Unit 1: Managerial Economics Basics

8th Semester

                                                                    UNIT 1:
                                                    Managerial Economics Basics
Definition of Economics:
          Economics involves the choices people make when matching their limitless needs and wants with scarcity of resources. Economics is to be considered as a set of tools for analyzing people and groups of people and choices they make.
Micro Economics:
        Micro economics focuses on the behavior of individual character actors on the economic stage i.e. firms and individuals and their interaction in market. It also deals with determination of price and quantity.
Macro Economics:
      Macroeconomics is the branch of economics and its field that studies how aggregate economy behaves. It is the study of economy as a whole. It deals with aggregate economics variables such as level of growth, rate of national output, interest rates, unemployment and inflation.
Relationship between Micro and Macro Economics:
             Factors studied in both micro- economics and macro -economics typically have an influence on one another.
For example:
      Rate of inflation helps to predict future cost of production and necessary adjustment in the price of products.
Managerial Economics:
       Managerial Economics focuses on the microeconomic factors that are used in decision-making process within an organization. Managerial Economic principles guides how and why corporations make certain decisions. Managerial Economics assists managers of a firm in rational solutions of obstacles faced by firm’s activities. It makes uses of statistical and analytical tools to assess economic theories in solving practical business problems.
For Example:
making strategic decisions that can result in a profit or loss.
Defining the moments of economics:
The defining moments in economics are often the economic revolution that has long term effect in conducting everyday business. Defining moments of economics involves defining economy from industrial revolution to information revolution.

  1. Industrial Revolution:

           Industrial Revolution was started in Britain in 18th century which replaced manual technology of doing work by inventing machinery. The main concern of industrial revolution was to enhance production and productivity so the work which used to be done manually was replaced by machineries. Steam Engines were invented to transport industrial products from place to place as a means of sea transport. Due to rapid increase in industrialization, there occurred the need of information. Due to need of information, demand for information revolution came to existence. Due to demand for information revolution, information economy came into existence.

  1. Information Revolution:

     The need of information to sell industrial product was the main reason for starting of information revolution. Information revolution started right after industrial products are freely made available to customers and due to which there arises the need of mode of communication due to which telephones were invented. Information revolution has three main concepts which are discussed below:

  • Computer Revolution:

       Computer revolution started right after invention of Analytical Engine. The evolution of computational technology varies from first generation of computer till fifth generation of computer at the present. Also the use of electronic chips varies in each generation of computers.

  • Digital Revolution:

Every information at the present can be digitized. The shift in technologies from analog to digital has helped us in changing information expressed in analog format to digital format.

  • Communication Revolution:

While talking about communication revolution, we have to talk about communication medium from past till present. At the past telephone was only mode of communication. After some period there came wireless mode such as mobiles. At present Internet has been invented to foster fast communication. Internet technologies being evolved till 4G. Change in channel of communication from twisted pair to fiber optics has been boon for us to communicate globally in few seconds of time.
Fundamental Aspects of theory of information revolution:
        Information is the factor of production as well as product sold in market. All products has use value, exchange value and information value. Industries develop information generating activities i.e. R&D.
Enterprise and societies develop the information control and processing functions. Labor can be classified into information labor and non-information labor. Information activities constitute a large new economic sector that is the information sector.
Technological Changes in Global Economy:
            In global economy, technological changes happens in following three ways: Invention: The process of creation of new product or process is termed as invention. Innovation: The process of application of invention is termed as innovation.
Diffusion means how faster others begin to adopt the technology/innovation.
Impact of Technological Change:

  1. Current technological changes has made it possible to integrate and analyze data collected from different sensors to manage and make activities more efficient.
  2. Rise of the era where every individuals should be software analyst; use the available information fed in by shared networks to create better products and services.

Examples of Technological Changes:

  1. Smart Phones can diagnose sleeping habits, daily active sessions and total calories burn.
  2. Teaching Learning process (virtual classes; online cultural sharing programs; world- wide discussions; rapid evolution of concepts; distance learning).
  3. Workforce Transformation (access to global workforce; outsourcing). Product VS.

Process Innovation:

  1. Product innovation involves the bringing of new goods or services in market. Whereas Process innovation is concerned with new techniques that reduces cost of producing and distributing existing products.
  2. The key to successful product innovation can be marketing and ability to provide service. Whereas profitable process innovation involves secrecy and being able to exploit economics of scale and scope.

Externalities and its types:
 An externality is an effect on a third party that is caused by the consumption or production of a good or service. It is a situation in which a person’s activities such as production and consumption of goods and services effects the well-being of uninvolved people. There are two types of externalities which are discussed below:

  1. Positive Externality:

Positive Externality is an outcome of product or services where there is positive effect on a third party. Positive externality occurs when there is a positive gain on both the private level and social level. For Example: Although public education sector may only directly affect students and schools, but an educated population may provide positive effect on society as a whole.

  1. Negative Externality:

A negative externality is an economic activity that imposes a negative effect on an unrelated third party. It is a cost that is suffered by a third party or society as a result of an economic transaction.
For Example: second hand smoker may have negatively impact on the health of people, even if they do not directly engage in smoking.
Market Failure and its reasons:
        Market failure is an inefficient allocation of goods and services in the free market where socially optimal level of output cannot be obtained. Market failure also refers to any shift from equilibrium position between market demand and market supply. The reasons of market failure are:

  1. Asymmetric Information:

        Information doesn’t flow equally which means that some people have access to information which other people do not have. Price should not reflect all the associated risk leading to inappropriate allocation of resources in terms of market failure.

  1. Monopoly:

          It means having only single supplier of goods or services. It has methods of excluding competitions in market due to which market failure occurs.

  • Lack of public goods.
  1. Negative Externalities.

Public Goods and its characteristics:
        Public goods are the goods which are produced and are made available to the member of the society. Characteristics of public goods are:

  1. Non-excludable:

People cannot be excluded from consuming it. It is difficult or impossible to charge people for using non-excludable goods. Non-excludable goods can be enjoyed by people without direct payment. Eg: National defense.

  1. Non-rival:

Those goods whose consumption by one consumer does not restricts consumption by other consumer. If these goods are supplied to one person, it should be available to all. Eg: Highways, Parks… etc.
Private Goods and its Characteristics:
           Goods that are purchased and used by party and which is not made available to others freely is termed as private goods.
Characteristics of Private Goods:

  1. Rival: Those goods whose consumption of one unit by one person decreases available units for consumption by another person. Eg: food, bike/car you owned…etc.
  2. Excludable: Those goods in which it is possible to prevent a person from

the benefit of a good if they have not paid for it. Eg: ISP, mobile data, movie tickets…etc.