Page 11 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes 1.3.1 Economics and Managerial Decision-making

As you have already learnt, economic activity is the constant effort to match ends to means
because of scarcity of resources. The optimal economic activity is to maximise the attainment of
ends, given the means and their scarcities or to minimise the use of resources, given the ends and
their priorities.
Decision making by management is truly economic in nature because it involves choices among
a set of alternatives – alternative courses of action. For example, a company may have to make a
choice in cases like:
1. Setting up a plant at location A or setting up a plant at location B.
or
2. Producing more of product X or product Y.

The optimal decision making is an act of optimal economic choice, considering objectives and

constraints. This justifies an evaluation of managerial decisions through concepts, precepts, tools
and techniques of economic analysis of the following types:
1. Micro and Macro Analysis: In micro analysis the problem of choice is focused on single
individual entities like a consumer, a producer, a market, etc. Macro analysis deals with the
problem in totality like national income, general price level, etc.
2. Partial and General Equilibrium Analysis: To attain the state of stable equilibrium, the
economic problem may be analysed part by part – one at a time – assuming “other things
remaining the same.” This is partial equilibrium analysis. In general, in equilibrium
analysis the assumption of “given” or “other things remaining equal” may be relaxed and
interdependence or interactions among variables may be allowed.
3. Static, Comparative Static and Dynamic Analysis: This is in reference to time dimension.
A problem may be analysed:
(a) Allowing no change at a point of time (static)
(b) Allowing once for all change at a point of time (comparative static)
(c) Allowing successive changes over a period of time (dynamic).
4. Positive and Normative Analysis: In positive economic analysis, the problem is analysed
in objective terms based on principles and theories. In normative economic analysis, the
problem is analysed based on value judgement (norms).

1.3.2 Central Problems of an Economy

An analysis of scarcity of resources and choice making poses three basic questions:

1. What to produce and how much to produce?
2. How to produce?
3. For whom to produce?

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