Economics

Economicsis thesocial
sciencethat analyzes
theproduction,distribution, and
consumptionofgoodsandservices.

Origin
The termeconomicscomes from theAncient Greek
(oikonomia, "management of a household,
administration") from(oikos, "house") + (nomos,
"custom" or "law"), hence "rules of the house
(hold)".Political economywas the earlier name for
the subject, but economists in the latter 19th
century suggested 'economics' as a shorter term
for 'economic science' that also avoided a
narrowpolitical-interestconnotation and as similar
in form to 'mathematics', 'ethics', and so forth.
(source Wikipedia)

Introduction
Economics is the science that deals
with production, distribution and
consumption of goods and services in
a society.
Economics studies the process by
which limited resources are allocated
to satisfy infinite human wants, that
is how different societies allocate
scarce resources optimally to satisfy
the wants and needs of their

 Economics mainly deals with making

choices about production,
distribution and consumption of
goods and services (commodities) to
satisfy present and future needs of
the society.
Economics also deals with moneyhow it is created, and how its supply
is regulated.

Economics : Definitions
Adam Smith (1776) : Wealth
Alfred Marshall (1890) : Welfare
Lionel Robbins (1935) : Scarcity and
Choice
Paul Samuelson (1948) : Growth

Wealth Definition of Adam

Smith
Adam Smith (1723-90) was one of the
prominent classical economists.
He considered economics as the Science of
Wealth.
He separated economics from philosophy
Arranged economic ideas systematically.
He is regarded as the father of economics
He published his famous book An enquiry
into the Nature and Causes of Wealth of
Nations

 According to Adam Smith, Economics is the

science of wealth that deals with the
acquisition, accumulation and utilization of
wealth of nations.
Economic development ,the leading theme
of his book, deals with the long term forces
that govern the growth of wealth of nations.
In economics wealth refers to scarce goods,
which satisfy human wants. Goods must
have monetary value.

Criticism
Too materialistic-It was called dismal
science and the science of
darkness by Arnold, Ruskin and
Carlyle.
Restricts the Scope of Economics
Neglects the welfare

Welfare Definition of Alfred Marshall

Alfred Marshall (1842-1924) was a leading neoclassical economist.
Shifted the emphasis from wealth to welfare
Published his book, "Principles of Economics in the
year 1890.
Economics is the study of mankind in the ordinary
business of life: it examines that part of a social
action which is most closely connected with all
attainment and use of the material requisites of well
being. Thus, it is on one side a study of wealth, and
on the other, the more important side, a part of the
study of man

Marshalls Definition
Emphasis on Welfare
Focus on Man-The subject matter of
economics deals with mans efforts in
gathering wealth to satisfy his wants.
Scope of the subject

Criticism
Faulty Divide-Economic and NonEconomic activity.
Vague conceptualization of welfare
Not Analytical
Marshall viewed economics as a topic
or as questions but not as a method.
Lionel Robbins criticized his work.

Scarcity Definition of Lionel Robbins

Lionel Robbins (1898-1984) Scarcity
definition is the most popular and used today.
He was the first to emphasize the scientific
nature of economics.
Robbins viewed economics as a method (how
choices are being made) rather than as a
topic of questions.
He emphasized economics as study of
individuals rather then the society as a whole.

 He has defined economics in his book An Essay on

the nature and Significances of Economic Science
(1932)
Economics is the science which studies human
behavior as a relationship between ends and scarce
means which have alternate uses
The object is to get optimal satisfaction out of limited
resources.
Human wants are unlimited
Means are limited
Scarce resources(like time, money, factors of
production) can be subjected to alternate uses.

 Robbins definition is also known as scarcity

definition of economics.
Leads to problem of choice.
Economics is a science and does not analyse
value judgments.
CHOICE is the essence of economic activity.
Economic problem arises because of
scarcity.
Problems may arise due to abundance as
well, example Air.

Criticism
Missing human touch-Human welfare
Limits the Scope of economics :
Resource allocation and price
determination.

Growth Definition of Paul Samuelson

Paul A. Samuelsons (1915-2009) definition
is known as growth definition.
Comprehensive
Combined the wealth, welfare and scarcity
with time element and growth.
Economics is a social science concerned
chiefly with the way society chooses to
employ its resources, which have alternative
uses , to produce goods and services for
present and future consumption

 Social Science
Present and Future consumption
The dynamic changes in the means as
well as the ends over time.
That is why it is called growth definition.
His definition is applicable to the primitive
society in which barter system was used
and to the modern economy where money
is used a medium of exchange.

Some other Definitions

David Ricardo: Economics studies how the
produce of the earth is distributed.
Robert Solow :Economics becomes the study
of the consequences of greed, rationality and
equilibrium.
John M. Keynes: The theory of economics
does not furnish a body of settled conclusions
immediately applicable to policy. It is a method
rather than a doctrine, an apparatus of the
mind, a technique of thinking, which helps its
possessors to draw correct conclusions.

 Duesenberry: Economics is all

about how people make choices.
Sociology is about why there isnt
any choice to be made.
Jacob Viner : Economics is what
economists do.

Positive and Normative

Economics
Positive Economics-The study of what
is
Normative Economics-The study of
what should be

Economic Methods
Inductive- From particular to general
Deductive- From general to particular

Economic Goals

Reduce Unemployment
Price Stability
Efficiency
An equitable distribution of income
Growth
Economic freedom and Choice
Economic welfare
Sustainable Development

Scope of Economics

Micro Economics
Macro Economics
International Economics
Development Economics
Health Economics
Environmental Economics
Urban and Rural Economics

Problem
A recent engineering graduate turns down a job
offer of Rs.3,00,000 per year and starts his own
business. He will invest Rs.5,00,00 of his own
money, which has been in a bank account
earning 7 percent interest per year. He also plans
to use a building he owns in Kolkata that has
been rented for Rs.15,000 per month. Revenue in
the new business during the first year was
Advertising
Rs.50,000
Rs.10,70,000 while other expenses were
Rent

Rs.1,00,000

Taxes

Rs.

Employees salaries

Rs.4,00,000

Supplies

Rs.

50,000

50,000

Quiz
Who is the father of economics?
Who wrote the book An enquiry into the
Nature and Causes of Wealth of Nations?
Who has given the welfare definition?
Who has given the scarcity definition?
Who has given the growth definition?
Who has given the wealth definition?
Keynes is credited for the growth of which
economics?
What is Says law?

Economics and Decision

Making
Nobel Prize winner Herbert Simon identifies
the primary activities in decision making.
1. Finding occasions for making decisions.
2. Identifying possible courses of action.
3. Evaluating the revenues and costs
associated with each course of action.
4. Choosing that one course that best meets
the goal or objective of the firm(i.e. that
maximizes the value of the firm)

Simon's 3 stages in Rational Decision Making:

Intelligence, Design, Choice (IDC)

Key Learning's
Economic Profit refers to revenues minus all relevant costs,
both explicit and implicit
Profit plays two roles in a market economy
a) Changes in profit signal producers to change the rate of
production
b) Profit is a reward to entrepreneurs for taking risks, being
especially innovative in developing new products, and
reducing production costs.
) Firms can earn economic profits because they have monopoly
power in a market. In general, such profits are not socially
useful.
) The primary decision-making role of managerial economics is
in determining the optimal course of action where there are
constraints imposed on the decision.

Micro and Macro Economics

MICRO ECONOMICS:1.Evolution of micro economics took place earlier than
macro economics.
2.It is branch of economics, which studies individual
economic variables like demand, supply, price etc.
3.It has a very narrow scope i.e. an individual, a market
etc.
4.Demand,supply,market forms etc. relate to micro
economics.
5.It is helpful in analysis of an individual economics unit
like firm.
6.Theory of demand, theory of production, price
determination theory etc. develop from micro
economics.

 MACRO ECONOMICS:1.It evolved only after the publication of keynes

book,General theory of employment, interest and
money.
2.It is a branch of economics which studies aggregate
economic variables, like aggregate demand, aggregate
supply, price level etc.
3.It has a very wide scope i.e. a country.
4.Aggregate demand aggregate supply, national income
etc. relate to macro economics.
5.It is helpful for analyzing the level of employment,
income, economic growth etc.
6.Theory of national income, theory of employment,
theory of money, theory of general price level etc.
develop from macro economics.

Managerial Economics
Managerial Economics may be viewed as
the study of economic principles and
methods which are relevant or useful for
managerial decision making of firms.
The role of managerial economist:-A
managerial economist helps the
management by using his analytical skills
and highly developed in solving complex
issues of successful decision-making and
future advanced planning.

 Edwin Mansfield "Managerial or Business economics is

concerned with the ways in which managers should
make decisions in order to maximize the effectiveness
or performance of the organizations they manage
Prof.DouglasBusiness Economics is concerned with the
application of economic principles and methodologies to
the decision making process within the firm or
organization under the conditions of uncertainty

Business Economics refers to the application of

economic theory and the tools of analysis of decision
sciences to find the optimal solution to managerial or
decisional problems.

 Business economics bridges

economic theory and economics in
practice.
Business economics tries to find out
whatever is likely to be the best for
the firm under a given set of
conditions.

Differences between Economics and

Business Economics
Area of Difference

Economics

Business
Economics

Nature

Economics deals with

the body of the
principles itself.

It deals with
application of
economic principles
to the problems of
business firms

Nature of Economic
Principles Studied

Economics deals with

both micro and
macro-economic
principles-normative
as well as positive.

It basically deals with

the application of
normative microeconomic principles
and involves value
judgements.It is
concerned with what
decisions ought to be
made.

Scope of Study

Micro economics as a
multi-facet branch of

Though business
economics is micro in

Focus of study

Under microeconomics as a
branch of
economics,
distribution
theories like rent,
wage and interest
are dealt along
with the theory of
profit.

The main focus of

study of business
economics is profit
theory. Other
distribution
theories have not
much relevance
here.

Approach to Study

Economic theory
takes assumptions,
hypothesis-economic
relationships and
generates economic
model models.

Business economics
adopts, modifies or
reformulates already
existing economic
models to suit the
specific conditions
and serves the
specific problems of
the business firm.

Methodology

Economic theory
avoids many
complexities and
makes simplified

Business economics
is pragmatic in the
sense that it
introduces some

Scope of Business
Economics
Fundamentals of Business Economics
Basic concepts and principles of economics
Opportunity cost and production possibility curve
Scarcity and efficiency
The Consumer Markets
Demand and Supply Analysis
Demand function
Demand schedule and demand curve
Determinants of demand
Demand forecasting
Supply function
Supply schedule and supply curve
Equilibrium of supply and demand curve
Price Elasticity of demand
Elasticity and revenue

The Business Organization

Prediction of consumer behavior

Determination of demand curve, like price, income, taste,
prices of other brands, etc
How and when consumers react to market signals like price
Consumer preferences and business organization
Determinants of firms behavior
Input cost, output and profit relations
Price determination in different market structures
Pricing and sales strategies of firms

Role of a managerial
economist

A managerial economist helps the management by using his analytical

skills and highly developed techniques in solving complex issues of
successful decision-making and future advanced planning.
Therole of managerial economistcan be summarized as follows:
He studies the economic patterns at macro-level and analysis its
significance to the specific firm he is working in.
He has to consistently examine the probabilities of transforming an everchanging economic environment into profitable business avenues.
He assists the business planning process of a firm.
He also carries cost-benefit analysis.
He assists the management in the decisions pertaining to internal
functioning of a firm such as changes in price, investment plans, type of
goods /services to be produced, inputs to be used, techniques of
production to be employed, expansion/ contraction of firm, allocation of
capital, location of new plants, quantity of output to be produced,
replacement of plant equipment, sales forecasting, inventory forecasting,
etc.
In addition, a managerial economist has to analyze changes in macroeconomic indicators such as national income, population, business cycles,
and their possible effect on the firms functioning.

 He is also involved in advising the management on public relations,

foreign exchange, and trade. He guides the firm on the likely impact of
changes in monetary and fiscal policy on the firms functioning.
He also makes an economic analysis of the firms in competition. He has
to collect economic data and examine all crucial information about the
environment in which the firm operates.
The most significant function of a managerial economist is to conduct a
detailed research on industrial market.
In order to perform all these roles, a managerial economist has to
conduct an elaborate statistical analysis.
He must be vigilant and must have ability to cope up with the pressures.
He also provides management with economic information such as tax
rates, competitors price and product, etc. They give their valuable
advice to government authorities as well.
At times, a managerial economist has to prepare speeches for top
management.

Application Areas
1.Risk analysis - various models are used to quantify rik
and asymmetric information and to employ them in
decision rules of manage risk.
2.Production analysis - microeconomic techniques are
used to analyze production efficiency, optimum factor
allocation costs, and to estimate the firm's cost function.
3.Pricing analysis - microeconomic techniques are used
to analyze various pricing decision including transfer
pricing join product pricing price description price
elasticity estimations, and choosing the optimum pricing
method.
4.Capital budgeting - Investment theory is used to
examine a firm's capital purchasing decision