Unit-1 Introduction

What Is Economics?

Economics is a social science concerned with the production, distribution, and consumption of goods and
services. It studies how individuals, businesses, governments, and nations make choices on allocating
resources to satisfy their wants and needs, trying to determine how these groups should organize and
coordinate efforts to achieve maximum output.

Economics can generally be broken down into macroeconomics, which concentrates on the behaviour of the
aggregate economy, and microeconomics, which focuses on individual consumers and businesses.

Micro-economic theory

Micro-economic theory is divided into five sections.

1. the theory of consumer choice and demand (khareedne wala). This theory describes how the typical
consumer, constrained by a limited income, chooses among the many goods and services offered for
sale.

2. the choices made by business organizations or firms(bechne wala). We shall develop a model of the
firm that helps us to see how the firm decides what goods and services to produce, how much to
produce, and at what price to sell its output.

3. how consumers and firms interact. By combining the theory of the consumer and the firm, we shall
explain how the decisions of consumers and firms are coordinated through movements in market
price. Eventually, the decisions of consumers and firms must be made consistent in the sense that
somehow the two sides agree about the quantity and price of the good or service that will be
produced and consumed. When these consumption and production decisions are consistent in this
sense, we say that the market is in equilibrium.

4. supply and demand for inputs into the productive process. These inputs include labor, capital, land,
and managerial talent; more generally, inputs are all the things that firms must acquire in order to
produce the goods and services that consumers or other firms wish to purchase.

5. welfare economics. There we shall discuss the organization of markets and how they achieve
efficiency

Application of Economics – The Bigger Picture

Economics plays a major role in big organizations where every business decision involves investments worth
crores of rupees. Decisions such as adding a simple feature to a product, changing the product-line to make it
more efficient, going for a new business strategy, increasing production require thorough study to ensure that
the intended goals are achieved. The goal may not be limited to maximizing profit. It may be to capture certain
market share, to increase sales, to lead the market or to simply add more value to the product at the same
cost or optimal cost of production. Since the decisions can greatly affect the company, business heads may
have managerial economists in their team or may themselves have the knowledge of principles of the subject.
Managerial economists study the business environment. They consider a wide number of macroeconomic
factors such as population growth and economic growth to study the market. This information will be helpful
to them in recommending long-term goals for the business.

Use of Economics-
Economics uses both Economic theory as well as Econometrics for rational managerial decision making.
Econometrics is defined as use of statistical tools for assessing economic theories by empirically measuring
relationship between economic variables. It uses factual data for solution of economic problems. Managerial
Economics is associated with the economic theory which constitutes “Theory of Firm”. Theory of firm states
that the primary aim of the firm is to maximize wealth.

Decision making in economics generally involves establishment of firm’s objectives, identification of problems
involved in achievement of those objectives, development of various alternative solutions, selection of best
alternative and finally implementation of the decision