ATMIYA UNIVERSITY

Faculty of Business and Commerce

Course: B.COM
Semester: 1

Subject:

Principles of Micro Economics

Faculty Name:

Akshita Makwana

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 Syllabus

Semester – I
Course Code Course Title (F) Credits
21BBACC103 Core 3: Principles of Economics 04 Credits
Commerce Program: B.Com

Course Description:
This course is designed to learn economic principles and theories and its practical application. It teaches
application of economic ideas in managerial decision making. Quantitative tools exposed to provide insight
into methods of economic analysis. It studies human behavior and helps in formulation of policies and
strategies.

Course Purpose:
This course is branch of economics and provides managerial aspects and use of economic theories. It
aims at guiding in decision making at any point of time at production, distribution, price determination
and cost analysis. It enhances skills and decision making capabilities of an individual. Overall, this
course aims to develop students' understanding of the microeconomic concepts and theories in order to
enhance their skill in analyzing business opportunities, market and risks.

Course Outcomes: Upon completion of this course, the learner will be able to
CO No. CO Statement Blooms Taxonomy
Level
(K1 to K6)
CO1 Familiarize the students with the fundamentals concepts and essentials of K1
economics.
CO2 Make student understand the demand and supply analysis in business K2
applications
CO3 Apply elasticity concepts under different market conditions. K3
CO4 Understand the concepts of cost, revenue and relationship to business K2
operations.
CO5 Understand the causes and consequences of different market structures. K2

Course Content Hours

Unit-I : Introduction to Economics 09 hrs
● Meaning and definitions of Economics

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 ● Nature and scope of Economics
● Classical and Neo classical approach
● Economics Statics and Economics Dynamics
● Significance of economics and its practical application
● Introduction to Managerial Economics
● Role of Economics in Decision Making
Unit-II: Theories of Demand and Supply 10 hrs
● Meaning and types of Demand
● Meaning and types of Supply
● Law of demand and supply
● Schedule & Curve of Demand & Supply
● Determinants of Demand & Supply
● Exceptions of Demand & Supply
Unit- III: Elasticity of Demand 10 hrs
● Meaning of Elasticity of demand
● Types& Methods of Elasticity of Demand
o Price Elasticity
o Income Elasticity
o Cross Elasticity
● Practical Significance of Elasticity of Demand
● Factors affecting to Price Elasticity of Demand
Unit- IV: Theory of Cost and Revenue Analysis 09 hrs
● Cost Concepts
● Revenue concepts
● Short-run cost analysis & long-run cost analysis
● Relationship between TR, AR and MR under perfect competition
● Relationship between TR, AR and MR under Monopoly
● Economies of large scale production
Unit –V: Market Structure 10 hrs
● Market Structure and degree of competition
● Perfect Competition and its characteristics
● Monopoly and its characteristics
● Monopolistic competition and its characteristics
● Oligopoly and its characteristics
● Kinked Demand Curve

Text books:
● Mithani. D.M. (2015). Principles of Economics. Himalaya Publishing House.
● Chopra. P.N. (2006). Micro Economics. Kalayani Publishing House

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Reference books:
● Ahuja.H.L. Modern Microeconomics: Theory & Application. Sultan Chand & Sons
● Dwivedi, D.N. (2006). Managerial Economics. Vikas Publishing House
● Mehta.P.L. (2016). Managerial Economics–Analysis, Problems and Cases. Sultan Chand &
Sons

Pedagogic tools:
● Chalk and Board
● Power point presentation
● Seminar
● Videos

Methods of Assessment & Tools:

Components of CIA: 30 marks

Sr. No. Component Content Duration (if any) Marks Sub Total
Test 1 1st 2 units 11/2 hours 5 (Set for 30)
A 20
Test 2 All 5 units 3 hours 15 (Set for 70)
B Assignment 05
10
C Class Activity 05
Grand Total 30
Assignment ● Abstract and executive summary
● Case study writing
● Student generated handbook
Class activity ● Reaction paper
● Quiz
● One-minute paper
● Situation based question
● Group Discussion
● Assignment

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 UNIT-1 Introduction to Economics

1. Meaning & Definitions

1.1 What is Economics?

Economics is a very interesting subject because it analyses how human beings make
choices in an effort to maximize utility. It also analyses how a society seeks to allocate
their limited resources in other to achieve growth. The term economics is derived from
two words economy and science meaning the science of the economy or the science of
proper utilization of resources. This chapter focuses on the nature and scope of
economics. To understand the subject matter of economics, we tried to look at its
different definitions by different scholars. The basic concepts of economics are
discussed in other to give a better understanding of the definitions. There is also the
need to understand the basic economic problems of any society because other problems
revolve around these problems. The various definitions of economics is grouped under
different headings as discussed below:

1.1.1 The Classical View of Economics

The Classical economists viewed economics as a science of wealth. Adam Smith, the
father of economics, in his book titled: ‘An Enquiry into the Nature and Causes of
Wealth of Nations’, defined economics as the science of wealth. According to Adam
Smith, economics makes inquiries into the factors that determine the wealth and
growth of a nation. So according to Adam Smith what forms the subject matter of
economics is the production and expansion of wealth. However, Ricardo shifted
emphasis from wealth production to wealth distribution. According to a French
classical economist, J. B Say, economics is the science of production, distribution and
consumption of wealth. Other classical economists such J.S. Mill, defines economics
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as the law that governs mankind in the production of wealth. The wealth definition
means that wealth was considered to be an end in itself.

Critical Evaluation of the Classical Economists View

The classical economists narrowed the scope of economics by defining it as the science
that deals with only material wealth. They do not regard the services of those who
produce non-material goods because their services do not relate to production of
tangible goods. This view or conception by the classical economists attracted a lot of
criticisms. Critics pointed out that economics studies not only material goods and
wealth, but also includes non-material goods such as services of teachers, doctors,
lawyers. These services provided by human resources fulfill human wants and should
be regarded as part of wealth.

Secondly, the classical economists emphasized the importance of wealth rather than
human beings in economic life. The critics observed that wealth was given primary
role while human life was given secondary role, but on the contrary, human life should
play a primary role and so cannot be sacrificed for wealth.

According to the classical economists, wage to labor is the only source of wealth to a
nation, but the critics are of the view that there are other sources of wealth such as
natural resources, human resources and capital resources.

1.1.2 The Neo- Classical View of Economics

The neo-classical economists led by Alfred Marshal gave economics a respectable

place among social sciences. Marshall defined economics as the study of mankind in
the ordinary business of life; it examines that part of individual and the social action
which is most closely connected with the attainment and use of material wellbeing
Wealth was regarded not as an end in itself but a means to an end because it was seen
as the source of human welfare.
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Major propositions of Marshall’s welfare definition are economics is the science of
material welfare. Secondly, economics is a social science because it is a study of men
as they live and move and think in the ordinary business of life and thirdly that
economics is the study of rational behavior of people as they maximize their material
welfare This means that Economics is concerned with economic activities that promote
material welfare but excludes all non-economic activities that are socially undesirable
like stealing, prostitutions, etc.

Critical Evaluation of the Neo-Classical Economists View

The neo-classical definition of economics was criticized by Lionel Robbins because of

the distinction between material and non-material activities. According to Robbins, the
use of the word ‘material’ narrows down the scope of economics because there are
many things in the world which are immaterial, but are useful for promoting human
welfare. Robbins regards all goods and services which command a price as economic
activity whether they are material or non-material. To say services are non–material is
misleading because services have value. Their definition of Economics from the
material point of view is a misrepresentation of the science of Economics.

To the neo-classical economists, economics is concerned with material welfare.

According to Robbins, the word welfare should not be used along with material
activities because there are many activities which are regarded as economic activities
but they do not promote human welfare. For example, the production and sale of
tobacco, drugs and alcohol are economic activities but harmful to human health.

Robbins has also objected to the word ‘welfare’ in the neo-classical definition. Welfare
is a subjective thing and varies from person to person, from age to age. According to
Robbins, it cannot be said in objective term which things will promote welfare and the
ones that will not. Robbins believes that economics is not concerned with welfare

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rather he explains economics as the problem that have arisen because of scarcity of
resources.

1.1.3 Scarcity and Choice Definition by Lionel Robbins

Robbins criticized Marshall’s definition and provided his own definition in his book,
“An Essay on the Nature and Significance of Economic Science” in 1932. According
to Robbins, economics is the science which studies human behavior as a relationship
between ends and scarce means which have alternative uses. This means that
economics is a human science. It involves maximizing satisfaction from scarce
resource and the means available for satisfying these ends (wants) are scarce or limited
in supply. Also the scarce means are capable of alternative uses, that is, the use of
scarce resource for one end prevents its use for any other purpose at that point in time.
The ends are of varying importance which necessarily leads to the problem of choice in
selecting the uses to which scarce resources can be put to. It is the various alternative
uses of the resources that we have to decide on the best allocation of resources.

It should be noted that Robbins definition stands on three major facts namely:
Unlimited wants, scarcity of resources and alternative uses of the resources. Robbins
economics studies man’s activities in regards to all goods and services, without
distinguishing them as material and non-material; provided they satisfy human wants.
In other words, economic problem is one of allocating scarce means in relation to
numerous ends.

Critical Evaluation of Robbins Definition

Robbins definition is no doubt popular among economists because it points out the
basic economic problems confronting the society. But Robbins definition has also been
criticized on several grounds. According to the critics, Robbins definition also talks
about welfare which he formally criticized. In fact in Robbins definition the idea of

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welfare is present because it involves the allocation of resources to maximize
satisfaction. But this maximum satisfaction is nothing but welfare.

Also Robbins assumption fails to explain fully the nature of ‘end’ and the difficulties
associated with it. The idea of definite ends is also not acceptable because immediate
ends many act as intermediaries to further ends. It is difficult to separate ends from
means because immediate ends may be the means to the achievement of further ends.

Robbins definition is also criticized for not analyzing the theory of economic growth
and development rather it talks about the theory of product and factor pricing. The
theory of economic growth and development studies how national income and per
capita income increase and what causes the increase. Robbins takes the resources as
given while the theory of economic growth is concerned with reducing the scarcity of
resources through accumulation of capital and wealth. Therefore, Robbins definition
though applicable to fully employed economy is not realistic for analyzing the
economic problems of the real world. Economic problems arise not only due to
scarcity but due to under, miss or over utilization of resources.

1.1.4 Samuelson’s Growth Oriented Definition

The present trend in the world is the establishment of welfare states and improvement
in the standard of living through reduction in poverty, unemployment and income
inequality. In line with this trend Samuelson has given a definition of economics based
on growth aspects. According to Samuelson, “Economics is the study of how people
and society end up choosing with or without the use of money, to employ scarce
productive resources that could have alternative uses l; to produce various commodities
over time and distribute them for consumption, now or in the future, among various
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person or groups in the society”. Samuelson’s definition is an improvement over
Robbins scarcity definition based on the following facts:

1. Samuelson regards economics as a social science which emphasized the problem of

scarce resources and the idea of alternative uses of resources.

2. He emphasized on the consumption and distribution of various commodities for the

present and future economic growth hereby highlighting the study of macroeconomics.

3. Samuelson lays emphasis on the use of modern technique of cost-benefit analysis to

evaluate the development program for the use of limited resources.

4. Samuelson’s definition of economics has superiority over that of Robbins because of

the inclusion of time element thereby making the scope of economics dynamic.

From the above discussion, it is clear that economics cannot adequately be defined in
one sentence. No definition of economics has been generally accepted as being
satisfactory because every single definition has been followed up with criticism. Even
though there are different definitions as there are different scholars, we will summarize
economics as a social science concerned with how human beings allocate their limited
resources in order to achieve a given end over time. That is, it analyses how
households, firms, and society as a whole try to maximize their gains from their limited
resources and opportunities now and in the future. A better understanding of the
subject matter of economics needs a probe into the scope.

1.2 The Scope of Economics

Economics as a subject is experiencing continuous growth. The frontier of the subject

has been widened after Alfred Marshall separated it from the term Political Economy.
A discussion on the scope of economics includes the definition of economics, whether
economics is an art or a science and whether it is a positive or a normative science.

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1.2.1 Economics as an Art and a Science

There have been numerous questions whether economics is an art or a science.

Economics is an art as well as a science. Economics is an art because different theories
and laws are explained with the help of graphs, figures, tables, equations. Also
economics make use of assumptions which helps to define the conditions for the
application of theories, laws and relationship between economic variables. It shows
practical implication of theories.

Economics is a science because it is a systematized body of knowledge in which

economic facts are studied and analyzed. Economics just like science have laws and
theories which trace out a causal relationship between two or more phenomena. For
instance the law of demand tells us that, all things being equal, a fall in price leads to
an increase in demand and vice versa. A rise or fall in price is the cause while the
decrease or increase in demand is its effect.

Economics is also a science because its laws possess universal validity such as the law
of demand, law of diminishing marginal utility, etc. Some people do not regard
economics as a science because there is no scope for experimentation. Science involves
collections of facts and testing them by experimentation. Economic phenomena are
complex because they relate to man who acts irrationally as a result of tastes, habits,
social and legal institutions in the society. Although economics deal with statistical,
mathematical and econometric methods for testing, but they are not so accurate to
judge the true validity of economic laws and theories. As a result, exact quantitative
prediction becomes impossible. For instance, a rise in price may not lead to a reduction
in demand rather may increase demand because people are scared of shortages in
future.

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But this does not mean that economics is not a science. It is rather classified as a social
science because it deals with human beings whose actions are so filled with
uncertainty.

1.2.2 Economics as a Positive and Normative Science

According to J.N Keynes, a positive science may be defined as a body of systematized
knowledge concerning what it is; while a normative science is a body of systematized
knowledge relating to the criteria of what ought to be. The objective of a positive
science is the establishment of scientific laws; while the objective of a normative
science is the determination of the ideals .A positive science is concerned with what
is.According toRobbins, economics is a science of what is which is not concerned with
moral or ethical questions. The positive science of economics makes it devoid of value
or ethical judgment, that is, it relates and describes facts without saying whether they
are good or bad. For instance, statements such as ‘Growth creates pollution’ or Growth
gets rid of pollution’ are called positive statements –assertions of facts that can be
tested.

Normative economics involves value judgment or what are simply known as value. It
is concerned with the question of what ought to be. It makes distinction between good
and bad depending on ethics and beliefs of the people rather than on scientific laws and
principles. For instance, positive economics is concerned with how aggregate
consumption and investment, how the national income and employment, and how the
general price levels are determined; it does not go into the question of what should the
prices be, what should be the savings rate, etc. these questions of what should be and
what ought to be, falls within normative economics.

Economics is both a positive and normative science because positive economics sets
about to discover what is true about the economy, while normative economics
evaluates whether the facts found are good or bad.

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1.3 Basic Economic Concepts

Scarcity: - Scarcity means limited in supply. According to Thomas Sowell, the first
lesson of economics is scarcity. There are three categories of economic resources:
Land, labor and capital. Each of these resources exists in a finite, limited quantity.
People have unlimited wants and since we have a limited amount of resources it means
we can only produce a limited amount of goods and services, that is, the limited
resources cannot produce enough to satisfy everyone’s unlimited wants. This gives rise
to the study of economics for better allocation of scare resources among competing and
insatiable needs so as to maximize welfare.

Choice: A choice is a comparison of alternatives. The problem of scarcity leaves us in

a situation in which we must constantly choose which of our wants we will seek to
satisfy. For instance, an individual consumer must choose among the types of goods
and services to consume because of his limited income. He must also choose between
spending on present consumption and saving for future consumption.

The firm with its limited capital must decide what to produce and what not to produce.
A situation where the firm wants to produce two commodities, the choice to produce
more of one would mean a resolve to produce less of the other.

The government is also forced to make a choice on the nature of public goods to
provide for the citizens. The government has the task of utilizing the scare resources
effectively in order to improve the welfare of the people. Scarcity gives rise to choice
and making a choice creates a sacrifice because alternatives must be given up leading
to the loss of the benefits which the alternative would have provided.

Scale of Preference: - In economics, it is assumed that man is rational in his choice

making,that is, if a man has to choose between one thing and another, it is expected
that he will always choose the alternative that will yield the greatest satisfaction.

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Similarly a firm faced with how to make a choice between production of one product
and another, will choose the product that will yield the greatest profits. Scale of
preference presents a list of wants arranged in order of importance with the most
pressing want listed first, followed by the second most pressing need and so on.

Opportunity Cost: - Opportunity cost means forgone alternative. People must make
choices because of limited resources. Every choice has an opportunity cost and so the
satisfaction of one want involves forsaking the other. Therefore the real cost of
satisfying any want is the alternative forgone or the opportunity cost. For instance,
suppose a community uses a land and other resources to build a school instead of a
factory, the opportunity cost of choosing the school is the loss of the factory and what
could have been produced by building the factory. Also if a student misses his lecture
on economics because he wants to go to the cinema, the cost to him is the lectures that
he decides to miss. Opportunity cost of any choice is the value of the best alternative
forgone in making it and not simply the amount spent on that choice.
1.6 Microeconomics and Macroeconomics

Economics is divided into two major areas – Microeconomics and Macroeconomics

Microeconomics: - The word micro is derived from the Greek word mikros meaning
small. Microeconomics is a branch of economics that is concerned with the behavior of
individual consumers, firms, industries, commodities and prices. It studies how
decisions made by individuals and business affect the prices of goods and services. The
main objective of microeconomics is to maximize utility and minimize cost. It is also
known as the price theory. The major drawback of microeconomics is the unrealistic
assumption of full employment condition in an economy and it deals with the part of
the economy instead of the whole economy.

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Macroeconomics: - The word macro is derived from the Greek word macros meaning
large. It is that branch of economics that focus on the impact of choices on the total or
aggregate level of economic activities. Macroeconomics is the study of aggregates of
individuals, firms, prices and outputs. In other words, it studies the economy as a
whole. It analyses issues such as aggregate level of employment, the general price
level, aggregate savings and investment in the economy. The main objectives of
macroeconomics are full employment, economic growth, favorable balance of payment
and price stability. The major limitation of macroeconomics is that it ignores the
welfare of individuals in an economy and it takes into account only aggregate variables
which may not clearly explain economic conditions.

Microeconomics differs from macroeconomics in that while microeconomics maps up

close how individuals make decisions and how these decisions affect the price and
output of various goods and services, macroeconomics analyses not individuals but
aggregates of the economy. While microeconomics studies how an individual firm
employs its labors, macroeconomics studies the total employment in a given economy.
While microeconomics is particularly concerned with the relative prices of goods and
service; macroeconomics studies total prices of all goods and services in the economy.

The division between microeconomics and macroeconomics is not rigid, they are
interrelated. What affects the part affects the whole while the whole is made up of the
parts. For instance, national income is the sum of the incomes of individuals,
households, firms and industries. Also aggregates that are studied in macroeconomics
are nothing but individual quantities which are studied in micro economics. Moreover,
modern macroeconomics is based upon the study of microeconomics. Therefore,
microeconomics and macroeconomics cannot be isolated from each other.

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The wealth definition of economics given by Adam Smith and his followers gave rise
to serious misconceptions especially at the hands of Carlyle, Ruskin and other literary
writers of the 19th century .The popular meaning of wealth is abundance of money so
it was thought that economics was concerned only with the acquisition of riches or
money. Economic science was misunderstood that it concerned itself with the art of
earning and spending of money. This sense of economics being against the prevailing
religious thought, economics came to be regarded as a dismal science', Gospel of
Memmon (Thomas Carlyle called economics the “dismal science,” a point reinforced for him when reading the dire
prediction of Thomas Malthus that the production of food would eventually be unable to meet the rise in the earth's
)and even as illegitimate science 'that
population, with the certain result of world-wide starvation
teaches the people the "love of money" Ruskin, for example. Said 'there is no wealth
but life and for Lord Russell, Wealth is liberty: wealth is disposable time and nothing
more. Some even dubbed economics as a bread-and-butter science with a selfish touch
about it.' For quite a long time, therefore, the science of economics remained under a
cloud for its so-called association with the meaner and baser things of life.

● Significance of Economics:

In the modem world, the study of economics has assumed great importance as
economics has a pervading influence on all types of activities.

(1) The knowledge of economics tells us how the economic system works.

(2) It enumerates the various factors which account for a given economic situation.

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(3) Economics is useful to the government, to the banker, to the businessman and to the
industrialist.

On the basis of economic considerations, government decides how money should be

raise eg, by taxation, borrowing or deficit financing and how it should be spent. The
banker also knows, with the knowledge of economics, what should be the rate of
interest, for which activities loans should be given, etc. The businessman and the
industrialist know what should be produced in which quantity ,where goods should be
exported to and from where they should imported.

(4) The knowledge of economics is also useful to the labor leader and employer. The
employer and labor leader know what would be the profits and what wages should be
paid. The knowledge of economics is very useful to trade unions in collective
bargaining.

(5) To an ordinary individual also, the knowledge of economics is very useful as it tells
him how to plan his expenditure and his savings, taking into account the trend of
prices.

Thus, the knowledge of economics provides the necessary basis for a logical and
consistent behavior to all sections of the community and the government.

Logical and consistent behavior means behavior with the full knowledge of the
consequences of several alternative lines of behavior. This includes not only the
knowledge of the given situation but also about the future. Economics is a science and
as such, it is possible to predict the economic trend in future. Moreover, in recent
times, with the end of laissez-faire,( means leave alone, less govt. involvement in
economy) various

objectives of economic policy have come to the forefront such as income policy, full
employment, economic growth, socialist pattern, etc. For the attainment of these
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objectives the government has to adopt various framework of economic policy or to
adopt various techniques. It is the knowledge of economics which helps us to know the
relative utility and the limitations of various policies and achieve our economic goals.
It would be evident that economics covers almost important aspect of our life past,
present and future and the knowledge of economics is bound to go a long way in
helping us to analyze these problems, to know their implications and to chalk out
future lines of policy. In fine, economics is a must for every modern man. It is

of especially interest to the citizens of a developing country like India, who are
confronted with difficult problems such as poverty, retarded rural development,
unemployment, inflation etc., and who have to solve these and bring about equality in
the distribution of income and wealth, achieve economic and social justice, and
improve the common man’s living standards through perspective planning efforts.

As mentioned above business economics makes use of principles and methods of

economics in order to solve the problems of decision-making. The economic principles
are generally divided into micro economics and macro economics.

Micro economics is related with individual customers and principles of decision-

making of a business firm, while macro economics concentrates on different all-
encompassing matters like national income, level of employment, general price level
etc. keeping in view the complete economic system.

Thus, business economics studies both micro economics and macro economics. It is
explained in the microeconomics as to how an individual customer selects the product
which can give him maximum satisfaction and

how a business can provide it with best quality at least cost.

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Statics, Comparative Statics and Dynamics:

In the modem world, the study of economics has assumed great importance as
economics has a pervading influence on all types of activities.

Thus, business economics studies both micro economics

and macro economics. It is explained in the micro economics as to how an individual

customer selects the product which can give him maximum satisfaction and how a
business firm decides price, production extent

and co-ordination of production resources. In the micro-economics, demand analysis,

expenditure and production analysis, price determination in different market structures
and extent of production are also included.

Macro economics examines aspects keeping in view the over- all view of the economic
system and it becomes useful to the business economists who face the problems of
decision-making, because any firm cannot function without getting affected by the
economic factors. The level of complete economic activities, National income and
employment, condition of overall

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demand, government policies (financial, fiscal and others), common price level etc.
have great impact on the business firm. This macro economics environment affects the
business decisions of a business unit. Hence,

recently macro economics for the business management is developed, which is useful
for taking business decisions. Forecasting of future demands and

the investment decisions taken by the business unit are especially dependent on
economic situation and its potential for future development. At the same time, macro
Principles for consumption become more important for demand for investment,
common price level and trade wheels, investment expenditure which are able to give
returns in future etc.

Statics, Comparative Statics and Dynamics:

Introduction:

Statics, Comparative statics and dynamics are economic jargons used for economic
analysis. These terms are used both in partial and general as well as micro and macro
analysis. They are also used with reference to

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states of equilibrium. An economist constructs a ‘model’ which may abstract from
reality and yet be in a position to focus attention on certain basic essentials so as to
enable him to make predictions. The concepts of statics, comparative statics and
dynamics are helpful to the economist in arriving at meaningful causal relationships
which are used for economic predictions.

Statics :

In physics, the word ‘static’ means a position of rest. In partial economic analysis it is
used in the sense of a position ‘wherein certain key variables are not changing’;
(Hicks). In general analysis or macro economic

analysis, economic statics; indicates a ‘still’ picture of the economy as a whole. it

shows the final position of equilibrium, without reference to the process of adjustment
that has taken place in order to attain that

position.

In the Marshallian demand analysis, the determination of price at a particular point by

the forces of demand and supply is indicative of ‘statics’. Here supply and demand
relationships determine price at a particular

point of time, but the relationships are constant through time.

For example, we state the law of demand as under

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D =f (P)

S = f (P) and

D =S

Where

D = Demand,

S = supply

P = price and

f indicates functional relationship.

Similarly, Keynesian determination of level of income in the economy at a particular

point of time through consumption and investment functions is an example of statics.
The equation Y = C + I shows a timeless identity

Without adjusting mechanism. Both of the above examples are ‘photographs’ or ‘still
positions’ of the pictures of the economy.

● Merits :

This concept helps economists to proceed from simple to more complex situations. It
helps to study activities of firms, industries and even the entire economy from a
particular angle. It is useful in solving more complex real

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life problems. The economic basis of the argument of free trade rests on economic
static analysis. But it should be emphasized as was done by Lionel Robbins that We
study statics not for its own sake. We study the

laws of rest in order to understand the laws of change.

● Limitations:

‘Statics’; abstracts from reality. It assumes certain variables as constant over time. It
excludes influence of external factors. Hence, it is often said that statics cannot be
relied upon to give realistic causal relationships i.e. economic laws. Changes are
continuously taking place in the economy but ‘static’ ignores these changes.

Comparative Statics:

Comparative static refers to the comparison of one static equilibrium position with
another. It is essentially based on economic statics.

Let us try to understand comparative statics with reference to Demand- supply -

induced price -determination. In the conventional model, P is

determined at a point where D = S. What happens if income changes.; ‘y’ is an

exogenous( whose cause is external to model) variable. There is an upward shift in
demand curve, and there is a new equilibrium price. Thus, an increase in income leads
to an increase in both the price and the amount of the commodity sold. The impact of

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an exogenous change may depend on several factors but the new equilibrium position
may now be comparable to the old one. This is an example of comparative statics. It
helps in comparing one state of equilibrium with another in relation to external
influences i.e factors other than those which are implied in the economic statics model.

The comparative statics as an analytical tool is used widely in Economics to compare

equilibrium positions

The comparative statics as an analytical tool is used widely in Economics to compare

equilibrium positions corresponding to two sets of circumstances. It is used both in
micro and macro economics. Keynes used it in his theory of income determination.
The comparative statics provides comparison between two still situations but cannot
describe the path along which the

variables move from one position of equilibrium to the other. Again, the time taken to
reach the next position of equilibrium is also not indicated in the comparative statics.
In short, this is an intermediate tool, to help reach the final tool namely dynamics. If
there is stability, comparative statics may yield valid predictions. But the real world is
not stable. Hence the need for economic Dynamics.

Dynamics:

According to W. J. Baumol Economic Dynamics is the study of economic phenomena

in relation to preceding and succeeding events. Thus, economic dynamics is concerned
with changes in relation to time. The variables change but their impacts are not broad.
There are lags in their impacts.
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Professor Robertson had introduced period analysis to take care of the lagged response
to changes in variables. In terms of period analysis, economic dynamics is a study of
lagged adjustments during the process of change. But Period analysis was only an
intermediate (middle /transitional) stage.

A truly dynamic analysis is concerned with disequilibrium. It analyses the impact of

change. It is a study of movement and change. An economist studies with the help of
this tool the movement of economic variables (both indigenous and exogenous) from
one equilibrium position to another. Thus, although the tie to equilibrium is sought to
be maintained, there is a study of continuous change If we take a broad view, then
economic dynamics becomes a study of a system which is never in equilibrium i.e it is
in a constant state of change (flux). A study of a business cycle may be an example of
economic dynamics; but the study of an economy steeped in depression is plain
economic statics.

Usefulness of Economic Dynamics:

Economic dynamics studies reality in contrast to the statics which makes assumption
of no change. How changes in the economic variables bring about changes in the
economy is the subject - matter of economic dynamics. Ít is a study of the economy in
transition i.e the path of the movement of the economy from one equilibrium to another
equilibrium. Sometimes, equilibrium is not attained at all; hence it is a study of a
system in perpetual disequilibrium.

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Economic growth can be studied only in terms of dynamics. Growth process involves
changes in a number of economic variables; hence statics as a tool of analysis is not at
all suitable for the study of economic growth. Turning points of business cycles can be
studied only by dynamic economic analysis. Keynes theory is not wholly dynamic,
although by introducing elements of uncertainty, Keynes had attempted to make it
dynamic. Harrod, Kalecki and other Keynesians developed dynamic growth theories,
In the real world, disequilibrium is more common than equilibrium, therefore,
economic dynamics as a tool is more useful than statics or comparative statics. Here
we attempt to study the path which the economy follows and different points at which
equilibrium or disequilibrium occur. But it must be said that the analysis becomes
extremely complex and can be presented only in elaborate mathematical terms.

● Meaning of Managerial Economics:

In the words of Me Nair and Meriam, “Managerial Economics consists of the use of
economic modes of thought to analyze the business situations.”

Managerial economics generally refers to the integration of economic theory with

business practice. Economics provides tools managerial economics applies these tools
to the management of business. In simple terms, managerial economics means the
application of economic theory to the problem of management. Managerial economics
may be viewed as economics applied to problem solving at the level of the firm.

It enables the business executive to assume and analyze things. Every firm tries to get
satisfactory profit even though economics emphasizes maximizing of profit. Hence, it
becomes necessary to redesign economic ideas to the practical world. This function is
being done by managerial economics.

Well, decision-making isn’t just for managers or the business world; it affects
everyone’s life. Regardless of whether an individual is employed or unemployed,

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decision-making is critical to all. Regardless of the job you are doing, you must make a
decision. As a participant, you must make numerous decisions.

● What do you mean by Decision Making?

Well decision making is not something which is related to managers only or which is
related to corporate world, but it is something which is related to everybody’s life.

Whether a person is working or non-working, irrespective of his/her field, decision

making is important to everyone. You need to make decision irrespective of the work
you are doing. As a student also you have to take so many decisions. Suppose at a
particular point of time you want to go for a movie, and at the same point of you want
to go for shopping then what you will do. You can’t do two things at the same point of
time. You have to decide what to do first and what to do next. Therefore decision
making can be called as choosing the right option from the given one. To decide is to
choose. Whether to do this or to do that is what is decision making.

● Steps in Decision Making:

There are certain things which are to be taken into account while making decisions. No
matter what’s the size of the problem but like everything decision making should also
be in certain steps. Following are the various steps in decision making:

1. Establish objectives:

First step of any decision making process is to identify, for which purpose you are
planning to take certain decisions. Identify all those objectives that which you want to
achieve at the end of your decision making process.

2. Specify the decision problem

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To make a decision, you must first identify the problem you need to solve or the
question you need to answer. Clearly define your decision. If you misidentify the
problem to solve, or if the problem you’ve chosen is too broad, you’ll knock the
decision train off the track before it even leaves the station. If you need to achieve a
specific goal from your decision, make it measurable and timely so you know for
certain that you met the goal at the end of the process.

3. Gather relevant information

Once you have identified your decision, it’s time to gather the information relevant to
that choice. Do an internal assessment, seeing where your organization has succeeded
and failed in areas related to your decision. Also, seek information from external
sources, including studies, market research, and, in some cases, evaluation from paid
consultants.

Beware: you can easily become bogged down by too much information—facts and
statistics that seem applicable to your situation might only complicate the process.

4. Identify the alternatives

With relevant information now at your fingertips, identify possible solutions to your
problem. There is usually more than one option to consider when trying to meet a
goal—for example, if your company is trying to gain more engagement on social
media, your alternatives could include paid social advertisements, a change in your
organic social media strategy, or a combination of the two.

5. Evaluate alternatives

Once you have identified multiple alternatives, weigh the evidence for or against said
alternatives. See what companies have done in the past to succeed in these areas, and

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take a good hard look at your own organization’s wins and losses. Identify potential
pitfalls for each of your alternatives, and weigh those against the possible rewards.

Depending on the decision, you might want to weigh evidence using a decision tree.
The example below shows a company trying to determine whether to perform market
testing before a product launch. The different branches record the probability of
success and estimated payout so the company can see which option will bring in more
revenue.

6. Select the best alternatives

Here is the part of the decision-making process where you, you know, make the
decision. Hopefully, you’ve identified and clarified what decision needs to be made,
gathered all relevant information, and developed and considered the potential paths to
take. You are perfectly prepared to choose.

7. Implement the decision

Once you’ve made your decision, act on it! Develop a plan to make your decision
tangible and achievable. Allot duties and responsibilities and resources to get the thing
done.

8. Monitor the performance

After a predetermined amount of time—which you defined in step one of the decision-
making process—take an honest look back at your decision. Did you solve the
problem? Did you answer the question? Did you meet your goals?

If so, take note of what worked for future reference. If not, learn from your mistakes as
you begin the decision-making process again.

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What is the nature of decision making in economics?

The way of managing the firm decides its success and failure. This observation made
by many economists led to the creation of this discipline. The manager invokes a sense
of leadership and guides his team during the project. One more goal which should is
important for a firm to succeed is the knowledge of the economic aspects of the
project.

What is the scope of decision making in economics?

Managerial economics is a proven concept and many big firms use it to better manage
the different teams. The managers of the department and their heads look after the
working of the company. Theorists have defined a set of rules for various problems
using the principles which are helpful to better manage the efficiency of different
teams and departments.

These are the four main aspects of decision making that help managers plan ahead for
their team: –

1. Resource Allocation: – Resources always are the top concern for managers. It is
often that most of them feel that their team has too little manpower to complete
the task at hand. It is also one of the principles that allow the best use of the
resources to complete the task.

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 2. Inventory: – Inventory allocation is another one of the major challenges. But,
they must be on top of these aspects by analyzing the demand and supply
models. Managers can get a better hold of management and transport of
inventories by queuing products.

3. Pricing: – Fixing prices for the products in any firm is a crucial part of the
decision making process. Pricing problems involve decisions about various
methods of pricing that firms need to adopt.

4. Investment: – Managers must be aware of the future of their firms. In this

manner, they can have oversight of falling prey to negative market forces. Thus,
investment planning is of the pillars.

Economics and Decision Making

Managerial economics provides a link between economic theory and

the decision sciences in the analysis of managerial decision making. You need to make
decision irrespective of the work you are doing. What if you go to the movies and shop
at the very same time? It is impossible to do two things simultaneously. You must
choose what to do first and then what to do next. As a result, decision making can be
described as selecting the best choice from a set of options. To make a decision is to
make a choice. Decision making involves deciding whether to do this or that.

Definition of decision making: – Decision Making can be described as the process of

choosing the best course of action from a variety of options. Most significant aim of
business manager is decision making. Managerial Economics’ main goal is to help
people make better decisions. When a number of options are open, the issue of
decision making occurs. For example: –

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 ● What would the price of the product be?

● What should the plant’s size be when it’s installed?

● How many employees should be hired?

● What kind of education do they receive?

● What is the ideal level of finished goods, raw materials, spare parts, and other
inventory?

As a result, we can assume that the issue of decision making occurs as a result of
resource scarcity. We have an infinite number of desires and a finite number of ways to
fulfill them; when one desire is satisfied, another emerges, posing a decision making
challenge. When doing his job, the manager must make several choices in order to
achieve the firm’s objectives. The majority of decisions are made in the face of
uncertainty and include risks.

The key causes of instability and risk are the following market forces’ unpredictable
behavior are as follows: –

● The demand and supply

● Changing business environment

● Government policies

● External influence on the domestic market

● Changes in society and politics

What is economic problem?

Meaning of Economic problem: – An economic method can be expressed as a

problem involving unlimited wants and limited resources. The issue occurs
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 solely as a result of these unrestricted desires. Since assets used to fulfill one
need cannot be used to satisfy another, every man addresses the challenge of
economizing his wealth. The meaning of the term “economic problem” is “a
problem that affects the economy”.

To understand what an economic issue is, we must combine the four

characteristics, as follows: –

● Human desires are limitless.

● The strength of human desires varies.

● The assets and means available are small.

● There are other ways to put the scarce resources to good use.

In the face of limitless desires, the economic dilemma is how to use the
comparatively restricted resources with alternative uses. Every person should
make every effort to put his or her limited resources to possible alternatives in
order to get the most satisfaction from his or her constrained capacity. Everyone
seeks to fulfill the most urgent or extreme desires first, then those that are
marginally lesser urgent, and so on, compromising the fulfillment of desires that
are lower on the scale of choice and for which he does not have money. This is
known as the economic problem; how to get the most out of limited resources.

The causes of the economic problem: – We have a finite amount of resources,

and we also have a finite number of ways to fulfill certain resources. The
society’s reserves include not only free gifts from nature, such as soil, trees, and
minerals, but also individual physically and psychologically ability, as well as
all kinds of man-made aids further to development, such as machines,
machinery, and construction.

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 These materials can be classified into three categories: –

1. Natural resources, which include property, trees, rocks, and other free gifts from
nature, are referred to as LAND by economists.

2. Both mental and physical human capital, both hereditary and produced, which
economists refer to as LABOUR.

3. All man-made helps to even further manufacturing, such as machines,

machinery, crops, and apparatus, as well as anything man-made that isn’t
consumed for its own sake but is being used in the production of products and
services, and is referred to as CAPITAL by economists.

Economics assists us in maximizing our resources. It aids us in comprehending

the issue and making the best decision possible, which is beneficial to the
institution’s future planning. Managerial economics is concerned with firm-level
decision-making.

Business companies face the following decision-making challenges: –

● To figure out what other options there are for achieving a set of goals.

● To choose the course of action that will accomplish the goals in the most cost-
effective manner.

● To correctly execute the chosen course of action in order to meet the company
objectives.

Decision-making and the forward preparing are two of management’s most

important functions. Forward planning and decision-making go hand in hand.
The term “forward planning” refers to the process of making future plans.

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