isthe soci " S00ds and services. “The te“ Beoneege hich means “Management ofa Household, Administ “nomos” means “Custom” or “Law”, Hence it 8 Economics, therefore, concerns ms isl ott scarce productive resources.. It also deals with tr utes een a ae which in the rate of utilization of resources. ON OF peace and diverse scope of economics. ~ Adam Smith (1723 -1790), the Pec dered tes Which relates to wealth. According to him if nation has larger an achieving its betterment. He defined economics as, “The study. of wealth of a nation”. Adam Smith in his famous book, “An Enguiry into oe Nations” emphasized the production and expansion of wealth as Ricardo, another British classical economist shifted the e “to the distribution of wealth” in the study of economic JS. Mill in the middle of 19th century looked upon. production and distribution of wealth”. fl According to Malthus, “Man is motivated by seiner never leaves hi. till he goes into the grave”, The main points ofthe definitions of economics given by the a 1. Economics is the study of wealth only, It deals with ec and distribution aspects of wealth. 2. Only those commodities, which are scarce, are in such as- air, services etc., are excluded from the categ The neo-classical school led by Dr. Alfred Marshall among social sciences. He was the first economist who lifted eco! fallen. Dr, Alfred Marshall (1842 - 1924) in his book, “4 Pr economics as “Study of mankind in the ordinary business which is closely connected with the ma and social actions, requisites of well being”. This definition clearly states that economics is on t wealth and on the other and more important side a Patt of the study oanINTRODUCTION TO ECONOMICS Marshall’s followers lil Sao Ser hee Cannon and Baveridge (the Neo-classical writers) have al fy of causes of material welfare™. For example. according o Cannon, the aim of Political Econom; iy is the Pe re aa GconomY is the explanation of the general causes, which the material welfare Marshall’: tic ee. eS of economics was an article of faith with all economists from 1830 to Sefence” (1932), there ake ie of Robbins book “Nature and Significance of Economic TB sis ea loped a fresh-controversy in regard to the definition of economies. Bi hisort actniccs ia the definitions given by the Classical and Neo-classical economists, eae on a Sapeas ‘According to him, the definition of economics given by him Eee es oe bestia does not contain any reference of the term material oF Eta aia ae ae oaeere! individual as to the complicated net working ee Se yen in zi that of science. It makes economics a positive Sect canes, ar) jids the economists to pass any value judgement of what eves Reais tins his definition economics precise, scientific and superior defines — ics: ae his k ‘Nature and Significance of Economic Science” (Published in 1932) as science which studies human behaviour as a relationship between ends and scarce means, which have alternative uses”. “Thus definition of economics varies from an individual to other and also from time to time. It has nature of many different sciences and is mixture of philosophy, ethics, history, politics. mathematics, etc. Hence it is very difficult to define economics accurately. Moreover some ‘economists feel that there is no need for definition of economics. Defining itis like bringing it fnside a boundary. As time passes more topics could be included. ‘Thus a definition that looks valid wouldn't be the same in the next decade. DIFFERENT VIEWS ON ECONOMICS Economics is the social science, which deals with the production, distribution and consumption of goods and services and with the theory and management of economies or economic systems. We can have a good idea about the nature and scope of economics by studying some of the important definitions of ‘economics. Some of the important definitions of economics are those of _giyen by leading economists like Adam ‘Smith, Alfred Marshall, Lionel Robbins and Samuelson. / Wealth View on Economics (Adam Smith's Wealth Definition) ‘Adam Smith (1723-90) defined economics as, wealth of the nations”. ‘Adam Smith is considered as the father of author of the famous book “Wealth of Nations” (1776), which i Opus” and the first modern ‘work of economics. He is known as the“ crease he was the first person who put all the economic ideas ina systet : os Adam Smith, we study economics as a systematic science. The term “Wealth has a a meaning in economics. Generally the term ‘wealth means money, but in economics, wealth i to those goods, which satisfy human wants. But all goods that satisfy human wants are ee ze For example, air, water and sunlight are ‘essential for our survival. However, they are not reg: dhave te wealth because they are available in plenty. Therefore those goods that are very scarce and he money value are considered as wealth. An inguiry into the nature and causes of the ‘modem economics and capitalism. He is the is considered as his “Magnum “Father of Political Economy” matic way. {tis only afterut 8 oF Adam Smith ws that “Eeonomies was concerned acquiring and using the wealth by people”. He was interested mainly IN" the wealth ofall nations could be increased, According to him, econTles oop 'make the people and the nation rich, ‘This wealth seience guides the StBKS in which We idered economics 88 284707 of wealth. revenue. In his book “Wealth of Nations”, he consi Production of wealth, distribution of wealth, consumption of wealth and at a) rs ; ices by combining __ Production of wealth means the production of goods and services of production such as ‘ 1. Land: Land is the natural resource such as- sea, minerals, and forest: fake of reward. 2. Labour: Labour isthe mental or physical work, whichis one fOFTNE TT eovices, 3. Capital: Capital refers man made resources, which help to produce 299%" produce 4. Organization: Organization is the act of combining four factors of P ta ‘of goods and goods and services for the sake of profit. The production of wealth means services. of Sere factors After the completion of production process this wealth is sinned el and profit production for their performance. Rent is given to land, wages to i Ttwants i i i ‘ ic ‘it to satisfy their wants. ‘0 organization, When people get their share from the production, they use It ‘and services are They spent their income to purchase of goods and services. The surplus exchanged with other surplus goods and services for the satisfaction of wants. i # Advantages of Adam Smith's View on Economics i m ‘Thus according to Adam Smith wealth becomes the main focus of the study of economics. This definition has some advantages. ‘They are as follows: : é 1. Ithighlighted an important problem faced by each and every nation of the world i.e. creation of wealth. ‘The problems of poverty, unemployment, etc., can be solved to a greater extent when wealth is produced and is distributed equitably. Hence, it goes to the eredit of Adam Smith and his followers who have addressed to the problems of economic growth and increase in the production of wealth, Criticisms of Adam Smith's View on Economics. As There are a lot of criticisms against Adam Smith’s definition of economics. It has got a bad name for economics. Some social scientists like Ruskin and Carlyle called it“A Dismal Science”, “A Dark Science”, “The Science of Getting Rich”, They considered itas “IIl"™ and Not Wealth”. But this criticism is unfair, because itis based on a misunderstanding about the nature and scope of economics. The main defects of Adam Smith’s wealth definition are as follows: 1. Wrong Notion about Wealth: As this definition emphasized ™ i all about money. They concluded that economics taught pa nl eae eae it E So they called ita selfish science as in their opinion it emphasized on “the Mean: Noa Rich”. The above charge against economics isa false one. In economics, wealth does s to Get money. Itrefers tothe scarce goods, which satisfy our wants, Moreover early esohominc iste) term“Wealth” in the sense of welfare. * onomtists used the 2. Emphasizes Wealth Much: A great demerit of Adam Smith’s definition is that Be ere is overemphasis on wealth. There is no doubt that we have to study about wealth in economics. But 2. mone}sm 4 rnot want the time or means for anything else, then you need not economize anything Though your means are limited, if they do not have alternative ust anything. Further, if all wants are of equal importance, you cannot economize an; es, you cannot economize yything. We know i eaeMANAG! a ney’ oth at the time is limited only 24 hours ina day. 1a worker wants only mae snot a Weed Whe wants leisure, he has to forgo is incomes © are not Ve may, however, note that all means, which satisfy humm a? Saves stands a ate n abn. The) ae HEHE eg hua But many things we want are scarce in relat nts, Hen CS ts behaviour as a relationship between unlimited wants and scarce oe a goodsare determine’ {ave to pay aprice for them. We study in economies how the prices of ity and choice are central We have to choose among different wants, ‘That is why we say that. Sarr stween alternatives is the problems in economics. Economics is the science of choice, Choice bf basic principle underlying all economic activities, a a scarcity de Since the definition of Robbins deals with scarcity of resources it vole However Modern definitions of economics are based on a theory of scarcity and cho’ human touch since it is missing welfare concept, Advantages of Robbins's View A ag ic activity and 1. The definition of Marshall classified human behaviour into economic me! eg non-economic activity. It considered only those activities, which pene ed. Fees welfare as economic activity. But Robbins's definition covers the whol sbject-matter of 'S scarcity of a thing in relation to the demand for it, it becomes the subje i economics. That way, even the labours of those who provide services (€.9- oe doctors, and actors) are taken for study in economics. i sl 2. Another merit of Robbins’s definition is that it makes economics a scientific study. Et aspects of economic problems are not taken into account in discussions, In other words, the moral aspects are not considered. And it does not try to establish a link between economics and welfare. 4 3. Robbins's definition makes study of economics analytical. It studies the particular aspect of human behaviour, which is imposed by the influence of scarcity. 4. Robbins’s definition is applicable everywhere, It is concerned with unlimited wants and limited resources, which is the problem facing every economy-socialistic or capitalistic, 5. Robbins's definition serves to specify the nature, scope and subject-matter of economics. {ccording to him. an economic problem is characterized by the possibilty of exercising choice between ends, which have alternative uses, 6. According to Robbins, valuation isthe central problem of economic: are unlimited and the resources are scarce, they give rise to an Marshall’s definition does not identity this valuation process, Disadvantages of Robbins's View 1. 2D social science, its aim should be promotion of human welfare, That ig wh i some Robbins’s definition has no human touch init 'y Some economists say same time. ‘inition. it lacks s. Wherever the ends economic problem, Reduced Economics to Merely a Theory of Value: science of pricing process. But economics is more than a theor According to Robbins, an economic problem wll arseonly wie thers gears are during times of abundance as well. ty, bu For example, the great depres of 190s was cased nto mich by Ser but by. Plenty That is why the word depression was described as pove ny in the midst of plenty im the de lif us = is s h c 4INTRODUCTION TO ECONOMICS 3. It does not cover the theory of economic growth and development. 4. It is too Narrow: The definition : is too narrow and macro economies does not come te field of say Studying economies based on allocation of resources and pelcog of products makes ery narrow. It does not include concepis Ii nal i fea this Gece vary narra include concepts like national incom In spite of the above criticisms, we have to note th In “ at most of the economists have accepted the degphion of Robbins because it emphasizes scarcity and choice, w' aceon tore fe under all economic, political and legal systems. Its true that there have bi re have been improvements in the methods of production because of technological advancements, But sercties ate always with us. That is why we say economics is the science of scarcity. MODERN VIEW OF ECONOMICS Samvelson’s Definition (Moder Definition of Economics) Modern definitions of economics are partly based on theory of scarcity and choice. However Bearety eintil/Sces nat cover conceyes like thecryof ecnnomic erent sad development. Thus defects of the above seen theories led to formulation of a theory taking all the modern factors into account. , employment Samuelson’s definition is known as a “Modern Definition of Economics”. According to Samuelson, “Economics is a social science concerned chiefly with the way society chooses t0 employ its resources, which have alternative uses, 10 produce goods and services for present and future consumption”. The above definition is general in nature. There are many common points in the definitions of Robbins and Samuelson. Samuelson’s definition tells us that economics is a social science and it is mainly concerned with the way how socicty employs its limited resources for alternative uses. lll these we find in the definition of Robbins also. But Samuelson goes a step further and discusses how a society uses limited resources for producing goods and services for present and future consumption of various people or groups. Advantages of Samuelson’s Definition 1, Samuelson's growth oriented definition recognizes the dynamic changes taking place in the economy. 2. It includes the element of time. 3, It stresses the problem of scarcity of means in relation to unlimited means 4, It studies the allocation of scarce resources in relation to unlimited ends and in determining income, employment and economic growth. 5. This growth oriented definition can be applied to capitalists, communists and mixed economic system. METHODS OF ECONOMIC ANALYSIS MICRO ECONOMICS AND MACRO ECONOMICS Modem economic analysis can be divided into “Micro Economies” and “ o The term “Micro” means “Small”, which is derived from the Greek word “Mikros” and the term “Macro” means “Large”, which is derived from the Greek word “Makro’ Macro Economics’ Micro economies (“‘small” + economics”) is a branch of economics that studies the behaviow of how the individual, modem household and firms make decisions to allocate limited resoureNATURE, SCOPE & FUNDAMENTAL CONCEPTS OF MANAGERIAL ECONOMICS (ome OF MANAGERIAL ECONOMICS, ’ c seem eos is the application of Economic Theory to managerial practie(Jt relates ce Eateoe ues of economic analysis to solve managerial problems, fanagerial Heras of “Economic Theory” and its application to business problems to take sions in right time. The nature of managerial economics is normative science like Psychology, Sociology, and Human Behaviour etc. This subject deals with all aspects of profit and optimization Xit helps in anticipating, determining and resolving, potential problems or obstacles? These problems may pertain to costs prices, forecasting future market human resource management profits and so on.) : DEFINITION OF MANAGERIAL ECONOMICS Managerial economics has been generally defined a the study of economic theories logic ‘and tools of economic analysis, used in the process of business decision-making. It involves the lnderstanding and use of economic theories and techniques of economic analysis in analyzing and solving business problems. (According to McGutgan and Moyer, “Managerial economics is the application of economic theory and methodology to decision-matking problems faced by both public and private institutions fs MeNair and Meriam defines that “Managerial economics consists of the use of economic modes of thought to analyze business situations". Inthe words of Spencer and Siegelman, “Managerial economics is The integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management”. aynes, Mote and Paul defines that “Managerial economics refers to those aspects economies and its tools of analysis most relevant t0 the firms decision-making process”: BY definition, therefore, its scope does not extend to macroeconomit theory and the economics of public policy, an understanding of which is also essential for the manager. According to Douglas, “Managerial ‘economics is the application of economic principles and methodologies to the decision-making process within the firm or organization Cn the words of Pappas & Hirschey “Managerial economics applies econ methods to business and administrative decision-making” ) omic teary andAL ECONOMICS, he MANAGER! ft “—___ fi eee application of is sre tines that “Managerial economies refers 10 the organization gan achieve i cojecre 100s of anaipsis of decision setence to examine how at Bie objectives most effectively . effectively vaspects of behavi Hence managerial economics i a science, which studies the Sear ernative uses in such ® the firm as an enterprise, ancl helps to allocate seatce resources to - ‘and a social institution, unat®t 88 to optimize the firm’s ultimate objective, as an corganizatl a ides principles, method, under conditions of the imperfect knowledge, risk and uncertainty. It pro\ scribe ways and means and techniques of analysis of economic behaviour and atthe same tim Pre to optimig “nomic efficiency, CONCEPT OF MANAGERIAL ECONOMICS Economics provides optimum uilization of earce resoutee to achieve te desired ie fecice Seonomic’s purpose isto show how economic analysis can be used formulating jiour of Management j Decision Problems i Optimal Solution to Managerial Decision Problems FIG. 1.1 - CONCEPT OF MANAGERIAL ECONOMICS, ‘onomics bridges the gap between purely analytical problems dealt with in Managerial Ecc holaee teary and decision problems faced in real business and thys helps out in making rational choices to yield maximum return out of minimum efforts and resources by making the best selection among alternative course of action. en Decision Science nomic Concepts in decision-making and acts asa link between theory and practice, Vieumsalaomeety a. combination Process of planning, organizing, leading and co of using al the available organizational resources to reach the stated hand, economics is mainly concemed with analyzing and providing seat objectives. In particular managerial economics is concerned available to a business firm or an organization, RELATIONSHIP BETWEEN MICRO, MACRO AND MANAGERIAL ECONomics mW Managerial economics has been described as economies applied tg decision-makir viewed asa special branch of economies bridging the gu betwace eet sone” is ry an managerial practice.val 18 MANAGERIAL ECONOMICS N S ATURE AND CHARACTERISTICS OF MANGERIAL ECONOMIC: Ss nt )fataeetal economies is coneerned withthe business firm and the ‘Managerial every business 1a yer and Seigelmen points out ilitati ms % management need to solve, Spencer an urpose offacilitating, decane: i the tegration of economic theory and business practice fo ‘ing and forward planning by management V) Te of Managerial Economics i , ; inly on Cele cheats above definition afte of managerial economies rests mainly {he decision-making function of managers.) lence we can say that the prime Tape. fnanagement executive in a business organization is deesion making ard forward planning) ion ‘Taking means the process of selecting one action from two of more alternative courser oF ftion Whereas forward planning means establishi plans for the future./The question of - saved Frsmuse resouregs such a capital, land, labour and management a limited and ean faeces thaltemative uses) The decision-making function thus becomes one of making, cicesone io that will provide she most efficient means of attaining a desired end, say, profit epee Soe Form Util ‘ofa good Supe then recor: umber of Befe activity, | utility. is 32 uti Teaching for the # decline utility fr The riding is > thisexa.iblic “Utility” Poly, ete? 1° *Company tha supplies a useful product, such ec eran) re ofthe term uty in the study of consumer behaviour need rot be “Useful ho oaine fom the consumption ofa commodity. The good we everyday sense of the term. Itonly needs to provide satisfaction. a ey Pera with the total utility derived from the consumption of different quantities good. is simply a measure of the total satisfaction of wants and needs obtained ‘range of quantities in a table such as the one disy ® played to the right. “Total utility is the total faction obtained from all units of a particular commodity consumed over a period of time”. Formula for calculating total utility is as below: TU, = BU; [Utility analysis is based on the presumption that the amount of utility generated from the consumption fa good can be explicitly measured. The standard hypothetical measurement unit is “Utils. ce fr exo, tal Kear pnts aay geo ct ttn rand rane aC records the ammount of total uty atthe en rie. The two columns presentedinthe table measure the imberofrides and the total utility accumulatedby Kumar atthe end ofeach rid (nus). Before his first ride, Kumar receives no utility. No activity, no utility. Kumar's first ride generates 11 utils of ‘Total Utility Milly, The total utility generated if Kumar takes 8 rides (Utils) "is 32 utils. Kumar’s utility increases for the first 6 rides, ing ahigh of 36 utils, before declining back 1032 utils the 8th ride, Presumably Kumar's utility continves 0 decline after the 8'8 ride. Kumar obtains the highest total Utility from 6th ride on the roller coaster The motivation that guides Kumar's roller coaster Fiding is to maximize utility, that is, to consume the quantity ofthe good that generates the highest Jevel of utility. In this example, utility is ‘maximized at 6 rides. j 2 however, the consumption ofa In many situations, ints. Ki , might face & 4 -TOTALUTILITY TABLE ‘G00d faces constraints. Kumar, for example, i iv TABLE 5. Time constraint because he plans to attend 2 live c; MANAGERIAL ECONONiIcs REE. i: Jecause the amusement Park ‘charges the rock-and-roll group or he might face an income constraint % 50 per ride and he has only € 200 in his pocket. ue constrained utility In these situations Kumar, as well ser some restrictions tha, ‘maximization. ‘This means achieving the highest possible Prevent the highest overall level of utility from being Soe cae Marginal Utility i deal of additional Total utility is used as a starting point wins Rat 2 eee insight is gained from marginal utility. Marginal utility ee Asse Begins good or of wants and needs, obtained from the consumption or use of an ‘an extra unit of good service, Marginal utility is, in other words, the extra satisfaction, Hence, it can be defined as “Marginal utility means an additional ‘or incre ae ein wits the change in the ttl tly ht res om oe Bere commodity within a given period of time”. : Marginal utility is specified as: Change in Total Utility a Marginal Unis one Formula: ATU IO Aas If, for example, total utlty increases from 20 o 27 utils, then marginal utility's 7utis. Table Showing Marginal Utility The far right column of this table presents marginal utility values derived from each ride Kumar undertakes. Marginal utility from the first ride is 11 utils, The extra utility generated by the second ride is 9 utils. The third ride provides another 7 utils. The remaining numbers in the right column are interpreted ina similar manner. ! Marginal utility provides a direct link between utility analysis and demand. ‘The demand price a buyer is willing to pay for a given good is based on the marginal utility derived from consuming the good, In this example, Kumar is most likely willing to pay more for the first ride than the fifth ride, in that the first ride generates 11 utils of satisfaction, but the TABLE S2-MARGI fifth ride generates only 3 utils. INAL UTILITY TABLE Thus, MUn = TUn-TUn-4 Where, MUn = Marginal Utility of ‘nth’ Commodity TUn = Total Utility ofn Units TUn_1 = Total Utility ofn1 Units= BEHAVIOUR _ Relationship between Total an | The relationship between 93 'd Marginal Utiity a total util iule giverrin Tabl lity and marginal yt sched le 5.3 anda graph given in Figs tility is now explained with the help ofa The table 5.3 shows that when a perso M consumes NO apples, he gets His total utility is zero. In case he wnt cults ot Apples “Total Utility in | Marginal Utility one apple a day, he gains tiaras, ved Daily | Utils Per Day | Utils Per Day "satisfaction. His total utility is 7 and his, ee ky ° 0 0 utility is also 7. ginal 1 7 7 © Incase he consumes second 5 0 4 (1-7) 2 apple, he gait a extra 4 utils (MU). Thus gives hima total utility i u 2a + of 11 utils from two apples. His marginal utility 4 4 1 (4-13) hhas gone down from 7 utils to 4 utils because he % Me Ms) has a less craving for the second apple. 6 B =1.(3-14) Same is the case with the consumy 5 y iption of |TABLE 5.3 -RELATIONSHIP BETWEEN TOTAL. third ee marginal utility has now fallen UTILITY AND MARGINAL UTILITY to2 ee ee utility of three apples has increased to 13 utils (7+ 4 +2). In case the Con Ges Lith apple his marginal utility falls to zero utils and ihe consumes sixth apple his marginal utility as well total utility starts decreasing. The total utility and marginal utility shown in Table 5.3 are plotted in Fig. 5.1. Point of Satie eee TU Total Utility / Marginal Utility po RAOe SEER, 2 ner " ‘Apples Consumed (per ay) FIG 5.4 TOTAL UTILITY AND MARGINAL UTILITY aru AQ =2 MU = Here MU = 7 The total utility curves starts at the origin as zero consumption of apples yield zero utility, The TU curve reaches at its maximum or a peak of M (point of satiety i.e., state of complete satisfaction) when MU is zero. The MU curve falls through the graph. A special point occurs when the consumer consumes fifth apple. He gains no ‘marginal utility from it. After this point, marginal utility becomes negative. The MU curve-can be derived from the total lity curve. It is the slope of the line joining two adjacent quantities on the curve. For example, the marginal utility of the third apple is the slope of line joining points ‘a’ and ‘b’, The slope of ‘such is given by the following formula: