Description
It explains the introduction to managerial economics. It explains concepts like opportunity cost, production possibility curve, three methods of resource allocation, types of economic systems,
MANAGERIAL ECONOMICS
Managerial Economics
? Objectives
Understand usefulness of economics in describing managerial behavior. – Understand how economics can be used to improve managerial decisions. – Appreciate vital role of business in society.
–
What is Managerial Economics?
Howard Davies “It is the application of economic analysis to business problems; it has its origin in theoretical microeconomics.”
Why Managerial Economics?
? ?
A powerful ?analytical engine?. A broader perspective on the firm.
? ? ?
what is a firm? what are the firm’s overall objectives? what pressures drive the firm towards profit and away from profit
?
The basis for some of the more rigorous analysis of issues in Marketing and Strategic Management.
Contents
? ? ? ? ?
Introduction to economics- scarcity, choice and Efficiency. Role of Government Demand and Supply analysis Consumer behaviour Production and costs Markets
TEN PRINCIPLES OF ECONOMICS
? ? ? ? ?
How people make decisions: People face trade offs The cost of something is what you have to give up. Rational people think at the margin People respond to incentives
? ? ? ?
How people interact? Trade can make everybody better off Markets are usually a good way to organize economic activity Government can sometimes improve market outcomes
? ? ? ?
How the economy as a whole works? A country’s standard of living depends on the its ability to produce goods and services Prices rise when Govt prints too much money Society faces a short run trade off between inflation and trade off
Market Structures
? ? ? ?
Perfect competition Monopoly Oligopoly Monopolistic Competition
? ?
Pricing practices- transfer pricing Current developments
Scarcity and Economic System
1.
2.
3.
What are the opportunity costs of the choices you make? How does a production possibility frontier (PPF) illustrate opportunity cost, specialization of resources, inefficiency, and economic growth? What are the differences between command economies, free market economies, and mixed economies in terms of the ways they address the 3 basic economic questions?
Opportunity Cost - Components
? ?
Direct money cost of a choice may only be a part of opportunity cost of that choice Opportunity cost of a choice = explicit costs + implicit costs – Explicit cost—dollars actually paid out for a choice ? Accounting cost – Implicit cost—value of something sacrificed when no direct payment is made
Opportunity Cost and Society
? ?
Resources in whole society are limited. All production carries an opportunity cost – To produce more of one thing
? Must
shift resources away from producing something else
?
No free lunch!
Increasing Opportunity Cost
?
According to law of increasing opportunity cost
–
The more of something we produce
? The
greater the opportunity cost of producing even more of it
?
This principle applies to all of society’s production choices
Production Possibilities Frontiers
?
Production Possibilities Frontiers (PPF) shows the combinations of two goods that can be produced with resources and technology available
Opportunity cost
•
Opp. cost of X = Amount of Y to be compensated for one more unit of X
•
Situation 1 2 3 4 5 6
X 0 1 2 3 4 5
Y 20 18 15 11 6 0
Opp. cost of X increases as you produce more of X
Opportunity Cost - Illustrated
?
Sacrifice of alternatives in production/consumption of a good Eg. Let a farm produce 1000 tonnes of wheat or 2000 tonnes of sugar Opportunity Cost of producing 1 ton wheat = 2 tonnes of sugar foregone.
?
Production Possibility Curve
? ?
Enclosed region – unemployment Outside graph – not feasible
6
5
4
Various combinations of 2 classes of goods produced provided resources in the economy are fully employed
Y
3
2
1
0 0 1 2 3 4 5 6
X
Production Possibility Frontier
Curve shows all possible 2-goods combination that an economy can produce - Specified time period - Resources fully & efficiently employed - Issues of choice & opportunity cost ? Concave to origin – increasing opportunity cost ? Region interior to PPF – economy has not attained Productive Efficiency unemployment
?
PPF Shift
8 7
6
5
Y
4
Economic Growth Improvement in skills Improved Technology Increase in factors of production
3
2
1
0 0 1 2 3 4 5 6 7 8
X
?
Economic Activity is transformation of inputs into output What to produce? How to produce? For whom to produce? Economics is concerned with identification, explanation and solution of these problems
? ?
?
?
Resource Allocation
?
Problem of resource allocation
–
–
–
Which goods and services should be produced with society’s resources? ? Where on the PPF should economy operate? How should they be produced? ? No capital at all ? Small amount of capital ? More capital Who should get them? ? How do we distribute these products among the different groups and individuals in our society?
The Three Methods of Resources Allocation
?
Market Economy
–
–
Resources are allocated through individual decision making Dominant method Resources are allocated according to explicit instructions from a central authority.
?
Command Economy (Centrally-Planned)
–
Mixed economy- a combination of markets and state
The Nature of Markets
?
A market is a group of buyers and sellers with the potential to trade with each other
– –
Global markets
? Buyers
and sellers spread across the globe and sellers within a narrowly defined
Local markets
? Buyers
area
INVISIBLE HAND
?
?
In trying to maximize his own welfare an individual is led by an invisible hand to achieve the best for all. A competitive market economy will provide an efficient allocation of resources through the price mechanism
The Importance of Prices
? ?
A price is the amount of money that must be paid to a seller to obtain a good or service When people pay for resources allocated by the market
–
They must consider opportunity cost to society of their individual actions
?
Markets can create a sensible allocation of resources
?
Objective – maximum possible ends by sacrificing the minimum possible resources
? ? ?
Ends are unlimited but can be graded in priority Means are limited and they have alternative uses This leads to the twin issues of efficiency and choice
Types of Economic Systems
?
An economic system is composed of two features
–
Mechanism for allocating resources
? Market ? Command
–
Mode of resource ownership
? Private
? State
Figure 4: Types of Economic Systems
Resource Allocation
Market Command
Private
Market Capitalism
Centrally Planned Capitalism
Resource Ownership
State Market Socialism Centrally Planned Socialism
Role of Government
?
?
?
Increasing efficiency by: a. Increasing competition b. control of externalities c. public goods Equity: redistribution of income by taxes and public expenditure Macro-stability : control inflation, ensure growth, reduce unemployment and stabilize exchange rates
Externalities
? ? ?
?
Externalities can occur in production or consumption. External costs : pollution due to industries, traffic congestion etc External benefits: research, ancilliary industries, reducing pollution External costs in consumption – passive smoking
Public Goods
? ?
?
Private goods are depletable and excludable. Hence there is no extra cost for serving an additional user. This makes pricing of such goods difficult. It is difficult to collect fees for public goods thus discouraging private enterprise.
Mixed economy
? ?
The government and the private sector interact in solving economic problems. Government controls a significant share of the output through taxation, transfers, provision of public goods and also regulates the extent to which individuals pursue their self interest.
doc_289983586.ppt
It explains the introduction to managerial economics. It explains concepts like opportunity cost, production possibility curve, three methods of resource allocation, types of economic systems,
MANAGERIAL ECONOMICS
Managerial Economics
? Objectives
Understand usefulness of economics in describing managerial behavior. – Understand how economics can be used to improve managerial decisions. – Appreciate vital role of business in society.
–
What is Managerial Economics?
Howard Davies “It is the application of economic analysis to business problems; it has its origin in theoretical microeconomics.”
Why Managerial Economics?
? ?
A powerful ?analytical engine?. A broader perspective on the firm.
? ? ?
what is a firm? what are the firm’s overall objectives? what pressures drive the firm towards profit and away from profit
?
The basis for some of the more rigorous analysis of issues in Marketing and Strategic Management.
Contents
? ? ? ? ?
Introduction to economics- scarcity, choice and Efficiency. Role of Government Demand and Supply analysis Consumer behaviour Production and costs Markets
TEN PRINCIPLES OF ECONOMICS
? ? ? ? ?
How people make decisions: People face trade offs The cost of something is what you have to give up. Rational people think at the margin People respond to incentives
? ? ? ?
How people interact? Trade can make everybody better off Markets are usually a good way to organize economic activity Government can sometimes improve market outcomes
? ? ? ?
How the economy as a whole works? A country’s standard of living depends on the its ability to produce goods and services Prices rise when Govt prints too much money Society faces a short run trade off between inflation and trade off
Market Structures
? ? ? ?
Perfect competition Monopoly Oligopoly Monopolistic Competition
? ?
Pricing practices- transfer pricing Current developments
Scarcity and Economic System
1.
2.
3.
What are the opportunity costs of the choices you make? How does a production possibility frontier (PPF) illustrate opportunity cost, specialization of resources, inefficiency, and economic growth? What are the differences between command economies, free market economies, and mixed economies in terms of the ways they address the 3 basic economic questions?
Opportunity Cost - Components
? ?
Direct money cost of a choice may only be a part of opportunity cost of that choice Opportunity cost of a choice = explicit costs + implicit costs – Explicit cost—dollars actually paid out for a choice ? Accounting cost – Implicit cost—value of something sacrificed when no direct payment is made
Opportunity Cost and Society
? ?
Resources in whole society are limited. All production carries an opportunity cost – To produce more of one thing
? Must
shift resources away from producing something else
?
No free lunch!
Increasing Opportunity Cost
?
According to law of increasing opportunity cost
–
The more of something we produce
? The
greater the opportunity cost of producing even more of it
?
This principle applies to all of society’s production choices
Production Possibilities Frontiers
?
Production Possibilities Frontiers (PPF) shows the combinations of two goods that can be produced with resources and technology available
Opportunity cost
•
Opp. cost of X = Amount of Y to be compensated for one more unit of X
•
Situation 1 2 3 4 5 6
X 0 1 2 3 4 5
Y 20 18 15 11 6 0
Opp. cost of X increases as you produce more of X
Opportunity Cost - Illustrated
?
Sacrifice of alternatives in production/consumption of a good Eg. Let a farm produce 1000 tonnes of wheat or 2000 tonnes of sugar Opportunity Cost of producing 1 ton wheat = 2 tonnes of sugar foregone.
?
Production Possibility Curve
? ?
Enclosed region – unemployment Outside graph – not feasible
6
5
4
Various combinations of 2 classes of goods produced provided resources in the economy are fully employed
Y
3
2
1
0 0 1 2 3 4 5 6
X
Production Possibility Frontier
Curve shows all possible 2-goods combination that an economy can produce - Specified time period - Resources fully & efficiently employed - Issues of choice & opportunity cost ? Concave to origin – increasing opportunity cost ? Region interior to PPF – economy has not attained Productive Efficiency unemployment
?
PPF Shift
8 7
6
5
Y
4
Economic Growth Improvement in skills Improved Technology Increase in factors of production
3
2
1
0 0 1 2 3 4 5 6 7 8
X
?
Economic Activity is transformation of inputs into output What to produce? How to produce? For whom to produce? Economics is concerned with identification, explanation and solution of these problems
? ?
?
?
Resource Allocation
?
Problem of resource allocation
–
–
–
Which goods and services should be produced with society’s resources? ? Where on the PPF should economy operate? How should they be produced? ? No capital at all ? Small amount of capital ? More capital Who should get them? ? How do we distribute these products among the different groups and individuals in our society?
The Three Methods of Resources Allocation
?
Market Economy
–
–
Resources are allocated through individual decision making Dominant method Resources are allocated according to explicit instructions from a central authority.
?
Command Economy (Centrally-Planned)
–
Mixed economy- a combination of markets and state
The Nature of Markets
?
A market is a group of buyers and sellers with the potential to trade with each other
– –
Global markets
? Buyers
and sellers spread across the globe and sellers within a narrowly defined
Local markets
? Buyers
area
INVISIBLE HAND
?
?
In trying to maximize his own welfare an individual is led by an invisible hand to achieve the best for all. A competitive market economy will provide an efficient allocation of resources through the price mechanism
The Importance of Prices
? ?
A price is the amount of money that must be paid to a seller to obtain a good or service When people pay for resources allocated by the market
–
They must consider opportunity cost to society of their individual actions
?
Markets can create a sensible allocation of resources
?
Objective – maximum possible ends by sacrificing the minimum possible resources
? ? ?
Ends are unlimited but can be graded in priority Means are limited and they have alternative uses This leads to the twin issues of efficiency and choice
Types of Economic Systems
?
An economic system is composed of two features
–
Mechanism for allocating resources
? Market ? Command
–
Mode of resource ownership
? Private
? State
Figure 4: Types of Economic Systems
Resource Allocation
Market Command
Private
Market Capitalism
Centrally Planned Capitalism
Resource Ownership
State Market Socialism Centrally Planned Socialism
Role of Government
?
?
?
Increasing efficiency by: a. Increasing competition b. control of externalities c. public goods Equity: redistribution of income by taxes and public expenditure Macro-stability : control inflation, ensure growth, reduce unemployment and stabilize exchange rates
Externalities
? ? ?
?
Externalities can occur in production or consumption. External costs : pollution due to industries, traffic congestion etc External benefits: research, ancilliary industries, reducing pollution External costs in consumption – passive smoking
Public Goods
? ?
?
Private goods are depletable and excludable. Hence there is no extra cost for serving an additional user. This makes pricing of such goods difficult. It is difficult to collect fees for public goods thus discouraging private enterprise.
Mixed economy
? ?
The government and the private sector interact in solving economic problems. Government controls a significant share of the output through taxation, transfers, provision of public goods and also regulates the extent to which individuals pursue their self interest.
doc_289983586.ppt