Economics is the study of how economic agents or societies choose to use scarce productive resources that have alternative uses to satisfy wants (needs) which are unlimited and of varying degree of importance. Microeconomics is the study of how individual, firms or consumers do and/or should make economic decisions taking constraints into accounts
Managerial Economics is microeconomics applied to decisions made by business managers. The business manager is a person who directs resources to achieve a stated goal.
Two basic assumptions are considered in managerial economics:
• Ceteri paribus
• Economic Rationality
Ceteri paribus is a latin phrase that means “all variables other than the one being studied are assumed constant, or literally “other things being equal”
Economic rationality means economic agents see feasible known and alternative course of action, and rank them on priority and choose the one which is highest in the ranking order.
Since resources are scarce, an allocation decision must be made. The allocation decision includes three separate choices:
What and how many goods and services should be produced?
How should these goods and services produced?
For whom should these goods and services produced?
The answers to these questions depend upon the economy, or economic system, which is the way a nation makes economic choices about how it will use its resources to produce and distribute goods and services.
In a pure market economy, there is no government involvement in economic decisions. The government lets the market answer the three basic economic questions. In a command or socialist economy, the government is fully involved in the economy and answers the three basic economic questions. In a mixed economy, the private sector is allowed to use free market within the broader political and economic policy framework, and the public sector reserves certain trade and activities
Economic agents have to make rational choices in all aspects of business, since resources are scarce and wants are unlimited. It is necessary to choose one alternative among various alternatives. The cost of this choice will be evaluated in terms of the sacrificed alternatives.
There are two types of cost, explicit cost and implicit cost. Explicit cost is the monetary payment for the owners of the market supply resources and implicit cost is associated with the owner supplied resources.
The difference between the revenue and the cost is profit. There are two types of profit here. One is economic profit and second one is accounting profit. In case of economic profit, it is the difference between the total revenue and the total economic cost.
Rational decision making requires that all relevant costs both explicit and implicit be recognized the concept of economics profit accounts for all cost therefore is a more useful management tool than the more normally defined concept of economic profit.
Other terms used in this course are “incentive” and “marginal. Incentive is a measure to promote beneficial activities. There are two types of incentive scheme:
• Performance pay : incentive schemes resolve the moral hazard by trying payments to some measure of performance
• Performance quota: minimum standard of performance below which a worker is subject to penalties. The penalties could include deferral of promotion; reduction in pay or even dismissal
Marginal is always a unit change in any of this variable, whether the variable is cost, revenue, or utility. For instance, marginal revenue is the change in the total revenue because there is a change in the output.
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