Managerial Economics: Concepts and theories

By: Shikha Singh, LBSIM,Delhi

 Economics: study of how society manages its scarce resources. Efficiency: society gets the most that it can from its scarce resources. Equity: the benefits of those resources are distributed fairly among the members of society. Externalities: impact of one persons actions on the well-being of a bystander;

 Market power: the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices. Opportunity cost: of an item is what you give up to obtain that item. The cost of using an item is the value of the best alternative use.

 Economic model: simplified representation of reality that is used to address relevant issues about that reality. Macroeconomics: studies economy-wide phenomena, including inflation, unemployment, and economic growth. Microeconomics: studies how households and firms make decisions and how they interact in specific markets. Normative statements: about how the world should be (prescriptive analysis). Positive statements: attempt to describe the world as it is (descriptive analysis). The production possibilities frontier: graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.

 Ceteris paribus: a Latin phrase, translated as other things being equal, used as a reminder that all variables other than the ones being studied are assumed to be constant. Competitive market: a market in which there are many buyers and many sellers so that each has a negligible impact on the market price. Complements: two goods for which an increase in the price of one good leads to a decrease in the demand for the other. Demand curve: a graph of the relationship between the price of a good and the quantity demanded. Demand schedule: a table that shows the relationship between the price of a good and the quantity demanded.

 Equilibrium: situation in which supply and demand have been brought into balance. Equilibrium price: the price that balances supply and demand Equilibrium quantity: the quantity supplied and the quantity demanded when the price has adjusted to balance supply and demand. Excess demand (or Shortage): situation in which quantity demanded is greater than quantity supplied Excess supply (or Surplus): situation in which quantity supplied is greater than quantity demanded Inferior good: a good for which, other things equal, an increase in income leads to a decrease in demand.

 Law of demand: the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises. Law of supply: the claim that, other things equal, the quantity supplied of a good rises when the price of a good rises. Law of supply and demand: the price of any good adjusts to bring the supply and demand for that good into balance. Market: a group of buyers and sellers of a particular good or service. Market demand: sum of all the individual demands for a particular good or service. Market supply: sum of the supplies of all sellers of a particular good or service.

 Monopolistic competition: a type of market that contains many sellers but each offers a slightly different product. Monopoly: a market with only one seller of a product without close substitutes. This seller sets the price. Monopsony: a market with only one buyer. Normal good: a good for which, other things equal, an increases in income leads to an increase in demand. Oligopoly: a market with few sellers that do not always compete aggressively. Perfect competitive markets: markets that are defined by two primary characteristics: (1) the goods being offered for sale are all the same, and (2) the buyers and sellers are so numerous that no single buyer or seller can influence the market price.

 Elastic demand: when the elasticity is greater than 1, so that quantity moves proportionately more than the price. Elastic supply: if the price elasticity of supply is larger than 1. Elasticity: A measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants. Income elasticity of demand: a measure of how much the quantity of a good responds to a change in consumers income, computed as the percentage change in quantity demanded divided by the percentage change in income. Inelastic demand: when the elasticity is less than 1, so that quantity moves proportionately less than the price. Inelastic supply: if the price elasticity of supply is less than 1.

Luxuries: those goods with a very high income and price elasticity of demand. Necessities: those goods with a very low income and price elasticity of demand. Perfectly elastic demand: quantity demanded changes infinitely with any change in price. Perfectly inelastic demand: quantity demanded does not respond to price changes. Elasticity equals 0. Perfectly elastic supply: close to infinity price elasticity of supply. Perfectly inelastic supply: zero price elasticity of supply. Price elasticity of demand: A measure of how much the quantity demanded of a good responds to a change in price of that good, computed as the percentage change in quantity divided by the percentage change in price. Price elasticity of supply: a measure of how much the quantity supplied of a good responds to a change in price of that good, computed as the percentage change in quantity supplied divided by the percentage change.

 Total revenue (PxQ): the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold. Unit-elastic demand: when the elasticity is exactly 1, so that quantity moves the same amount proportionately as price. Unit-elastic supply: if the price elasticity of supply is exactly one. Willingness to pay: the maximum amount that a buyer will pay for a good.

 Tax incidence: is the manner in which the burden of a tax is shared among participants in a market. Tax incidence is the study of who bears the burden of a tax.

 Welfare economics: the study of how the allocation of resources affects economic well-being. Marginal consumer (or buyer): the buyer who would leave the market first if the price were any higher. Marginal producer (or seller): the seller who would leave the market first if the price were any lower. Willingness to pay: the maximum amount that a buyer will pay for a good. Willingness to sell (cost): the value of everything a seller must give up to produce a good.

 Consumer surplus: the amount that buyers are willing to pay for a good minus the amount they actually pay for it, measures the benefit that buyers receive from a good as the buyers themselves perceive it. Producer surplus: the amount a seller is paid for a good minus the seller s cost, it measures the benefit to sellers participating in a market. Total surplus: the sum of consumer surplus plus producer surplus. In the absence of market imperfections, it can also be computed as the difference between the value to buyers minus the cost to sellers. Market efficiency: a market allocation is said to be efficient if it maximizes the total surplus received by all members of society. Deadweight loss: the fall in total surplus that results from a market distortion, such as a tax.

 Fixed costs: those costs that do not vary with the quantity of output produced. Variable costs: those costs that do vary with the quantity of output produced Efficient scale: the quantity of output that minimizes average total cost. Economies of scale: the property whereby longrun average total cost falls as the quantity of output increases. Diseconomies of scale: the property whereby long-run average total cost rises as the quantity of output increases.

National Income Consumption Investment Aggregate DD, SS Inflation/deflation Business cycles Monetary and fiscal policy Globalisation and FDI

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