Role of Economics for Managers
Dr. Zafar A. Sultan
Dept. of Management
Session 1
Microeconomics
• Two branches of economics:
1-Microeconomics
2- Macroeconomics
Microeconomics deals with the behaviour of individual economic units
like, consumers, producers ,workers, investors, owners of land etc.
Microeconomics explains how and why these units take decisions.
For example:- Consumer behaviour, producer behaviour etc.
Microeconomics also deals with how economic units interact to form
larger units- markets and industries. By studying the behaviour and
interaction of individuals firms and consumers, microeconomics
reveals how industries and markets operate and evolve, why they
differ from one another and ho they are affected by govt. policies
and global economic conditions.
By contrast macroeconomics deals with aggregate economic quantities,
like determination of national income, employment, inflation.
Role of Economics for Managers
•Rapid vast changes taking place in the
economic political and social environment
•Business success depends upon managers
anticipating and coping with change.
To do this, the manager must first identify
the characteristics of the world in which they
operate.
Role of Economics for Managers
•‘World’ may be examined at the following two
levels:
-microeconomic environment
-macroeconomic environment
Role of Economics for Managers
•Microeconomic environment deals with operation of
the firm in his immediate market, involving
determination of prices, revenues, costs, employment
levels and so on.
•Macroeconomic environment comprises the general,
social and economic conditions of the large system of
which each firm forms a part. This larger system
involves impact of political, legal and economic
decisions, both nationally and internationally.
Role of Economics for Managers
•Single firm cannot exert control over the macro
environment -in the way it can over its micro
environment.
•Knowledge of business economics trains the manager
and equips him with the managerial skills necessary to
make decisions in diverse business situations involving
-complex problems of resource allocation,
-choice of inputs and product mix,
-scope of marketing the product,
-demand forecasting, etc.
Role of Economics for Managers
•Government macroeconomic policy is concerned with
regulation of the level of economic activity
•Impacts directly on businesses by affecting levels of
consumer demand and costs of raising capital.
•Managers need to have an understanding of the
nature of macroeconomic policy if they are to
understand the consequences of policy changes on
their trade-e.g. a rise in interest rates.
•Important for managers to understand why
governments alter interest rates, taxes and spending
and how the levels of consumer activity and hence
consumer demand is likely to respond.
Role of Economics for Managers
•Firms who ignore the macroeconomic environment
are likely to be wrongfooted by macroeconomic
policy changes.
Macroeconomic Policy
•If level of economic activity is declining, interest
rates may be cut in terms of monetary policy to
reduce savings and increase investment.
•Alternatively, the government could reduce taxation
and increase its own spending in terms of fiscal
policy.
•If level of economic activity is rising too quickly,
leading to inflation , these policies could be reversed.