Adam Smith (1723 1790) was a Scottish Economist. He is said father of economics & capitalism.

. His Book: wealth of nations. We want to talk about poverty not wealth. His main theory is There is an invisible hand that determines everything Dont disturb it. What is the invisible hand? He says Economics is very easy. Teach a Parrot to say Demand and Supply then the parrot becomes an economist. Ask her any questions she will say demand and supply then she is a great economist. David Ricardo (1772-1823). His theory said, increase in agricultural production would ultimately decline. Thomas Robert Malthus, (1766-1834), English economist & demographer. He was a Church Priest. Once he noted he had never seen a dead bird (except bats and crows). Bird die on a flowing stream and the body is taken away by the water. Birds commit suicide when food is not available. A tragic case God cannot do this. He investigated further & studied economics especially Ricardo. Gives Population Theory. His theory: population growth will always tend to outrun the food supply,* There will be hunger, famine, war, disasters, * Population Control is needed. * This is called Malthusianism. Karl Heinrich Marx (1818 1883) was a German philosopher, economist, sociologist, historian, journalist & revolutionary socialist. His ideas played a significant role in establishing communism. His book: Das Kapital; His thinking are: Factors of Production, Congealed Labor theory, Exploitation, Dialectic Materialism. John m Keynes (1883 21 April 1946) A British Economist. Studied Mathematics. Very young professor, most learned young man, wanted to marry an illiterate woman. Wrote a book General Theory. Went to stock market, Dominated stock market, Became rich, Became Lord, Married, Divided economics into Macro and Micro, An interview of his wife. He successfully introduced mathematics in economics Economy. The word economy comes from a Greek word for one who manages a household. Economics is the study of how society manages its scarce (occasional) resources. Alfred Marshall provides a definition in his textbook Principles of Economics (1890): Economics is a study of man in the ordinary business of life. It enquires how he gets his income & how he uses it. Thus, it is on the one side, the study of wealth & on the other and more important side, a part of the study of man. According to Lionel Robbins, Economics is the science which studies human behavior as a relationship between ends
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& scarce means

which have alternative uses. Robbins describes the

definition as not classificatory in "picking out certain kinds of behaviour" but rather analytical in "focusing attention on a particular aspect of behaviour, the form imposed by the influence of scarcity." Douglas - Managerial economics is .. the application of economic principles and methodologies to the decision-making process within the firm or organization. Pappas & Hirschey - Managerial economics applies economic theory and methods to business and administrative decision-making.

Salvatore - Managerial economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objectives most effectively. Howard Davies and Pun-Lee Lam - It is the application of economic analysis to business problems; it has its origin in theoretical microeconomics. Prof. Joel Dean The Purpose of managerial economics to show how economics analysis can be used formulating business policies. Managerial Economics should be thought of as applied microeconomics. It is an application of the part of microeconomics that focuses on the topics that are of greatest interest & importance to managers such as Risk, Demand, Production, Cost, Pricing, Market Structure & government regulation. It helps rational decision making through model building. Meaning of managerial economics Managerial Economics refer to the integration of economy theory with business practices. It deals with application of economy principles to the problem of business firm. It modify or reformulates already existing economic model to suit the specific condition and serve the specific problem of the business firm. It help to solve real complex problem of business firm. The Process of Model-building The economics method illicit relationships with beautiful models The steps: the hypothetical-deductive approach i. ii. iii. iv. v. vi. make assumptions about behaviour work out the consequences of those assumptions make predictions test the predictions against the evidence PREDICTIONS SUPPORTED? The model is accepted as a good explanation (for the moment) PREDICTIONS REFUTED? Go back and re-work the whole process

Definitions & assumptions

Theoretical analysis Predictions Predictions tested against data Economic Laws Idea Hypothesis

If predictions not supported by data, model is amended or discarded

If predictions borne out by data, the model is valid, for the moment

Check the idea, Prove it. If proved then Prove the hypothesis. If proved then

Theory

Prove the theory. If proved then

Law

Law is valid everywhere

The Circular Flow of Economic Activity

Fig: The Circular flow

o o o o o

Assumption: The economy composed of households and firms only Households: A household is a person or a group of people that share their income. Firms: hire factors of production to produce goods and services for sale. Firms sell goods and services that they produce to households in markets for goods and services. Firms buy the resources they need to producefactors of productionin factor markets. The flow of payments in an economy is a circular flow. The diagram represents the transactions between firms & households in a simple economy. In the upper loop, the arrow emanating from firms to households represents the sale by firms of goods & services to households. On the other hand, the arrow from households to firms represents the payments.

In the lower loop, the arrow originating from the households to the firms shows that firms hire labor & capital from households in order to produce goods & services. The arrow emanating from the firms indicates their payments for the use of the factors of production. Prices of outputs & inputs are determined in these markets & guide the decisions of all market participants, The firm, an entity, organizes factors of production to produce goods and services, The prices of product and factor of production guide interaction between individual & firms. The Production Possibilities Frontier Model The production possibilities frontier is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.

Fig : The Production Possibilities Frontier

Theory of the Firm Expected Value Maximization Owner-managers maximize short-run profits. Primary goal is long-term expected value maximization.

Constraints and the Theory of the Firm Resource constraints. Social constraints

Limitations of the Theory of the Firm Alternative theory adds perspective. Competition forces efficiency. Hostile takeovers threaten inefficient managers.

Theory of firm :- managerial economics is concerned with theory of firm in economy. Classical economist propounded the theory of firm which can be explained under:

-To maximize long-term profit - To work Rationally -A firm is a transformation unit -Production and price decision Theory of the Firm Combines and organizes resources for the purpose of producing goods and/or services for sale. Internalizes transactions, reducing transactions costs. Economic theory assumes that the primary goal of managers is to maximize the value of the firm. Profit Measurement Business Versus Economic Profit Business (accounting) profit reflects explicit costs and revenues. Economic profit. Profit above a risk-adjusted normal return. Considers cash and noncash items.

Variability of Business Profits Business profits vary widely.

Why Do Profits Vary Among Firms? Disequilibrium Profit Theories Rapid growth in revenues. Rapid decline in costs.

Compensatory Profit Theories Better, faster, or cheaper than the competition is profitable.

Role of Business in Society Why Firms Exist Business is useful in satisfying consumer wants. Business contributes to social welfare

Social Responsibility of Business

Serve customers. Provide employment opportunities. Obey laws and regulations.