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Introduction November 23, 2010

Posted by Chetan Chitre in Introduction, Managerial Economics.
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A general understanding of economics is that it has got something to do with wealth and money. This is not entirely wrong. Ultimately we do end up discussing wealth and money in economics and that is why it is so essential for business managers to study economics.

But that is only the end result of what economics studies. The basic focus of the subject is how individuals and societies deal with wealth and money. Why do we need wealth? What is our definition of wealth? How do we create wealth? How do we distribute wealth? These are some of the questions commonly asked in economics – both at the level of individual behavior and at social level as well. The focus therefore is more on an individual’s (or society’s) attitudes towards wealth rather than wealth itself.

Not surprisingly, one of the first recognized books on modern economics was called – “An Enquiry into Causes and Consequences of Wealth of Nations” written by Adam Smith in 1776.

Natural and Social Sciences –

Before we get into the formal details of the subject it is important to understand that Economics is essentially a social science.

Science can be in simple terms defined as any systematized body of knowledge. Classification is one of the essential aspects of this systematization process. So we begin with classifying sciences as (i) Natural Sciences and (ii) Social Sciences.

(i)    Natural Sciences – All streams of knowledge that aim at studying universe as it exists around us can be grouped under Natural Sciences. This universe can be further classified as (a) Living and (b) Non Living

a.    Non Living part of the universe is studied under subjects such as Physics, Chemistry, Metallurgy, etc.

b.    The Living part of the universe is studied under subjects like Botany, Zoology, Anatomy, Medical sciences, etc.

(ii)    Social Sciences – Social sciences on the other hand are more concerned with Human behavior – both as individuals and also as part of society. So functioning of human body and its various organs such as heart, liver, pancreas, lungs, and tissues such as bones, blood, etc are subject matter of Medical Sciences. But behavior of an individual – eg. patriotism, love for the family, friendships, etc. are subject matter of Social Sciences.

If we are to analyze human behavior in detail, it can be seen that it is affected by a number of factors – eg. The place where a person is born, the geographical conditions of that place, the family into which a person is born and the religious and cultural values followed by that family, the country in which a person is born and the history of that country, etc. Each of these aspects that influence human behavior can be studied separately as geography, history, literature, political science, etc.

Economics studies human behavior related to his satisfaction of material wants and desires. Management studies what governs human behavior when they come together in a group to achieve common objectives such as profits, production, social welfare, etc.

At this stage one should also note a few aspects about Social Sciences

a.    Free Will – The natural world which is governed by laws of the Universe. Entities in the natural world have to obey these laws and do not have any control over these laws. Eg. A block of metal, when released from a certain height on the surface of the earth, has to follow the law of gravity. It does not have a choice in the matter. The task of the natural sciences is thus simple, i.e. they have to discover the governing laws – eg. the law of gravity. These laws have remained, by and large, unchanged since the birth of the universe and will continue to do so for a long time.

Social Sciences on the other hand study human behavior. Human beings in the course of their social behavior do follow certain laws. However, two important things need to be noted here. Firstly they have a choice of not following the law. Secondly they also have the power in certain circumstances to change these laws. The humans are endowed with a “Free Will” which enables them to make a choice about their own behavior – and thus distinguishes them from the rest of the Universe.

b.    No Exact Definitions – The freedom to choose one’s behavior results into a lot of confusion. One aspect of the confusion is that there are no exact definitions in Social Sciences. Eg. How do we define a ‘student’? Is she the one who is registered for a University course? So a person studying a subject but not formally registered for a course – will she not be defined as a student? Does one have to be studying a specific subject? Do we not learn from every moment that we live? So then will all living humans be classified as students?

So we see that there arises a problem in defining as simple a term as a student. Either the definition is too general and covers every living person and is therefore useless. Or it is too narrow and misses out on some persons and is therefore again useless.

c.    Opinions Matter – In the above case if there is ambiguity about the definition of a student – how do we solve the problem? So the University may decide that all those registered for a course and have paid the fees will be recognized as students. While we accept that this is not a universally acceptable definition of a student, it is the ‘Opinion’ of the University regarding who should be recognized as a student. Most concepts and definitions in Social Sciences are of such nature i.e. They are Opinions and like all Opinions – (i) have limited applicability (ii) and are not correct in certain other contexts

d.    Whose Opinion Matters – If concepts in Social Sciences are Opinions, then it important to understand – whose Opinion are we discussing? Eg. In an educational institution, there is a director and then there are professors, students, non-teaching staff, etc. Each of these classes of people would have an opinion say on wearing a subject like ‘class attendance’. And the opinions may be different from each other. In such cases what will be the final rule adopted by the institution. It is easy to understand the Opinion of the student will be given least importance in this matter.

e.    No Wrong Answers – If freedom to choose is accepted as the essence of being human, then the ideas of right and wrong become relatively weak. Thus an answer to a question in Social Sciences is an Opinion and like any Opinion, it has limited applicability and is likely to be wrong or right. So questions such as –
(i)   Should Uniforms be compulsory in colleges?
(ii)   Should we have a test tomorrow?
(iii)   Should we increase the salary of the workers?
(iv)   Should the packaging of my product be green or red?
(v)   Should the Indian army withdraw from Kashmir?
Most of the above questions will not have a single right or a wrong answer. Quite often different people will have different Opinions.

f.    Subjectivity – A related aspect of the above is that a single answer may be seen as right by some people and wrong by others depending on every individual’s cultural, social, religious, psychological, economic background, etc.

While dealing with subject like Economics or Management, it is important to keep in mind some of the above aspects. A Business Manager is essentially a “social engineer”. She deals with a group of humans. Her aim is to make them behave in a manner so as to achieve the objectives of the Business Organization. To be able to do this, she will have to understand what are the factors that govern the behavior of the people that she is dealing with – be they the co-workers, the suppliers, the share-holders, the financiers, the customers, etc. of the organization.

Understanding the factors that govern the behavior of a person is the first step in directing (manipulating / managing) the behavior of that person.

It is also important to understand that when one is working in a group, every person will have an opinion which may be different from your own. And since as business managers we are dealing with aspects of human behavior, none of these opinions can be absolutely right and none of these opinions can be completely wrong. As a Manager, therefore, it is important to firstly, allow every member of the team to express her opinion and then having done that, have the humility to accept that your own opinion need not always be the right opinion.

Nobody here has all the right answers at all times.

Economics – Definition –

Economics has been defined differently by different economists.

John Stuart Mill, has defined the subject simply as – “The practical science of production and distribution of wealth.”

Alfred Marshal has defined economics as – “A study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with attainment and with the use of material requisites of well-being.”

A more widely accepted and comprehensive definition is given by Lionel Robins as – “Economics is a science which studies human behavior as a relationship between multiple ends and scarce means which have alternative uses.”

From the above definitions one can say that the emphasis is on the following aspects

(i)    Study of Human Behavior – Economics is essentially a study of human behavior and thus is a branch of social sciences. The focus of the subject is not money, wealth, resources, etc. The core is clearly study of human behavior. Thus, it is important to recognize the study of the subject and its conclusions will be affected by all the advantages and limitations that are applicable to any other subject of Social Science.

(ii)    Well-being – According to Marshal, the subject studies human behavior pertaining to attainment and use of material requisites of well-being. However, it is important to understand that idea of “well-being” cannot be fully defined in material terms. Different cultures have different conceptions of “well-being” and each will lead to either more or lesser quantity of material requisites.

(iii)    Multiple Wants – According to Lionel Robbins Economics studies human behavior with respect to satisfaction of wants. Robbins further emphasizes that human wants are multiple and never-ending. This aspect of the definition focuses on the study of an individual as a consumer and tries to understand the consumer demand in greater detail.

(iv)    Use of Resources – Wants are satisfied by use of Resources. This aspect of the definition focuses on the supply and production side of economic activity. Robbins states that resources are scarce. As a result they need to be used carefully in the production process.

(v)    Allocation of Resources – Apart from being scarce, Resources also have multiple uses. As a result a decision has to be taken whether to use a given resource in Use ‘A’ or Use ‘B’. i.e. There arises a problem of allocation (or distribution) of resources. Economics studies various mechanisms that can help us to decide a proper allocation of given resources between multiple uses. Some of these mechanisms include government policies and market mechanisms.

Microeconomics and Macroeconomics –

These are two important approaches to the study of economic behavior.

Microeconomics focuses on study of behavior of individual economic units – eg. individual consumer, individual firm and individual markets. It studies in detail the factors that influence the behavior of each of these agents, the likely constraints that would operate of their behavior, their decision criterion, etc.

Microeconomics is useful to Business Managers in the following ways –

(i)    Understanding consumer behavior and demand

(ii)    Understanding optimum quantities to be produced

(iii)    Factor and product pricing

(iv)    Understanding the functioning of market

(v)    Future planning and estimation

Macroeconomics on the other hand deals with the economic behavior of large groups eg. economy of a Country, World Trade, etc. Thus discussions of national economy, national income, budget, etc would be covered under macroeconomics. It is important to note that if a single firm is being studied, even if it has large number of employees, it will NOT be a macroeconomic study, as we are studying behavior of a single firm.

Macroeconomics is useful to Business Managers in the following ways –

(i)    Understanding Government policies and its impact on business

(ii)    Predicting business cycles

(iii)    Estimating growth in national economy and its impact on business

(iv)    Trade relations with different nations and possibilities for profitable exports and imports

(v)    Understanding impact of changes in tax structure

(vi)    Identifying new business opportunities in the changing global economic scenario.

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