Unit-1: Introduction to Managerial Economics Practice Flashcards

A comprehensive set of vocabulary flashcards covering the introductory concepts of managerial economics, micro and macroeconomics, the law of demand, and various types of elasticity.

Economic activities

Any activity involved in efforts aimed at earning money and spending this money to satisfy wants such as food, clothing, and shelter.

Adam Smith

Known as the Father of Economics, he defined economics in the eighteenth century as the 'study of nature and uses of national wealth'.

Alfred Marshall's Definition of Economics

A study of man’s actions in the ordinary business of life: it enquires how he gets his income and how he uses it.

Lionel Robbins' Definition of Economics

The science which studies human behavior as a relationship between ends and scarce means which have alternative uses.

Microeconomics

The study of an individual consumer or a firm; the term 'micro' means 'one millionth'.

Macroeconomics

The study of 'aggregate' or total level of economic activity in a country, including the flow of resources and factors of production.

Managerial Economics

Refers to the firm’s decision making process; it can also be interpreted as 'Economics of Management', 'Industrial economics', or 'Business economics'.

Normative statements

Statements that imply 'ought' or 'should', reflecting moral attitudes and value judgments of what is 'good' or 'bad', which cannot be verified by looking at facts.

Prescriptive actions

Goal oriented actions that suggest a course of action from available alternatives for an optimal solution based on a problem and the firm's objectives.

Operational issues

Internal issues within a business organization under management control, including demand theory, resource allocation, and profit analysis.

Environmental issues

External issues referring to the general economic, social, and political atmosphere within which the firm operates.

Demand

The desire for an object backed by purchasing power and the willingness to buy; it has three essentials: price, quantity demanded, and time.

Law of Demand

The relation stating the amount demand increases with a fall in price and diminishes with a rise in price.

Giffen paradox

An exception to the law of demand regarding inferior goods where a fall in price leads the poor to buy less.

Veblen effect

Also known as the 'Demonstration effect', it involves conspicuous consumption where goods are bought for social distinction or prestige.

Cross Demand

The effect of changes in the price of a commodity on the amounts demanded of related commodities (substitutes or complements).

Elasticity of demand

Explains the relationship between a change in price and the consequent change in amount demanded.

Price elasticity of demand (Formula)

$$\text{Price elasticity} = \frac{\text{proportionate change in the quantity demand of commodity}}{\text{proportionate change in the price of commodity}}$$

Perfectly elastic demand

When a small change in price leads to an infinitely large change in quantity demanded, represented as $(E = \infty)$.

Perfectly Inelastic Demand

When even a large change in price fails to bring about a change in quantity demanded, represented as $(E = 0)$.

Relatively elastic demand

When demand changes more than proportionately to a change in price, represented as (E > 1).

Relatively in-elastic demand

When quantity demanded changes less than proportional to a change in price, represented as (E < 1).

Unit elasticity of demand

When the change in demand is exactly equal to the change in price, represented as $(E = 1)$.

Income elasticity of demand (Formula)

$$\text{Income elasticity} = \frac{\text{proportionate change in the quantity demand of commodity}}{\text{proportionate change in the income}}$$

Cross elasticity of Demand (Formula)

$$\text{Cross elasticity} = \frac{\text{proportionate change in the quantity demand of commodity x}}{\text{proportionate change in the price of commodity y}}$$