good that complements a good decreases, then the quantity demanded of one increases and the demand for the other increases. When the price of a substitute good decreases, the quantity demanded for that good increases, but the demand for the good that it is being substituted for decreases

  
• Normal goods


  Goods that experience an increase in demand due to a rise in consumers' income
• Inferior goods


  Goods that see their demand drop as consumers' incomes rise. The term "inferior" doesn't refer to quality, but rather, affordability
• Demand for normal goods increases when income increases, but demand for inferior goods decreases when income increases

  
• Law of supply


  As the price of the commodity increases, quantity supply increases and as the price of the commodity decreases, quantity supply decreases

  
• Changes in supply and shifts of the supply curve

  • Increase in the number of sellers (shift to the right)
  • Decrease in the number of sellers (shift to the left)
  • Better technology (shift to the right)
  • Decrease in the cost of production (shift to the right)
  • Goals of the firm (it depends)

  
• Market equilibrium


  A market is generally composed of buyers (consumers) and sellers (producers or suppliers). These buyers are represented in microeconomics as the demand side of the market, while all sellers and producers are collectively represented by the supply side of the market