1. Unit 1
Economics Concepts and Values
Objectives:
After going through this unit, you will be able to explain:
Use of economic tools and concepts in business decision making
Meaning, nature, scope, and significance of managerial economics
Concept of value
Meaning, nature, and scope of managerial economics
Micro and macroeconomics for mangers
Structure:
1.1 Introduction
1.2 Resource allocation – The problem of Scarcity and Choice
1.3 Concept of Economics
1.4 The fundamental problems of an economy
1.5 Nature and Scope of Economics
1.6 Concept of value – Use value and Exchange value; Input theory of value;
Value added
1.7 Areas of economics - Micro and Macro Economics
1.8 Managerial Economics – integrating economic theory with business
decisions
1.9 Summary
1.10 Key words
1.11 Self-assessment questions
1.1 Introduction:
Economics is as ancient as the human race and as contemporary as nuclear science. At
the advent of the human race when men went out to hunt while others remained to defend

2. the fire, or when commodities were traded for each other, simple economics formed the
basis of trade; and in modern age when globalization dominates the world trade
economics and the consequent benefits continue to state the rules.
The foundations of economics as a formal study were laid down by Adam Smith in The
Wealth of Nations in 1776. Since then the subject has developed rapidly and now there
are several specialized branches of economics in myriad fields. Since there is an
economic aspect to everything, economics as a study is extremely comprehensive. The art
and science of business also finds its basis in economics through what is known today as
Managerial Economics.
1.2 Resource allocation – The problem of Scarcity and Choice
All human actions are oriented towards satisfaction of wants. These wants range over day
today lives and long term goals and their achievements. However when human beings do
that, they realize that they are constantly juggling between plenty of wants and limited
means to achieve them. Besides one want satisfied almost always leads to a succession by
another. Because goods and services are scarce, choices must be made. This, indeed,
forms the basis of the study of economics. Consider the following figure, which describes
two important issues that human being deal with in all facets of life that of Scarcity and
Choice. Economics as a body of knowledge or study discusses how a society tries to
solve the human problems of unlimited wants and scarce means.

3. satisfy ENDS
MEANS
Are scarce Are unlimited
Have alternative Recur
uses
Scarcity and
Choice
Let us define the terms scarcity and choice before arriving at a formal definition of
economics
• Scarcity implies that means or resources available are inadequate to satisfy all
human wants and needs.
• Choice implies the options available as a result of multiple wants and scarce
means having alternative uses.
These concepts imply that there is a deficiency of things in the world, clean-water, food,
houses, roads, hotels, cars and so on. Humans devise systems to share out these scarce
resources between themselves. Economists are interested in describing these systems and
finding the best methods.
1.3 Concept of Economics
Alfred Marshall (1920) portrayed economics as, “…the study of mankind in the ordinary
business of life; it examines that part of individual and social action which is most closely

4. connected with the attainment and with the use of the material requisites of wellbeing.”
This highlights the fact that economics is perhaps a means for achieving prosperity and
wealth. Robbins (1932) describes economics as “…a social science that studies human
behavior as a relationship between ends and scarce means which have alternative uses.”
This perspective of economics brings out the essence of resource utilization and goal
achievement. Most of modern business orientations of efficiency and effectiveness are
captured by these propositions of Robbins. The Economist’s Dictionary of Economics
describes economics as “…the study of the production, distribution and consumption of
wealth in human society”. This point of view brings to the fore the involvement of
economic concepts and tools in various functions that economies perform. Some other
ideas that further strongly imply the scope of economics as a study are offered by
Heilbroner who states economics as“…the process by which society marshals and
coordinates the activities required for its provisioning”, and Samuels who talks about
economics as “…a process of valuation… That to behave and to choose is to engage in
valuation and thereby to participate in the social, socioeconomic, valuation process.”
1.4 The fundamental problems of an economy
All individuals, households, business firms, communities, nations - rich and poor alike -
confront scarcity. The fundamental economic problem is the appropriate use of limited
resources to produce the goods and services that we value most. Much of economics is
devoted to the study of how markets and prices enable society to solve the problems of
how, what and for whom to produce. Consider the following figure,

5. What?
How to How
distribute much?
?
For Goods What
whom? and combination
services ?
How How?
efficiently? When?
The above figure decomposes the issues of scarcity and choice into some fundamental
problems that the economy and its units face and the economic tools and techniques help
solve them. These problems are:
a) What goods and services should be produced? : The economy and its
productive units have to make decisions regarding which goods and services to be
produced so that scarce resources are utilized to produce those commodities
which are needed.
b) How many of each good (and service) should be produced? : Excessive
production will only cause wastages which may be economically disastrous. So
the right quantity of goods and services should be produced.
c) What combination of goods and services to produce? : Resources are not only
scarce, they have alternative uses. To have them invested in particular bundle of
goods and services would imply forgoing another bundle. Correct choices have to
be made for maximum satisfaction of maximum number of people.
d) How should those goods be produced? : This relates to the process and systems
of production. Any leakages or inefficiency in this regard will only cause wastage
of scarce resources.
e) When should those goods be produced? : Time is of great value. If
commodities do not exist when and wherever they are needed to satisfy human
needs and wants they loose their utility.

6. f) How to utilize its resources efficiently? : Technology underlying production
processes should be continuously updated and advanced for efficient utilization of
scarce resources.
g) For whom to produce? : This is in context of the ultimate beneficiary of goods
and services that need to be known before commodities are manufactured.
h) How much of each good to distribute to each person? : Finally, once the
beneficiaries are known distribution of benefits have to be such as to have
maximum good of maximum number of people.
1.5 Nature and Scope of Economics
The development of society can be described as the uncovering of new wants and needs -
which producers attempt to supply by using the available factors of production.
Archeological and written records of human existence suggest that obtaining the material
means to satisfy wants has been a perpetual problem. Food and shelter are requirements
of human life. Other goods satisfy a range of human desires and give pleasure or utility to
individuals. Economics has contributed as a study of ways to deal with these issues and
challenges. The nature and scope of economics can, hence, be best described in following
points,
a) Economics as a study of the allocation of scarce resources: From a technical
perspective, economics is the study of how various alternatives or choices are
evaluated to best achieve a given objective. The domain of economics is the study
of processes by which scarce resources are allocated to satisfy unlimited wants.
Ideally, the resources are allocated to their highest valued uses. Supply, demand,
preferences, costs, benefits, production relationships and exchange are tools that
are used to describe and analyze the market processes by which individuals
allocate scarce resources to satisfy as many wants as possible. This increasingly
narrow focus is the domain of modern, “neoclassical,” microeconomic analysis.

7. This approach is typical of most economists and is referred to as orthodox
economics.
b) Economics as a study of provisioning: Economics as a study of provisioning is a
social science and tries to understand the historical and philosophical context of
the allocation problem. It is a study of the nature of the ends and processes as well
as the means. The allocation problem is one aspect of the provisioning problem. If
we are to study the allocation of resources to competing ends, what is the nature
and origin of the ends (goals, objectives)? Individuals have goals. To what extent
are these goals shaped by different forces in society? How do individuals’
objectives shape society? Why do individuals value some goods (or services)
more highly than others? Are some goods more valuable to the functioning of
society than others?
c) Economics and its relationship with other disciplines: There is a general
saying that, “If two or three economists are gathered together in one place, there
you will find four or five opinions”. One reason is because economics is
influenced by several academic disciplines such as sociology, politics, physics,
chemistry, and the natural sciences. For instance, technological developments
have influenced economic life and economic decisions cannot be solely based on
economic factors. Government budgets have always been socio-political
documents and international trade relations are a function of international
relationships between nations. While the economist as a scientist is concerned
altogether with the understanding of phenomena, nevertheless it has often
happened that his conclusions have been helpful to statesmen in shaping the trade
and industrial policies a nation Indeed the so-called father of political economy,
Adam Smith, made his famous study of the subject for the purpose of discovering
those policies of trade and production which were best adapted to enrich a nation.
d) Methodology in economics: Business and economies, often, come across issues
and challenges which, at times, can be solved/ supported with reference to facts,

8. and then there are other times when they cannot be purely referred to facts and
require value judgments. Economics has both of these approaches inherent in its
nature, when it is referred to as both a Positive science (supported with facts) as
well as a Normative Science (supported with value judgments). Important
methodological issues in economics have included: methodological individualism
the relation of science to economics, discussed by J.S. Mill, J.M.Keynes
andLionel Robbins; the role of simplifying assumptions, debated at length by
M.Freidman and P. Samuelson; the role of a priori deduction, discussed by
L.V.Mises; and the uses of the axiomatic method and formalization as represented
in the work of K.Arrow, J.R.Hicks, and Amartya Sen.
e) Economics for business: Physics is a science concerned with the laws governing
the forces of nature. Engineering is a technical art aiming to utilize those forces to
the advantage of man. Engineers built bridges, towers and roads long before they
had mastered the science of physics. They worked by what is known as the rule of
thumb, guessing and experimenting until they arrived at a satisfactory method, but
they never could have constructed the marvelous machines and towering
structures of today. The modern engineer must know physics as well as
mathematics. In the same way, the science of economics is essential to the
training of any person who wants to give his business talent the greatest possible
opportunity for achievement. Business is the art whereby man produces wealth for
the gratification of his wants; economics is the science which studies the laws and
conditions under which wealth is and must be produced. A person unfamiliar with
the principles of this science, unless he has most extraordinary ability, is at a
disadvantage in modern competition and will have to be satisfied with small
business affairs and small results.
1.6 Concept of value
The concept of value and providing value to the customer is increasingly acquiring
significance in contemporary business environment. In economics, the value of a
commodity is understood as how much the commodity is worth relative to other
commodities to an individual. Value of a commodity is evaluated in terms of its worth

9. (valuation) or assessed in terms of its value in the market (price). The concept of value is
important in answering key questions in business like why goods and services are priced
as they are, how the value of goods and services comes about, and how to calculate the
correct price of goods and services.
In his analysis of value Marx has distinguished between Use value and Exchange value.
He implies that commodities have a value, a use value, an exchange value, and a price,
defined as follows,
a) Value: The worth of a commodity in relation to other commodities.
b) Use value: The intrinsic or inherent characteristics of commodity that enables it
to satisfy consumer need.
c) Exchange Value: The value that commodities acquire because they are traded in
markets.
d) Price: The numerical monetary value that is ssigned to a commodity in the
market.
Value is intrinsically related to the worth derived by the consumer. This measure of
worth is based purely on the utility derived from the consumption of a product or service.
Utility derived value allows products or services to be measure on outcome instead of
demand or supply theories that have the inherent ability to be manipulated.
1.7 Areas of Economics
The study of economics can be classified into various specialized areas of studies.
However the most popular form of classification divides the study of economics into
Micro and Macro economics. This kind of a categorization owes its origin to the fact that
people, insitutions, and units in an economy inpact both in the individual capacity as well
parts of the economic system. This is why they need to be studied in individual capacity
as well as parts of economic interelationships and systems. Consider the following figure
which details out individual economic units,

10. HOUSEHOLDS
BUSINESS
INDIVIDUAL
GOVERNMENT ECONOMIC
UNITS
REST OF THE
WORLD
Consider the following figure which details out the economy as a whole system,
GOVERNMENT
HOUSEHOLDS BUSINESS
REST OF THE
WORLD
The above figures describe two approaches to the study of economics. This distinction
has been largely due to the works of J.M.Keynes who viewed economic theory as micro
and macroeconomics. A generic definition of these two areas of economics follows,
a) Microeconomics is an area of economics that evaluates how individuals,
households, and firms within the large economic system make decisions to
allocate limited resources to fulfill unlimited wants. It encompasses the study of
behavior of individual economic units within the whole economic system. It
places primary emphasis on the nature and functions of product markets, and

11. includes the study of factor markets and of the role of government in promoting
greater efficiency and equity in the economy.
b) Macroeconomics on the other hand, involves the study of sum total of economic
activity as result of the functioning of the entire economic system. When
individual economic units interact and perform they create the economic system
as a whole. This system acts as both a result as well as a cause of economic
behavior and decisions of individual economic units. This study places particular
emphasis on national income and macroeconimc aggrgates, and also develops
economic performance measures, economic growth, and international economics.
Following table distinguishes between the Micro and Macro economics,
S.N. Microeconomics Macroeconomics
1. A study of individual economic units A study of the economic system as a
and their economic behavior. whole.
2. Microeconomics focuses on supply and Macroeconomics looks at economy-
demand and other forces that determine wide phenomena such as Gross
price levels for specific companies in domestic product (GDP) and how it is
specific industry sectors. affected by changes in unemployment,
national income, rate of growth, and
price levels.
3. Microeconomics takes a bottoms-up Macroeconomics takes a top-down
approach to analyzing the economy approach to analyzing the economy
while macroeconomics. while macroeconomics.
4. This is often called as Price Theory. This is often dcalled as Theory of
Income and Employment.
5. This places emphasis on the functioning This places emphasis on the broad
of product and resource markets. macroeconomic aggregates and their
evaluation.
6. This studies individual income, output This is concerned with national income
level in individual sectors etc. and national output.
7. This may not concern itself with the This concerns itself with the
interrelationships between various interrelationships between various
economic units. economic units and their impact on the

12. economy as a whole.
8. This views individual economic units in This does not view individual economic
isolation with each other. units in isolation with each other but as
parts of a whole system.
While these two studies of economics appear to be different, they are actually
interdependent and complement one another since there are many overlapping issues
between the two fields. For example, increased inflation (macro effect) would cause the
price of raw materials to increase (micro effect) for companies and in turn affect the end
product's price charged to the public.
1.8 Managerial Economics – integrating economic theory with business decisions
Managerial economics is a branch of economics that applies microeconomic analysis to
specific business decisions. As such, it bridges economic theory and economics in
practice. It concerns with the application of economic principles and methodologies to
business decision problems. Contemporary business firms require the knowledge of
economics, its tools, and techniques on a vriety decision issues. Consider some of the
issues where the knowledge of managerial economics aids business managers,
1. Multiple Goals
A business firm may be confronted with a multiplicity of goals. Since it is technically not
possible to try to maximize simultaneously the values of multiple conflicting goals, the
decision makers have to choose one of the goals for primary pursuit. The other goals,
expressed as minimum or maximum acceptable values, can then be regarded as
constraints on the pursuit of the primary goal. The object of the decision is to maximize
the value of the primary goal, subject to realization of satisfactory levels of subordinate
goals.
2. Multiple Strategies

13. With respect to any single goal, a business decision often involves multiple possible
courses of action, or strategies. If there were no alternatives, no decision would be
required other than selecting the goal for pursuit. The deliberate approach to decision
making involves the identification of all possible courses of action and the benefits and
costs likely to result from each of the alternatives. The rational choice is the alternative
that yields the greatest relative positives or the largest sum of net benefits (positives less
negatives), given the decision maker's set of preferences.
3. Marginal Changes
In many cases, the choices are not mutually-exclusive alternative courses of action; rather
they involve more or less of the same course of action. The range of possible alternatives
includes larger or smaller quantities to be selected. Typically, the decision problem is to
select some quantity that is an alternative to the present one. Assuming that the
alternative quantities are arrayed from smallest to largest, or vice-versa, choosing to shift
from one to another involves additions to or subtractions from benefits or costs.
Economists speak of such additions and subtractions as incremental changes, or marginal
changes if they are the smallest possible changes that can be made. The rational choice in
such cases is to make a quantitative change that will yield the greatest marginal benefit
relative to marginal cost.
4. Multiple Outcomes
Often the possible alternative courses of action can be identified, but each decision
alternative may have several outcome possibilities. If the decision maker can in some
meaningful sense assess the probability of the occurrence of each possible outcome, for
each of the alternative courses of action, he may then compute the expected value of each
alternative. Economic tools and techniques provide the requisite knowledge.

14. The application of economic tools and techniques to business decision making, summed
up in the study of Managerial Economics, can be described in the following figure,
The study of
Managerial
Economics
Business decision
Application problems
of Economic Unlimited and
tools and constantly recurring
techniques goals
Scarce resources
having alternative
uses
Optimal
business
solutions
1.9 Summary
Economics as a body of knowledge or study discusses how a society tries to solve the
human problems of unlimited wants and scarce means. Much of the study is devoted to

15. the study of how markets and prices enable society to solve the problems of how, what
and for whom to produce. Economics has contributed as a study of ways to deal with the
issues and challenges of humans and maximization of utility to individuals. This scope of
economics is exhibits through micro and macroeconomics, i.e., the study of economics
through evaluation of individual economic unit behavior (Microeconomics) and the
evaluation of economy as a whole (Macroeconomics). When these concepts and
techniques of economics are utilized in business decisions it leads us to the formal study
of Managerial economics.
1.9 Key Words
a) Scarcity implies that means or resources available are inadequate to satisfy all
human wants and needs.
b) Choice implies the options available as a result of multiple wants and scarce
means having alternative uses.
c) Economics: A social science that studies human behavior as a relationship
between ends and scarce means which have alternative uses.
d) Central Problems of an economy: The problems of how, what and for whom to
produce.
e) Microeconomics: This is an area of economics that evaluates how individuals,
households, and firms within the large economic system make decisions to
allocate limited resources to fulfill unlimited wants.
f) Macroeconomics: This involves the study of sum total of economic activity as
result of the functioning of the entire economic system.
g) Managerial economics: This is a branch of economics that applies
microeconomic analysis to specific business decisions
1.10 Self assessment questions
1) Discuss the role and significance of scarcity and choice in economic decision
making?
2) Explain the meaning and scope of economics as a formal study

16. 3) What are the central problems of an economy? Explain the concept of efficiency and
effectiveness in this context?
4) Distinguish between macro and microeconomics and discuss their role in business
decision making.
5) Define the term “Managerial Economics”. Cite some ways in which managers use
economic tools for better business performance.
6) Scarcity implies that
i) Resources are abundant
ii) Resources are not available
iii) Resources are scarce
iv) All of the above
7) According to economics choice relates to
i) Plenty of recurring wants
ii) Plenty of resources
iii) Plenty of economic units
iv) None of the above
8) Central problems of an economy imply
i) What to produce?
ii) How to produce?
iii) For whom to produce
iv) All of the above
9) Microeconomics is also called as
i) Price Theory
ii) Demand Theory
iii) Theory of income and employment
iv) Theory of factors
10) Macroeconomics deals with the study of macroeconomic aggregates
i) True
ii) False
iii) Neither true nor false
iv) Can’t say

17. 11) Managerial economics helps business in
i) Decision making
ii) Resource allocation
iii) Choosing between multiple goals
iv) All of the above
12) Fill in the blanks:
i) Economics is a social science that studies human behavior as a relationship
between _____________ and scarce _____________ which have alternative
uses.
ii) Economics as a study of_____________ is a social science and tries to
understand the historical and philosophical context of the allocation problem.
iii) Value of a commodity is evaluated in terms of its _____________ or assessed
in terms of its value in the _____________
iv) The most popular form of classification divides the study of economics
into_____________ and_____________.
v) The study of _____________ bridges economic theory and economics in
practice.
vi) With respect to any single goal, a business decision often involves multiple
possible courses of action, or _____________.
vii) The application of economic tools and techniques to business decision making
is summed up in the study of _____________.

18. viii) Economics has two approaches inherent in its nature, when it is referred to
as both a _____________- supported with facts- as well as a _____________ -
supported with value judgments.