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BBA LLB
BBA LLB115
Managerial Economics
Unit-I: Introduction to Managerial Economics
a. The Circular flow of Economic Activity
b. The Nature of the firm: The Rationale for the Firm, the Objective of the Firm,
Maximizing versus Satistisficing
c. The Principal-Agent Problem, Constrained Decision Making
d. The Concept of Economic Profit
e. Profit in a Market System
f. Economics and Decision Making
Unit-II: Demand Theory and Analysis
a. Individual Demand,
b. Market Demand: Determinants of market demand, the market demand equation,
Market Demand vs. Firm, Demand
c. Price Elasticity
d. Price Elasticity and Marginal Revenue
e. Price elasticity and Decision Making
Unit-III: Production and Costs
a. The Production Function
b. Production with one Variable Input
c. The Production Isoquant
d. Profit Maximization
e. The Economic Concept of Costs: Opportunity Cost, Explicit and Implicit Costs,
Marginal, Incremental and Sunk Costs
f. The Cost of Long-Lived Assets
Unit IV: Market Structure
a. Perfect Competition (Equilibrium Price) and Monopoly
b. Market Structure: Product Differentiation, Conditions of Entry and Exit
c. Oligopoly: Price Rigidity and Price Leadership
d. Advertising
, Unit1
The Concept of Circular Flow of Economic Activity
The growth or sustainability of a nation’s economy is highly dependent on the circular flow of
income among the different stakeholders of the economy. It is due to the consumers habits of
spending that triggers investments as a way of meeting their demand for goods and services.
Such investments open new employment opportunities to the people thus increasing the net
expenditure capacity of the consumers. Increase in the net expenditure ability of the
householders has a linear implication on the growing demand for goods and services thus
consequently increasing the investment capacity of the investor. It is the laws of demand and
supply which influence the economic growth of any society.
The spending ability by the consumer greatly factors in determining the type, quality and
quantity of goods and services that an organization should provide. This cycle of income and
expenditure is referred to as the circular flow of economic activity. It is to be clearly noted that
for economic prosperity in the society income of the citizens should exceed their related
expenditure. In the event that expenditure exceeds income levels, then the economy of the
society is said to be on recession. It is still to be noted that any economic equilibrium is the state
where expenditure and income are equal thus implying stagnation of the nations economic.
Therefore, it should be in the sole purpose of any government to put in place the necessary
measures for ensuring economic prosperity.
The economy of any human society must involve the activities of production and consumption.
To be noted here is the fact that firms are both producers and consumers in the circular flow
chain while the household serves the consumption aspect of our economic chain. Production can
be defined as any act of using available economic resources in the process of creating goods and
services which match the needs of the consumers. Consumption on the other side can be defined
,as the act of purchasing goods and services either for household use or for use in the process of
making new goods and services. The later is the reason behind the qualifying of firms as
consumers. It is also to be noted that economic activities also include employment and income
generation. Employment is the acquisition of human resources for the benefits of realizing the
production of goods and services by a firm. Income generation as an economic activity includes
all the costs incurred by the organization in the process of producing goods and services. Such
could include costs for purchasing raw materials, labor wages and other expenses incurred by the
firm during the production process.
Firm Objectives
Economic Objectives of Firms:
Usually, in economics we assume firms are concerned with maximizing profit. Higher profit
means:
Higher dividends for shareholders.
More profit can be used to finance research and development.
Higher profit makes the firm less vulnerable to takeover.
Higher profit enables higher salaries for workers
Alternative Aims of Firms
However, in the real world, firms may pursue other objectives apart from profit maximization.
1. Profit Maximising:
In many firms there is separation of ownership and control. Those who own the company
(shareholders) often do not get involved in the day to day running of the company.
This is a problem because although the owners may want to maximise profits, the
managers have much less incentive to maxise profits because they do not get the same
rewards, (share dividends)
, Therefore managers may create a minimum level of profit to keep the shareholders
happy, but then maximize other objectives, such as enjoying work, getting on with other
workers. (e.g. not sacking them) This is the problem of separation between owners and
managers.
2. Sales Maximization.
Firms often seek to increase their market share – even if it means less profit. This could occur for
various reasons:
a) Increased market share increases monopoly power and may enable the firm to put up
prices and make more profit in the long run.
b) Managers prefer to work for bigger companies as it leads to greater prestige and higher
salaries.
c) Increasing market share may force rivals out of business. E.g. supermarkets have lead
to the demise of many local shops. Some firms may actually engage in predatory pricing
which involves making a loss to force a rival out of business.
3. Growth Maximization.
This is similar to sales maximization and may involve mergers and takeovers. With this
objective, the firm may be willing to make lower levels of profit in order to increase in size and
gain more market share.
4. Long Run Profit Maximization.
In some cases, firms may sacrifice profits in the short term to increase profits in the long run. For
example, by investing heavily in new capacity, firms may make a loss in the short run, but enable
higher profits in the future.
5. Social/ Environmental concerns.
A firm may incur extra expense to choose products which don’t harm the environment or
products not tested on animals.
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