Managerial Economics

Managerial Economics generally refers to the integration of economic theory with business practice. It deals with the use of economic concepts and principles of business decision making. Managerial Economics is thus constituted of that part of economic knowledge or economic theories which is used as a tool of analyzing business problems for rational business decisions. Managerial economics can be viewed by most modern economists as a practical application of economics theory in using effectively the firms scarce resources.

The Law of Diminishing Marginal Utility

The law of diminishing marginal utility was first developed by a German economist Hermann Heinrich Gossen. This law is also known as the first law of Gossen. The law of diminishing marginal utility states that the marginal utility derived from the consumption of every additional unit goes on diminishing, other thing remaining the same.

The law of diminishing marginal utility is based on two important facts :

  1. Though human wants are unlimited, each single want is satiable.
  2. Commodities are not perfect substitute for each other.

Therefore, as a consumer consumes more and more units of a commodity, intensity of his/her want for the commodity goes on falling and reaches a point where a consumer do not want any more units of the commodity.… Read the rest

Abey Francis

Income Elasticity of Demand – Concept and Types

The income elasticity of demand shows the responsiveness of quantity demanded of a certain commodity to the change in income of the consumer. The income elasticity of demand is also defined as the ratio of the percentage change in the demand for a commodity to the percentage change in income. Income elasticity of demand can be expressed as follows:

Income elasticity (ey) = Percentage change in quantity demanded / Percentage change in income

For example, consumer’s income rises from $ 100 to $ 102, his demand for good X increases from 25 units per week to 30 units per week then his income elasticity of demand X is: ey = 5/25 x 100/2 = 10.… Read the rest

Abey Francis

Opportunity Cost – Definition, Advantages and Disadvantages

Opportunity cost  analysis  is an important part of a company’s  decision-making processes, but is not treated as an  actual cost  in any  financial statement. While the term  opportunity cost  has its roots in economics, it’s also a very important concept in the investment world.   It’s a model that can be applied to our everyday decisions, as we’re faced with making a choice between the many options we encounter each day.

It is a very powerful concept when someone has to make a decision to select a particular product or making a choice. In simple words, opportunity cost means choosing or making a best decision from different option.… Read the rest

Abey Francis

Trade-Off Between Equity And Efficiency

In any society at any point of time all the resources would be relatively scarce. We cannot have whatever we want. We need to decide our priorities and then distribute the resources. In such a situation we need to take into consideration goals of efficiency and equity (sense of fairness). If the distribution of resources or goods in an economy is fair between different members of the society, it indicates equity. Efficiency is making the best out of scarce resources at the best possible price. Efficiency refers to the size of economic resource and equity refers to how this economic resource is distributed.… Read the rest

Abey Francis

International Trade Theories – Absolute, Comparative and Competitive Advantage

Absolute advantage theory was first presented by Adam Smith in his book “The Wealth of Nations” in 1776. Smith provided the first concept of a nation’s wealth. Adam Smith is a grandfather of economics because he introduced two important concepts that many of the new trade theories are based on these two main concepts, which are specialization and free exchange. However, many arguments were made and many economists thought there was a problem with the theory of absolute advantage after David Ricardo published the theory of “comparative cost” (aka “comparative advantage”) in the early 19th century. Even though Smith and his followers introduced many important points for the thoughts of economic, it is too complicated with this simple version of trade theory in today’s global economy.… Read the rest

Abey Francis

Introduction to Neo-Classical Economics

Neo-classical economics began around the turn of the century. It provided more analysis on the processes through which the market system allocates   economic resources. The application of supply and demand curves, micro-economics and price theory helped to calm many of the disquieting aspects that Marx had created around classical economics. It accomplished this by ignoring the class division and working from the assumption of the existence of the “autonomous” rational wealth maximizer as subject for study.

Alfred Marshall was a professor at Cambridge in the late 1890’s. He created the idea that supply and demand can be used to determine a fair price for the exchange of commodities in an industrialized society.… Read the rest

Abey Francis