concepts and techniques unit 1
TRANSCRIPT
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UNIT I
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Introduction Economics is broadly categorized by:
i) Microeconomics
ii) Macroeconomics
Microeconomics focus on the behavior of individual actors on the
economic stage, that is firms and individuals and their interaction in
market.
Macroeconomics is the study of the economic system as a whole. It
includes techniques for analyzing changes in total output, total
employment, consumer price index, unemployment rate , exports andimports.
Thus, economics is defined as a social science, which studies human
behavior in relation to optimize allocation of available resources to
achieve the given goals.
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Circular flow of economic
activity
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Five sector circular flow of
economy
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Characteristics of managerial
economics It is concerned with decision making of an economic nature. It is micro-economic in character.
It largely uses that body of economic concepts and principles, which is known as
theory of the firm. It is goal oriented and prescriptive
Managerial economics is both conceptual and metrical. It includes theory with
measurement.
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Decision Making
Decision-Problem
TraditionalEconomics
Optimal Solutionto BusinessProblems
Decision Science(Tools &
Techniques ofAnalysis
ManagerialEconomics
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Marginal Analysis Marginal cost and Marginal Profit/Benefit
Marginal cost is the cost which incurred to produce the next or one more unit.
Marginal revenue is the benefit which gets by producing next or one more unit.
Cost will be less and benefit will be more. Marginalism Principle
Marginal Cost (MC)= (TC)n(TC)n-1 where TC = Total Cost and n = unit of
Product, TCn = Total cost of producing n units, TCn-1 = Total Cost of producing n-1
units
Marginal Revenue (MR)= (TR)n(TR)n-1 where TR = Total revenue
Decision Rule:
MR>MC.MR=MC..MR
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Optimization Optimization is the technique of finding the value of independent variables that
maximizes or minimizes the value of the dependent variables.
For example: most of the firms are interested in finding the level of output that
maximizes their total revenue, some firms facing constant price may want to find the
level of output that would minimize the average cost and most important , most
firms may be interested in finding the level of output that maximizes their profit.
Technique of Maximizing Total Revenue
Total Revenue (TR) of firm is defined as:
TR=P.Q
where P= Price and Q = Quantity sold.
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Contd..
Technique of Optimizing Output: Minimizing Average Cost
The optimum size of the firm is one that minimizes the average cost of production.
The level of output that minimizes the average cost of production can be obtained by
dividing Total Cost (TC) by the quantity (Q) produced.
AC=TC/Q
Suppose TC function is given as:
TC=100-30Q+2Q2
AC=100/Q -30+2Q
The Rule of Minimization is same as Rule of Maximization that is first derivative of
AC function with respect to Q must be set equal to zero, as given below:
AC/Q=0
The value of Q can be calculated which indicates the optimum size of output that
minimizes the average cost.
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Contd..
Maximization of Profit
Profit maximization is the most common objective of the business firm. Profit
maximization is thus dependent on Total Revenue (TR) and Total Cost (TC)
Total profit (P) is defined as:
P=TR-TC
Total Profit is maximum when TR-TC is maximum. Therefore, profit maximization
firms tries to maximize TR-TC.