Economics: is the social science concerned with how individuals, businesses, governments,

and societies allocate scarce resources to satisfy unlimited human wants. It studies both
individual decisions (micro) and overall economic performance (macro).

Definition of Economics

Lionel Robbins: "Economics is the science which studies human behaviour as a relationship
between ends and scarce means which have alternative uses."

Adam Smith: "Economics is the study of the nature and causes of the wealth of nations."

Alfred Marshall: "Economics is the study of mankind in the ordinary business of life.

Features of Economics

1. Social Science – Deals with human behaviour (e.g., consumer choice).

2. Study of Scarcity – Resources are limited (e.g., land, capital).
3. Choice Making – Individuals decide among alternatives (e.g., buying a car vs bike).
4. Wealth and Welfare – Focus on wealth creation and distribution (e.g., GDP growth).
5. Positive and Normative – Describes facts and prescribes solutions (e.g., inflation causes
and control).
6. Dynamic in Nature – Adapts to changing conditions (e.g., digital economy).
7. Micro and Macro Approach – Studies individuals and whole economy (e.g., demand vs
national income).
8. Theoretical and Applied – Provides principles and policies (e.g., supply law & subsidy
policy).
9. Interdisciplinary – Related to sociology, politics, statistics (e.g., income inequality).
10.Universal Application – Relevant to all countries (e.g., USA, India, Japan).

Scope of Economics

1. Consumption – How people use goods (e.g., demand for smartphones).

2. Production – How goods are produced (e.g., Toyota’s lean production).
3. Exchange – Trade and markets (e.g., Amazon online market).
4. Distribution – Factor income (e.g., wages, profits).
5. Public Finance – Govt spending & revenue (e.g., Indian budget 2024).
6. International Economics – Trade between nations (e.g., WTO, exports).
7. Economic Development – Growth strategies (e.g., India’s 5-year plans).
 8. Price Theory – Demand & supply analysis (e.g., rise in onion prices).
9. Welfare Economics – Social justice (e.g., free education schemes).
10.Environmental Economics – Sustainability (e.g., carbon tax).

Microeconomics: Study of individual units like households, firms, markets.

Definition: According to Kenneth Boulding, “Microeconomics is the study of particular firms,
particular households, individual prices, wages, incomes, specific commodities.”

Scope:

1. Theory of Consumer Behaviour (e.g., buying fruits vs snacks).

2. Theory of Demand (e.g., petrol demand rises with income).
3. Theory of Production (e.g., Tesla production).
4. Cost Analysis (e.g., fixed vs variable costs in startups).
5. Price Determination (e.g., airline ticket pricing).
6. Theory of Distribution (e.g., salaries of IT employees).
7. Welfare Economics (e.g., subsidy schemes).
8. Market Structures (e.g., monopoly like Microsoft).
9. Factor Pricing (e.g., land rent in Mumbai).
10.Resource Allocation (e.g., allocation of coal & gas).

Macroeconomics

Meaning: Study of economy as a whole.

Definition: According to J.M. Keynes, “Macroeconomics deals with aggregates such as
national income, employment, output, and general price level.”

Scope:

1. National Income (e.g., India’s GDP).

2. Aggregate Demand & Supply (e.g., recession trends).
3. Employment Theory (e.g., unemployment rate in US).
4. Money & Banking (e.g., RBI monetary policy).
5. Business Cycles (e.g., 2008 global recession).
6. Inflation & Deflation (e.g., rising food prices).
7. Fiscal Policy (e.g., tax reforms).
 8. Monetary Policy (e.g., repo rate cuts).
9. Balance of Payments (e.g., India’s exports vs imports).
10.Economic Growth & Development (e.g., China’s industrialization).

Difference Between Micro & Macro Economics

Basis Microeconomics Macroeconomics

Focus Studies individuals and firms Studies entire economy
Nature Partial equilibrium General equilibrium
Approach Bottom-up Top-down
Units Individual units (households, firms) Aggregates (GDP, employment)
Price Relative prices of goods General price level
Demand & Supply Individual demand & supply Aggregate demand & supply
Income Individual income National income
Employment Individual employment Aggregate employment
Time Frame Short-term Long-term
Used for micro policies (pricing, Used for macro policies (fiscal,
Policy Use
wages) monetary)
Assumes interdependence of
Assumptions Assumes “ceteris paribus”
variables
Welfare Individual welfare Social welfare
Tools Demand-supply curves National income accounting
Interdependence Needs macro support Needs micro foundation
Example Price of Milk Inflation in Economy

Interdependence between Micro & Macro Economics

Basis Micro’s Dependence on Macro Macro’s Dependence on Micro

 Consumer demand depends on National demand is sum of individual
Demand
national income demands
Prices Inflation affects household budgets Prices set by firms affect inflation
Employment National unemployment affects jobs Firm hiring adds to employment
Savings Savings depend on overall economy National savings depend on households
Investment Influenced by interest rates Aggregate investment = sum of firms
Production Depends on economic growth Growth depends on firm production
Wages National wage policy affects workers Firm wages add to national income
Exports Trade policy affects firms Export volume depends on firm output
Tax policy affects household
Taxes National tax revenue from individuals
spending
Monetary Loan decisions by individuals affect
RBI policy affects bank loans
Policy money supply
Govt revenue comes from taxes on
Fiscal Policy Govt spending affects firms
firms
Business
Recession reduces demand Individual firm losses create recession
Cycles
Innovation encouraged by macro Innovations aggregate to economic
Technology
policies growth
Total firm compliance affects national
Environment Environmental laws restrict firms
sustainability
Example GST affects consumer prices Consumer choices affect GDP growth

Meaning of Managerial Economics

Managerial Economics is the application of economic theories, concepts, and tools of analysis
to solve practical problems of business and management. It bridges the gap between economic
theory (abstract principles) and business practice (real decision-making). Example: A company
like Coca-Cola uses managerial economics to decide pricing strategy based on demand
elasticity and competition.

Definitions of Managerial Economics

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.”

McNair and Meriam: “Managerial Economics consists of the use of economic modes of
thought to analyse business situations.”

Haynes, Mote and Paul: “Managerial Economics is economics applied in decision-making. It

is a special branch of economics bridging the gap between abstract theory and managerial
practice.”

Nature of Managerial Economics

1. Microeconomic in Nature – Focuses on firm-level decisions (e.g., demand forecasting
for a company).
2. Pragmatic – Deals with real-life practical problems rather than theoretical ones (e.g.,
pricing new products).
3. Normative Science – Prescribes policies and solutions (e.g., “what should be the best
price policy?”).
4. Multidisciplinary – Integrates statistics, mathematics, finance, accounting, and
psychology (e.g., demand analysis uses econometrics).
5. Prescriptive in Nature – Provides alternative solutions and recommends the best one
(e.g., selecting between in-house production vs outsourcing).
6. Decision-Oriented – Helps managers in making rational choices (e.g., expand
production or not).
 7. Forward-Looking – Focuses on future planning (e.g., forecasting sales for 2025).

Scope of Managerial Economics

1. Demand Analysis & Forecasting – Predicting future demand (e.g., Ola forecasts cab demand
during festivals).
2. Cost & Production Analysis – Studying cost behaviour (e.g., Amazon reduces logistics cost
with AI).
3. Pricing Decisions & Policies – Setting price strategies (e.g., Apple’s premium pricing vs
Xiaomi’s penetration pricing).
4. Profit Management – Ensuring maximum profit with risk minimization (e.g., hedging in stock
markets).
5. Capital Management – Investment analysis (e.g., Tata deciding on a new steel plant).
6. Risk & Uncertainty Analysis – Studying uncertain business environments (e.g., insurance
companies assessing risks).
7. Decision-Making under Market Structures – Monopoly, oligopoly, perfect competition, etc.
(e.g., Reliance Jio in telecom oligopoly).
8. Business Environment Analysis – External environment (legal, political, social, global) (e.g.,
GST policy impact on FMCG).
9. Resource Allocation – Optimal use of scarce resources (e.g., manpower allocation in IT
companies).
10.Strategic Planning – Long-term corporate strategies (e.g., Tesla’s global expansion).

Principles of Managerial Economics

Managerial Economics provides a framework for managers to make rational, objective, and
effective decisions. The following principles guide managerial decision-making:
1. Principle of Marginal Analysis: Decisions are made by comparing marginal cost (MC)
and marginal revenue (MR).A firm maximizes profit when MR = MC. Example: A bakery
produces extra cakes. If the additional revenue from selling one more cake is higher than the
cost of producing it, production should increase.
2. Principle of Incremental Concept: Focuses on the additional benefit vs additional cost of
a decision. Managers should only undertake actions where the incremental benefit exceeds
incremental cost. Example: A hotel offering an extra discount to attract more guests must
ensure the additional revenue from increased bookings exceeds the cost of discounts.
3. Principle of Opportunity Cost: Every choice involves a sacrifice. The cost of the next best
alternative forgone is the opportunity cost. Helps managers choose the most valuable use of
limited resources. Example: If a factory uses land to build a warehouse, the opportunity cost is
the profit that could have been earned by renting it out.
4. Principle of Time Perspective: Decisions should balance short-term gains with long-term
sustainability. Managers must evaluate how current actions impact future profitability.
Example: A company may cut training expenses to save money now, but this could reduce
employee productivity in the long run.
5. Principle of Discounting: The time value of money states that a rupee today is worth more
than a rupee tomorrow. Managers must discount future benefits and costs to present values.
Example: A firm investing ₹10 lakhs in a project must evaluate if the present value of future
returns exceeds ₹10 lakhs.
6. Principle of Equi-Marginal Utility (Optimization)
Resources should be allocated so that the last unit of resource used in each activity yields equal
marginal benefit. This ensures optimal utilization of scarce resources. Example: A company
dividing its advertising budget across TV, online, and print should distribute funds until the
marginal return per rupee spent is equal in all mediums.
7. Principle of Risk and Uncertainty:Business decisions involve risk (measurable) and
uncertainty (non-measurable).Managers must use forecasting, probability, and decision-
making under uncertainty. Example: A car company launching a new model faces uncertain
demand. They may use market surveys and simulations to reduce risks.

8. Principle of Profit Maximization: Profit is the key objective of firms and the guiding force
behind managerial decisions. Profitability indicates efficiency and survival in the long run.
Example: Amazon sets competitive prices while maintaining cost efficiency to maximize
profits.
9. Principle of Managerial Responsibility: Managers must act rationally, ethically, and in the
best interest of stakeholders. Managerial Economics helps them justify decisions with sound
logic. Example: A pharma company must not only focus on profit but also on patient safety
and compliance with regulations.
10. Principle of Policy Consistency: Decisions should align with organizational policies,
values, and goals. Avoids conflicts, ensures uniformity, and maintains a clear direction.
Example: A sustainable company may avoid cheap but environmentally harmful production
methods to stay consistent with its green policy.