economics chapter 1
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An Introduction to Economic Analysis
1
Chapter – 1
An Introduction to
Economic Analysis
An Introduction to Economic Analysis
2
Objectives of the Session To understand positive and normative
economics To know about the interdependence of
macroeconomics and microeconomics To know about economics analysis
typical managerial decisions To understand Economists, finance
manager and functional areas of management
An Introduction to Economic Analysis
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Introduction Economic analysis evolves from basic
propositions about how individual human beings behave, struggle with the problem of scarcity and react to an observed change.
There are two basic ingredients of economic phenomena: scarcity and choice.
Opportunity cost is the real cost of making a choice.
An Introduction to Economic Analysis
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Positive and Normative Economics
The scientific approach to the analysis of economic events, commonly referred to as positive economics.
Normative economics involves prescriptions or statements about “what ought to be”, rather than “What is”.
An Introduction to Economic Analysis
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Interdependence of Macroeconomics and Microeconomics
In microeconomics, the underlying assumptions is that the total output, total employment and total spending are given.
What macroeconomics take as given- the distribution of output, employment and total spending which microeconomics seeks to explain.
Analysis of economy is not done in two watertight compartments.
Contd…………………
An Introduction to Economic Analysis
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Interdependence of Macroeconomics and Microeconomics
When macroeconomic variables are analyzed, one must allow for changes in microeconomic variables that influence the macroeconomic variables and vice versa
An Introduction to Economic Analysis
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Economic Analysis and Typical Managerial Decisions
Decisions within a corporate unit are taken at various levels from the junior executive up to the chief executive. Decisions at the lowest level pertain to the day
to day operations of the unit. Decisions at the middle management level
pertain to the current and near-future operations of the firm.
The decisions at the highest levels concern the long-term plans of the company.
In every practicing manager needs a good understanding of both microeconomics and macroeconomics.
An Introduction to Economic Analysis
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Typical Corporate Decisions
Demand Forecasting Pricing and other Marketing Decisions Cost Analysis Investment Appraisal Specific Industry Analysis Government, Regulation and Policy
Impact Analysis.
An Introduction to Economic Analysis
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Economists, Finance Manager and Functional Areas of Management
The primary function of the economists are to teach, contribute research and empirical findings and formulate policies.
In many companies economists act as advisors to functional manager in finance, marketing, production, personnel and in other departments.
An Introduction to Economic Analysis
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Economists, Finance Manager and Functional Areas of Management
A knowledge of economics is essential for sound policy making.
A finance manger may call upon the economist for forecasts relating to the money and capital market, inflation rates, and other trends in the economy.
An Introduction to Economic Analysis
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Production Possibility Curve
It helps us to understand the problem of scarcity better.
It shows what can be produced with the given resources and technology
Technology is the knowledge of how to produce goods and services.
O X
Y
X-Good
Y-
Good
A
E
B
C
D
An Introduction to Economic Analysis
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Shift in Production Possibility Curve Increase in the
quantities of economic resources
Improvement in the quality of resources
Advances in technology
O X
Y
X-Good
Y-
Good
A
A’
F F’