ECONOMICS AND MANAGERIAL ECONOMICS The principal features of scarcity definitions are as follows:

1. Human wants are unlimited: The scarcity definition of Economics

CONCEPT OF ECONOMICS
states that human wants are unlimited. If one want is satisfied,
Whenever a baby born in this world, he/she has needs so many another want crops up. Thus, different wants appear one after
things to survive in this world such as sunlight, water, air (oxygen), another.
milk, food, clothing and shelter (housing) etc. some of these
requirements are met freely (free of cost) like sunlight and oxygen etc 2. Limited means to satisfy human wants: Though wants are
because these are available in abundance. These types of wants are unlimited, yet the means for satisfying these wants are limited. The
'Non-economic Wants' in Economics. But, to meet some other resources needed to satisfy these wants are limited. For example,
requirements (like milk, food, clothing and shelter (housing) etc) one the money income (per month) required for the satisfaction of wants
has to pay something in exchange. One has to pay a price for these of an individual is limited. Any resource is considered as scarce if its
scarce resources in terms dollars (currency), other goods& resources
supply is less than its demand.
(for barter or exchange) or may has to render some service in
exchange. Thus, these types of requirements or wants are called
3. Alternative uses of scarce resources: Same resource can be
'Economic Wants' in Economics. Therefore, the Economics studies
that how the people meet their Economic Wants through managing devoted to alternative lines of production. Thus, same resource can
these Scarce Resources. be used for the satisfaction of different types of human wants. For
example, a piece of land can be used for either cultivation, or building
MEANING OF ECONOMICS: a dwelling place or building a factory shed, etc

The word ‘Economics’ originates from the Greek work ‘Oikonomikos’ 4. Efficient use of scarce resources: Since wants are unlimited, so
which can be divided into two parts: these wants are to be ranked in order of priorities. On the basis of
(a) ‘Oikos’, which means ‘Home’, and such priorities, the scarce resources are to be used in an efficient
(b) ‘Nomos’, which means ‘Management’ manner for the satisfaction of these wants
Thus, Economics means ‘Home Management’. The head of a family
faces the problem of managing the unlimited wants of the family 5. Need for choice and optimization: Since human wants are
members within the limited income of the family. In fact, the same is unlimited, so one has to choose between the most urgent and less
true for a society also. If we consider the whole society as a ‘family’, urgent wants. Hence, Economics is also called a science of choice.
then the society also faces the problem of tackling unlimited wants of So, scarce resources are to be used for the maximum satisfaction
the members of the society with the limited resources available in (i.e., optimization) of the most urgent human wants.
that society. Thus, Economics means the study of the way in which
For the purpose of study and teaching Pro. Rangnar Frish has
mankind organizes itself to tackle the basic problems of scarcity. All
classified economics into two broad categories. These are: Micro-
societies have more wants than resources. Hence, a system must be
economics and Macro-economics. These two words have been
devised to allocate these resources between competing ends
derived from Greek words ‘Micro’ and ‘Macro’, which means small
DEFINITIONS OF ECONOMICS and large respectively.

We have now formed an idea about the meaning of Economics. This MICRO-ECONOMICS: The study of an individual consumer or a firm
at once leads to a general definition of Economics . Economics is the is called micro-economics. It is also called as the theory of firm.
social science that studies economic activities.
MACRO-ECONOMICS: The study of aggregate or total level of
Economists at different times have emphasized different aspects of economic activity in a country in a country is called macro-economics
economic activities, and have arrived at different definitions of
NATURE OF ECONOMICS
Economics.
It includes Economics is a science or an Art, or is it a Positive or
These definitions can be classified into four groups:
Normative science.
1. Wealth definitions,
2. Material welfare definitions, Economics as a Science
3. Scarcity definitions, and Science is a systematized body of knowledge that traces the
4. Growth-centered definitions relationship between cause and effect. Another attribute of science is
that its phenomena should be amenable to measurement. Applying
Adam Smith’s Definition these characteristics, we find that economics is a branch of
Adam Smith, considered the founding father of modern Economics, knowledge where the various facts relevant to it have been
systematically collected, classified and analyzed. Economics
defined Economics as the study of the nature and causes of nations’
investigates the possibility of deducing generalizations as regards the
wealth or simply as the study of wealth. The central point in Smith’s economic motives of human beings. The motives of individuals and
definition is wealth creation. Implicitly, Smith identified wealth with business firms can be very easily measured in terms of money. Thus,
welfare. He assumed that, the wealthier a nation becomes the economics is a science
happier are its citizens. Thus, it is important to find out, how a nation
can be wealthy. Economics is the subject that tells us how to make a Economics as an Art
nation wealthy. Adam Smith’s definition is a wealth-centered An art is a system of rules for the attainment of a given end. A
definition of Economics science teaches us to know; an art teaches us to do. Applying this
Lionel Robbins’ Definition definition, we find that economics offers us practical guidance in the
solution of economic problems. Science and art are complementary
According to Robbins, “Economics is a science which studies human to each other and economics is both a science and an art.
behavior as a relationship between ends and scarce means which
have alternative uses”. Economics as a Positive Science
Positive economics is a branch of economics that focuses on the
description and explanation of phenomena, as well as their casual
relationships. It focuses primarily on facts and cause-and-effect
behavioral relationships, including developing and testing economic
theories. As a science, positive economics focuses on analyzing
economic behavior. It avoids economic value judgments. INTRODUCTION OF MANAGERIAL ECONOMICS
For example, positive economic theory would describe how money Managerial Economics as a subject gained popularity in USA after
supply growth impacts inflation, but it does not provide any guidance the publication of the book “Managerial Economics” by Joel Dean in
on what policy should be followed. "The unemployment rate in India 1951.
is higher than that in the China" is a positive economic statement. It Managerial Economics refers to the firm’s decision making process.
gives an overview of an economic situation without providing any It could be also interpreted as “Economics of Management”.
guidance for necessary actions to address the issue. Managerial Economics is also called as “Industrial Economics” or
“Business Economics”.
Other examples Managerial Economics is the use of economic analysis to make
(i) The main cause of price-rise in India is increase in money supply. business decisions involving the best use of an organization’s scarce
(ii) Production of food grains in India has increased mainly because
of increase in irrigation facilities and consumption of chemical resources. Economics is concerned with the problem of scarce
fertilisers. resources among competing wants. Those economic principles,
(iii) The rate of population growth has been very high partly because concepts, methods, tools and techniques that can be applied
of high birth rate and partly because of decline in death rate. practically to solve the problems of business management is known
as managerial economics. Managerial economics is a part of
Normative Economics economics and it is concerned with decision making.
Normative economics is a branch of economics that expresses value
or normative judgments about economic fairness. Normative science Definitions:
relates to normative aspects of a problem i.e., what ought to be. “The use of economic analysis in the formulation of business policies
Under normative science, conclusions and results are not based on is known as managerial economics.”
facts, rather they are based on different considerations like social, ------- Joel Dean.
cultural, political, religious and son are basically is subjective in
nature, an expression of opinions “Business Economics consists of the use of economic modes of
(i) Inflation is better than deflation. thought to analyze business situations.”
(ii) More production of luxury goods is not good for a poor country ------- Mc Nair and Meriam
like India. NATURE OF MANAGERIAL ECONOMICS
(iii) Inequalities in the distribution of wealth and incomes should be Managerial economics is, perhaps, the youngest of all the social
reduced. sciences. Since it originates from Economics, it has the basis
features of economics.
Conclusion The other features of managerial economics are explained as below:
Economics is concerned with human well-being as well as ethical (a) Close to microeconomics: Managerial economics is
values. It is science and an art, since the scientific principles are concerned with finding the solutions for different
applied practically. It is both positive and normative science since the managerial problems of a particular firm. Thus, it is closer
actual happening and the future happenings are dealt. Hence the to microeconomics.
(b) Operates against the backdrop of macroeconomics: The
scope and nature of economics deals in with all the above as macroeconomics conditions of the economy are also seen
explained by the economists. as limiting factors for the firm to operate. In other words,
the managerial economist has to be aware of the limits
SCOPE OF ECONOMICS set by the macroeconomics conditions such as
Economics is a social science. The subject matter of economics government industrial policy, inflation and so on.
deals with the analysis of economic problems of people in the society (c) Normative statements: A normative statement usually
and the satisfaction of their wants. With the evolutionary changes of includes or implies the words ‘ought’ or ‘should’. They
the society and its civilization, the subject matter scope of economics reflect people’s moral attitudes and are expressions of
has expanded. Scope of economics is discussed below: what a team of people ought to do. For instance, it deals
with statements such as ‘Government of India should
1. As social science economics deals with the economic open up the economy. Such statement are based on
activities of human being. One person day to day money value judgments and express views of what is ‘good’ or
earning and money spending activities constitute the ‘bad’, ‘right’ or ‘wrong’. One problem with normative
subject matter of economics. For example, parents’ statements is that they cannot to verify by looking at the
affection and nursing service for their children are not the facts, because they mostly deal with the future.
subject matter of economics. Disagreements about such statements are usually settled
2. Resources are needed to satisfy people's wants. So, the by voting on them.
availability of resources and their use are important (d) Prescriptive actions: Prescriptive action is goal oriented.
subject matter of economics. Adam Smith has termed Given a problem and the objectives of the firm, it suggests
economics as the “Science of Wealth”. the course of action from the available alternatives for
3. People's wants are unlimited. But the resources to satisfy optimal solution. If does not merely mention the concept,
the wants are scarce. Economics discusses how men can it also explains whether the concept can be applied in a
get the maximum satisfaction by using the scarce means given context on not. For instance, the fact that variable
to satisfy wants on the basis of priority. So, as subject costs are marginal costs can be used to judge the
matter of economics, the scarcity of resources is feasibility of an export order.
considered very important. (e) Applied in nature: ‘Models’ are built to reflect the real life
4. People's wants are related to production, exchange, complex business situations and these models are of
distribution and consumption. Again, currency, banking immense help to managers for decision-making. The
system, public finance, trade etc is also parts of economic different areas where models are extensively used include
activities. Economics discuss these issues also. Besides, inventory control, optimization, project management etc.
how economic development of the country is achieved In managerial economics, we also employ case study
through the means of economic planning is also included methods to conceptualize the problem, identify that
in the subject matter of economics. alternative and determine the best course of action.
5. Economics discusses the economic problems and (f) Offers scope to evaluate each alternative: Managerial
economic activities and indicates proper solution to these economics provides an opportunity to evaluate each
problems. Economics also discuss about the value alternative in terms of its costs and revenue. The
judgment of human actions and behavior.
 managerial economist can decide which is the better Profit making is the major goal of firms. There are several constraints
alternative to maximize the profits for the firm. here an account of competition from other products, changing input
(g) Interdisciplinary: The contents, tools and techniques of prices and changing business environment hence in spite of careful
managerial economics are drawn from different subjects
planning, there is always certain risk involved. Managerial economics
such as economics, management, mathematics,
statistics, accountancy, psychology, organizational deals with techniques of averting of minimizing risks. Profit theory
behavior, sociology and etc. guides in the measurement and management of profit, in calculating
(h) Assumptions and limitations: Every concept and theory of the pure return on capital, besides future profit planning.
managerial economics is based on certain assumption 6. Capital or investment analyses:
and as such their validity is not universal. Where there is Capital is the foundation of business. Lack of capital may result in
change in assumptions, the theory may not hold good at small size of operations. Availability of capital from various sources
all. like equity capital, institutional finance etc. may help to undertake
large-scale operations. Hence efficient allocation and management of
SCOPE OF MANAGERIAL ECONOMICS capital is one of the most important tasks of the managers. The major
The scope of managerial economics refers to its area of study. issues related to capital analysis are:
Managerial economics is primarily concerned with the application of
economic principles and theories to five types of resource decisions 1. The choice of investment project
made by all types of business organizations. 2. Evaluation of the efficiency of capital
The scope of managerial economics covers two areas of decision 3. Most efficient allocation of capital
making Knowledge of capital theory can help very much in taking investment
a. Operational or Internal issues decisions. This involves, capital budgeting, feasibility studies,
b. Environmental or External issues analysis of cost of capital etc.
a. Operational issues: 7. Strategic planning:
Strategic planning provides management with a framework on which
Operational issues refer to those, which wise within the business
long-term decisions can be made which has an impact on the
organization and they are under the control of the management. behavior of the firm. The firm sets certain long-term goals and
Those are: objectives and selects the strategies to achieve the same. Strategic
1. Theory of demand and Demand Forecasting planning is now a new addition to the scope of managerial
2. Pricing and Competitive strategy economics with the emergence of multinational corporations. The
3. Production cost analysis perspective of strategic planning is global.
It is in contrast to project planning which focuses on a specific project
4. Resource allocation
or activity. In fact the integration of managerial economics and
5. Profit analysis strategic planning has given rise to be new area of study called
6. Capital or Investment analysis corporate economics.
7. Strategic planning
1. Demand Analyses and Forecasting: b. Environmental or External Issues:
A business firm convert raw material into finished products and these An environmental issue in managerial economics refers to the
products are sold in the market. Hence the firm has to estimate and general business environment in which the firm operates. They refer
forecast the demand before starting production. The firm will prepare to general economic, social and political atmosphere within which the
firm operates. A study of economic environment should include:
production schedule on the basis of demand forecast
a. The type of economic system in the country.
Demand analysis provides: b. The general trends in production, employment, income,
1. The basis for analyzing market influences on the firms; prices, saving and investment.
products and thus helps in the adaptation to those c. Trends in the working of financial institutions like banks,
influences. financial corporations, insurance companies
2. Demand analysis also highlights for factors, which d. Magnitude and trends in foreign trade;
influence the demand for a product. e. Trends in labor and capital markets;
f. Government’s economic policies viz. industrial policy
2. Pricing and competitive strategy:
monetary policy, fiscal policy, price policy etc.
Pricing decisions have been always within the preview of managerial
economics. Pricing policies are merely a subset of broader class of
The environmental or external issues relate managerial economics to
managerial economic problems. Price theory helps to explain how
macro-economic theory while operational issues relate the scope to
prices are determined under different types of market conditions. micro economic theory. The scope of managerial economics is ever
Competitions analysis includes the anticipation of the response of widening with the dynamic role of big firms in a society.
competitions the firm’s pricing, advertising and marketing strategies.
Product line pricing and price forecasting occupy an important place
here.
3. Production and cost analysis:
Production analysis is in physical terms. While the cost analysis is in
monetary terms cost concepts and classifications, cost-out-put
relationships, economies and diseconomies of scale and production
functions are some of the points constituting cost and production
analysis.
4. Resource Allocation:
Managerial Economics is the traditional economic theory that is
concerned with the problem of optimum allocation of scarce
resources. Marginal analysis is applied to the problem of determining
the level of output, which maximizes profit. In this respect linear
programming techniques has been used to solve optimization
problems. In fact lines programming is one of the most practical and
powerful managerial decision making tools currently available.
5. Profit analysis: