Introduction to Economics

• Economics is essential for managerial decision making, designing public policy, and understanding how an economy works.
• It provides a practical tool for understanding global events and aids business owners in navigating market forces.

Introduction to Economics

• Economics studies the allocation of resources and the choices made by economic agents.
• It addresses how to use scarce natural resources and analyzes how resources are allocated.
• Economics is a social science focusing on the production, distribution, and consumption of goods and services.
• The primary concern of economics is analyzing resource allocation choices made by individuals, businesses, governments, and nations.

Classification of Economics

• Economics is divided into Micro Economics and Macro Economics.

Reasons for Studying Economics

• Studying economics is important because it is a study of society.
• It enhances systematic thinking about business and wealth issues.
• Studying economics allows for predicting economic trends.
• It provides a basis for economic alternatives decision-making.

Economics Science

• Economics involves decision-making using scarce resources.
• Resources include anything used to achieve a production goal.
• Economic decisions entail allocating scarce resources to meet managerial goals.
• The nature of managerial decisions varies with management goals.

Managerial Economics

• Managerial economics integrates economic theory with business practices for decision-making and planning by Milton H. Spencer and Louis Siegelman.
• Evan J. Douglas defines it as applying economic principles to decision-making within firms under uncertainty.

Nature of Managerial Economics

• Managerial economics finds optimal solutions to business decision-making, micro economic in nature.
• It is practical and pragmatic.
• Problems are analyzed from a macro economic perspective.
• It provides solutions for business problems.

Scope of Managerial Economics

• Managerial economics evolves dynamically.
• This includes demand analysis and forecasting.
• Including cost and, production analyses.
• As well as pricing decisions, policies, and practices.
• Focusing on profit management.
• Using capital management.

Benefits of Business Economics

• Provides tools and techniques.
• Provides Concepts.
• Answering basic problems such as product mix.
• Determining the least cost production techniques and input mix.
• It determines the output level and product price.
• It helps in taking investment decisions and calculating selling costs.
• Supplies Data.
• It can aid in Forecasting.

Functions of Managerial Economics

• The most important function is decision-making from available alternatives.
• Identifying firm objectives like profit, sales, and service.
• Stating the problem related to product, price, promotion, and production.
• Identifying the possible alternatives.
• Choosing, implementing and monitoring the alternative.
• Also impacting inventory management, location, operating, financial, cost & output decisions.

Fundamental Concepts

• Incremental Concept
• Concept of Time Perspective
• Concept of Discounting Principle
• Opportunity Cost Concept
• Profit maximization
• Demand & supply analysis
• Risk and uncertainty analysis.

Incremental Concept

• Focuses on small additional changes rather than large shifts.
• It requires evaluating benefits and costs before making decisions.

Concept of Time Perspective

• Economics distinguishes between the short-run and the long-run.
• This distinction is based on the speed of decision-making and variation in production factors.
• Short run-period where some factors can vary but not others.
• Long run is the period in which all factors may vary.

Concept of Discounting Principle

• A rupee today is worth more than it will be in the future.
• It is due to the time value of money and future uncertainty.

Opportunity Cost Concept

• Opportunity cost measures the value of the best alternative foregone when choosing an option.
• This represents the value of the next best choice.

Types of Goods in Economics

• Goods are products made by firms using production factors to meet customer wants and needs.

Free Goods

• Free goods are those not scarce and have no opportunity cost.
• Their supply is unlimited.
• Their consumption is not limited by scarcity, resulting in zero opportunity cost.

Economic Goods

• Economic goods are produced using scarce resources.
• They have limited supply.
• They involve opportunity costs due to their scarcity.

Types of Economic Goods

• Consumer Goods
• Fast-Moving Consumer Goods
• Durable Goods
• Capital Goods
• Intermediate Goods
• Normal Goods - Demand increases with income.
• Luxury Goods
• Inferior Goods - Cheaper than normal, are preferred when income decreases.
• Veblen Goods - Show-off goods.
• Complementary Goods
• Substitute Goods - Alternatives to another good.
• Giffen Goods - Demand increases as price rises.

Utility

• Utility determines the worth or value of a good or service.
• It measures the total satisfaction from consuming a good or service.
• Economic utility affects demand and price.

Production Utility

• Utilities take place in three manners: Form, Place, and Time.
• Form Utility: Created by changing the physical shape or size of goods; e.g., converting wood into furniture.
• Place Utility: Created by transporting goods from supply to demand location, such as gold, coal, and petrol.
• Time Utility: Created by storing goods until needed, e.g., storage of grains.

Wealth

• It refers to the total value of all assets owned by an individual, household, business, or nation.
• Wealth should have utility and satisfy human wants.
• Wealth should be scarce and transferable.
• Wealth types are, Personal, National, Financial and Productive.

Value

• It refers to the worth of a good or service.
• This is measured by utility, exchange, and cost.
• Value can be "in use" or "in exchange".
• Value in use is the satisfaction from consuming goods or services.
• Value in exchange is what consumers pay and is equal to benefits divided by cost.

Factors of Production

• Factors of production describe inputs to make goods or service for economic profit.
• It includes any resource to create a good or service.
• The main factors are land, labor, capital, and entrepreneurship.
• Initially, only labour was considered, but later land and capital were added.
• Entrepreneurship is a more recent addition, previously grouped with capital.

Land as a Factor

• Land is a broad term for natural resources like oil, gold, wood, and water.
• These can be divided into renewable and non-renewable resources.
• Renewable resources can be replenished, like water, wind and solar energy.
• Non-renewable resources can be depleted, like oil, coal, and natural gas.
• All resources can be inputs to produce goods or services.
• Income from land and resources is rent.
• Land is also used for agriculture, housing, and commercial buildings.
• Land is limited in quantity and supply cannot increase with demand.

Labor as a Factor

• Labor refers to the effort put in to produce goods or services.
• Labor value depends on human capital: skills, training, education, and productivity.
• Productivity measures output per hour of work.
• Income from labor is wages.
• Labor is heterogeneous, efficiency varies across workers due to different skills, knowledge, motivation, etc.
• Also labor is perishable; lost work time cannot be recovered.
• Labor is tied to human effort, flexibility, fair treatment, and safe conditions are important.

Capital as a Factor

• Capital refers to the money to buy items for producing goods and services.
• The income from capital is interest.
• Capital is created by humans unlike land and natural resources.
• It last a long time, but its value depreciates.
• Also it can be transported such as computers and other equipment.

Entrepreneurs

• Entrepreneurs combine land, labor, and capital to produce goods/services for consumers.
• Entrepreneurs have the risk and identify opportunities.
• Entrepreneurs also have an idea and innovation.

Economies of Scale

• Refers to the cost advantage experienced by firms increasing their output levels.
• These are financial benefits gained by organizations through enhanced production capacity.
• Economies of scale occur when the average cost per unit decreases as production volume increases.
• Buy in bulk.
• Efficient Production
• Reduction In Logistics Costs
• Cheaper Capital.
• Reduction in Promotion Costs.
• Spread Risk.

Scale

• Scale refers to the size or level of production, operation, or economic activity.
• Scale of the organization is one of the most important factors influencing economies of scale and more likelihood is achieved.
• Because fixed costs of rent, salaries, spread over larger output, leads to lower average costs and higher more bargaining.

Firm

• A firm is a profit business unit that is legally recognized, providing goods or services to consumers, businesses, and governmental entities.
• A business is formed to increase the wealth of its owners.
• Business owners/operators get financial returns for work and risk.

Types of Firms

• Sole proprietorship.
• Partnership.
• Corporation: owned by multiple shareholders and overseen by a board of directors that hires managerial staff.
• Cooperative: fundamental to economic democracy, with limited liability and investors having a say in company operations.

Objectives of Firms

• Non-profit / Co-operative
• Business Objectives
• Social / Environmental Concerns.
• Profit Satisficing
• Profit Maximisation.
• Increase market share/ Sales maximization

Decision Analysis

• Decision analysis (DA) is a decision-making form involving identifying and assessing decision aspects.
• Basing actions based on the decision that produces the best outcome.
• Ensures decision are made with all relevant information.

Types of decisions to take in business

• Price and Output Decision.
• Demand Estimation.
• Choice of Technique of Production.
• Advertising Decision.
• Long run Production Decisions.
• Investment Decisions.

Decision Making Process

• Establish objective.
• Define problem.
• Identify Possible Alternative Courses of Action.
• Evaluate Alternative courses of Action and choosing the best.
• Implement and Monitor the decision.

Decision Analysis works

• Helps Corporations evaluate outcomes to determine correct course of action.
• Analysis entails understanding varies goals, outcomes, and uncertainties.
• Involves framing the problem for evaluation involving multiple perspectives.
• A model can be to evaluate favorability decision trees and influence diagrams.

Economic Decisions

• Economic feasibility analysis is measures economics efficiency of projects.
• Identifying which alternatives is superior to avoid the others.
• Economic Analysis is the process of quantity differences alternatives and reduces project comparison.
• What are the expected revenues and capitals expenditures and operational cost.
• Also include cash flows over time, which is the return of investments and payback period?

Technical Decisions

• Ensures all facilities are available and best alternative for project implementation.
• Sound Technology is scalable, and materials suitable for the need of the project, engineering challenges.
• These are the schedule of project implementation.
• Also include Technology, Plant & Machinery and Availability of Raw Materials, Resources and other Inputs.

Tata Nano Case Study

• Tata Motors (TML) intended to set a manufacturing plant.
• Singur, a small town of WB, was chosen to locate the plant.
• Considered locating plants in various states.
• West Bengal (WB) was keen for rapid industrialisation.
• The government of WB provided TML a loan of 200 crores at 1% interest.
• Accurate understanding of Political interests & Compulsion of State Government.
• Facing "great agitation" and "great aggression".
• Tata motors had to look for strategic locations and were offered one in Orissa at Gopalpur.
• They exploited such weakness to its advantage.
• They were offered an Incentive package in Uttarakhand/Himachal Pradesh and they were 100% exemption from excise duty for 10 years b)100% exemption from Corporate Income tax.
• WB out of desperation walked into the trap.
• Other States offered : Karnataka 1st , Gujrat offered 3 at Mundra in Kutch or Charodi in Sanand and Maharashtra, Andhra Pradesh also made one.