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Amity School of Business

Amity School of BusinessBBA-SEMESTER :I

MICRO ECONOMICS FOR BUSINESS

Mrs. ROLI RAGHUVANSHI

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Amity School of BusinessStructure

Theory of Production & Cost

Theory of Production & Cost

MicroEconomics for Business

MicroEconomics for Business

Theory of Consumer Behavior Marginal utility theory, Indifference curve theory

Theory of Consumer Behavior Marginal utility theory, Indifference curve theory

Introduction. The nature of managerial economic decision making

Introduction. The nature of managerial economic decision making

Competition, market structures and business decisions

Competition, market structures and business decisions

Alternate Theories of Firm

Alternate Theories of Firm

-Demand analysis and estimation

-Demand analysis and estimation

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Amity School of BusinessECONOMIC THEORY

• Is divided in two parts:– 1.- Microeconomics, which deals with economic

behavior in the marketplace where buyers and sellers interact.

– 2.- Macroeconomics, which deals with the behavior of economic aggregates such as the gross national product, national income, national employment, national consumption.

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Amity School of BusinessWhat is Managerial Economics?

• Douglas - “Managerial economics is .. the application of economic principles and methodologies to the decision-making process within the firm or organization.”

• Pappas & Hirschey - “Managerial economics applies economic theory and methods to business and administrative decision-making.”

• Salvatore - “Managerial economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objectives most effectively.”

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Amity School of BusinessManagerial economics deals with

• “How decisions should be made by managers to achieve the firm’s goals - in particular, how to maximize profit.”

• (Also government agencies and nonprofit institutions benefit from knowledge of economics, i.e. efficient recourse allocation is important for them too...)

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Amity School of BusinessQuestions that managers must answer:

– Should our firm be in this business?– If so, what price and output levels achieve our

goals?– How can we maintain a competitive

advantage over our competitors?• Cost-leader?• Product Differentiation?• Market Niche?• Outsourcing, alliances, mergers, acquisitions?• International Dimensions?

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Amity School of BusinessQuestions that managers must answer:

– What are the economic conditions in a particular market?

• Market Structure?• Supply and Demand Conditions?• Technology?• Government Regulations?

Future Conditions?• Macroeconomic Factors?

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• Decision Sciences

• Tools and Techniques of Analysis– Numerical Analysis– Statistical Estimation– Forecasting– Game Theory– Optimization

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Amity School of BusinessManagerial Decision Problems:

Managerial decision problems arise in any organization (i.e. non-profit organization such as a hospital or a university or government agency), when they seek to achieve some goal or objective subject to limitations on the availability of essential inputs and in the face of legal constraints.

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Amity School of BusinessEconomic Decisions

• Constraints -- limitations of time, energy, money, productive capacity, regulatory climate, etc.

• Information -- forecasting, relationships, expectations, possible retaliation by rivals, etc.

CONSTRAINTS

INFORMATION

GOALS & OBJECTIVES

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Amity School of Business

       Case of Hospital:A hospital may seek to treat as patients as possible at an adequate medical standard with its limited physical resources (i.e. physicians, technicians, nurses, equipment, beds etc.) and budget.

 Case of University:The goal of a state university may provide an adequate education to as student as possible subject to the physical and financial constraints it faces.

Case of government agency

Similarly, a government agency may investigate to provide a particular service to as many people as possible at the lowest feasible cost.

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Amity School of BusinessManagerial Decision Problems

Economic theoryMicroeconomicsMacroeconomics

Decision SciencesMathematical Economics

Econometrics

MANAGERIAL ECONOMICSApplication of economic theory

and decision science tools to solvemanagerial decision problems

OPTIMAL SOLUTIONS TOMANAGERIAL DECISION PROBLEMS

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Amity School of BusinessA Decision-Making Model

Objectives

Define the problem

Alternative Solutions

Evaluation

Implement andmonitor the

decision

Organizationaland input

constraints

Social constraints

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Interaction of MEB with Other Disciplines of Management

• Marketing• Demand• Price Elasticity

• Finance• Capital Budgeting• Break-Even Analysis• Opportunity Cost• Economic Value Added• Incremental Cost Analysis

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• Strategy• Types of Competition• Structure-Conduct-Performance Analysis

• Management Science• Linear Programming• Regression Analysis• Forecasting

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Amity School of BusinessSCOPE OF MEB

• Economics has two major branches-

• Micro Economics

• Macro Economics

• Both Micro & Macro economics are applied to business analysis and decision making directly or indirectly.

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• The areas of business issues to which economic theories can be directly applied may be broadly divided into two categories-

• A- Operational or Internal issues

• B- Environmental or external issues

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Amity School of BusinessMicro Economics applied to Operational Issues

• Operational problems are of internal nature. They include all those problems which arise within the business organisation and fall within the purview and control of the management.

• Some of the basic internal issues are-• 1- choice of business and the nature of product,i.e, what to produce• 2- choice of size of firm,i.e, how much to produce• 3- choice of technology.i.e, choosing the factor combination• 4- choice of price• 5- how to promote sales• 6- how to face price competition• 7- how to decide on new investments• 8- how to manage profit and capital• 9- how to manage inventory,i.e, stock of both finished goods and

raw materials

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Amity School of BusinessThe microeconomic theories which deal with most

of these questions are-

• 1- Theory of demand

• 2- Theory of production

• 3- Analysis of market structure and pricing theory

• 4- Profit analysis and profit management

• 5- Theory of capital and investment decisions

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Amity School of BusinessMacro Economics applied to business environment

• Environmental issues pertain to the general business environment in which a business operates. They are related to the over-all economic, social and political atmosphere of the country. The factors which constitute economic environment of a country include the following factors-

• 1- the type of economic system of the country• 2- general trends in

production,employment,income,prices saving and investment, etc.,

• 3- trends in the working of financial institutions• 4- trends in foreign trade

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• 5- trends in labour and capital markets

• 6- governments economic policies

• 7- social organisations like- trade unions, consumers co-operatives, producers union

• 8- the degree of openness in the economy and the influence of mnc’s on the domestic markets

• 9- state’s attitude towards business

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Amity School of BusinessBasic Assumptions

• 1) Ceteris Paribus• 2)Rationality

• Types of Economic Analysis

• 1) Micro and Macro• 2) Positive and Normative• 3) Short run and Long Run• 4) Partial and General Equilibrium