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.