MANAGEMENT AND ECONOMICS 11. Management is intangible.

12. Management is both science and an art.

MANAGEMENT 13. Management is a profession.
14. Management is an inter-disciplinary approach.
• The science of organizing and allocating a firm's
15. Management is dynamic and not static.
scarce resources to achieve its desired objectives.
• The use of economic analysis to make business MANAGEMENT IS AN ACTIVITY
decisions involving the best use (allocation) of an
organization's scarce resources. • It is a process of organized activity concerned with
• It is a distinct process, consisting of planning, efficient utilization of resources of production like
directing, organizing, controlling, perform ed to men, material, machine, money etc.
determine and accomplish stated goals by the use • Efficient utilization of resources can be helpful for
of human beings and other resources. both employees and employers.
• Management is a process a systematic way of doing • Not only does it ensure that employees have
things. enough work to make their role viable and profitable,
• Done according to a particular system in an on the other side of the spectrum it can also prevent
organized way. overworking and burnout – providing a more
• Methodical in procedure or plan. balanced work life overall.
• Presented a coherent body of ideas or principle. • According to a study, unreasonable workload and
• Marked by thoroughness and regularity. excessive overtime are two leading contributors to
employee burnout.
ECONOMICS • At the same time, underutilizing your employees’
talent can decline their productivity and even lead to
• The study of the behavior of human beings in unplanned attrition.
producing, distributing and consuming material • Resource utilization is an important part of project
goods and services in a world of scarce resources management.
• Economics is the science that deals with production, • It helps project managers do their jobs better and
exchange and consumption of various commodities get the best results out of employees.
in economic systems. • Leads to happier team members
• It shows how scarce resources can be used to • Increases profitability
increase wealth and human welfare.
• Encourages team training and growth
• The central focus of economics is on scarcity of
• Increased productivity
resources and choices among their alternative uses.
• Improved pricing accuracy
THE FOUR MANAGEMENT FUNCTIONS • Increased ROI
• Strengthened cross-functional collaboration
• Planning
• Directing MANAGEMENT IS A PURPOSEFUL ACTIVITY
• Organizing
• It is concerned with the achievement of an objective
• Controlling
through its functions.
PLANNING - Refers manager’s think of their actions in • With great power, comes great responsibility
advance. Their actions are usually based on some method, • This is especially relevant for management teams
plan or logic, rather than on a hunch. that hold responsibility for the career success of
every individual employed by the organization.
ORGANIZING - Refers manager’s coordinate the human • Management teams are also responsible for the
and material resources of the organization. success of their customers to whom they’ve
promised a specific offering and to the external
DIRECTING - Refers managers motivate and direct
vendors with whom they hold agreements.
subordinates.
• Maintaining a sense of purpose is so important that
CONTROLLING - Refers attempts to ensure that there is no it’s recommended that leaders keep a shared
deviation from the plan or norms. document outlining the mission that they intend to
serve in their role. This will help ensure
NATURE/CHARACTERISTIC OF MANAGEMENT accountability through a manager’s career.
1. Management is an activity. MANAGEMENT CONCERNED WITH THE EFFORTS OF
2. Management is a purposeful activity. A GROUP
3. Management concerned with the efforts of a group.
4. Management is getting things done. • Management is concerned with management of
5. Management applies economic principles. people and not the direction of things. It motivates
6. Management involves decision- making. the workers to contribute their best.
7. Management coordinates all activities and • According to Lawrence A. Appley, management is
resources. an art of getting things done through the efforts of
8. Management is a universal activity. other people.
9. Management is an integrating process. • It involves the use of group effort to achieve
10. Management is concerned with direction and predetermined goal of management.
control.
 • Management can be viewed as a group effort ➢ Lower Level
towards a common goal in which team behavior • Coordination also allows for the more beneficial and
plays the important role. efficient allocation of resources in an organization,
• Management is getting things done which can reduce conflict and redundancies
• A manager does not do any operating work himself between individuals or departments.
but gets it done through others. • Properly allocating resources so that they are used
• According to ‘’Peter Drucker’’ “Management is a in the most efficient way and strategizing for the
multipurpose organ that manages a business and long-term attainment of an organizational goal.
manages Managers and manages Workers and
work.” MANAGEMENT IS AN INTEGRATING PROCESS
• Management is the “art of getting things done • It integrates the men, materials and machines for
through other people” Mary Parker Follett. achieving stated objectives
MANAGEMENT APPLIES ECONOMIC PRINCIPLES • Management undertakes the job of bringing
together human physical and financial resources so
• Management is the art of applying the economic as to achieve organizational purpose.
principles that underlie a control of men and • Therefore, is an important function to bring harmony
materials in the enterprise under consideration. between various factors.
• Four Key Economic Concepts: • Without integration management, it’s difficult to
➢ Scarcity identify conflicts in advance and know how to
➢ Supply and Demand resolve them.
➢ Costs and Benefits • The essence of management is integration of
➢ Incentives human and other resources in such a manner that it
leads to effective performance.
MANAGEMENT INVOLVES DECISION-MAKING • All these resources are made available to those who
manage.
• It is a decision-making process and the decisions
are involved in all the functions of management • Managers apply knowledge, experience and
principles for getting the results. In other words, it
• Decision making in management is the process of
seeks to harmonize the individual goals with
making a choice between two or more options.
organizational goals.
• This involves evaluating the pros and cons of
various choices and choosing the best option to MANAGEMENT IS CONCERNED WITH DIRECTION AND
achieve a desired outcome. CONTROL
• In management, decision making is about acting in
a way that meets organizational goals and • It is concerned with direction and control of human
objectives. efforts to attain the specific objectives.
• For example, a business manager may decide to • Direction:
invest in marketing to attract new customers. ➢ It involves issuance of orders, instructions and
• This decision could involve analyzing the costs, leading and motivating the employees to
benefits, and risks involved with each possible execute them.
course of action and choosing the best course of ➢ Influencing, guiding, supervising and motivating
action for the organization. the subordinates for the accomplishment of pre-
• Management decision is an important part of determined objectives.
managing any organization. • Control:
• It allows managers to set goals and figure out what ➢ All other functions of management cannot
actions are needed to meet those goals and be completed effectively without
evaluate whether those actions are working as performance of the control function. It
intended. implies measurement of accomplishment
• Management decision meaning refers to managers against the standards and correction of
guiding their organizations down the right path deviation, if any, to ensure achievement of
toward success. organizational goals.
➢ The efficient system of control helps to
MANAGEMENT COORDINATES ALL ACTIVITIES AND predict deviation before they actually
RESOURCES occur.
➢ Control: Controlling ensures that there is
• It is concerned with coordination of all activities and effective and efficient utilization of
resources to attain the specific objectives. organizational resources so as to achieve
• Coordination is needed to perform all the functions the organizational goals.
of management. ➢ Controlling has two basic purposes
➢ In Planning a) If facilitates coordination
➢ In Organizing b) It helps in planning
➢ In staffing ➢ Significance of good control system are as
➢ In Directing follows:
• Coordination is needed at all levels of management: 1. Basis of future action
➢ Top Level ▪ Control provides the basis for future
➢ Middle Level actions. It will reduce the chances of
 mistakes being repeated in future by ➢ Management is essentially an art because it
suggesting preventive steps. shares all the characteristics of an art, such as:
▪ Facilitates decision making a) Perfection through practice
▪ The process of control is complete only b) Personalized application
when corrective measures have been c) Creativity
taken. This requires taking a right • Management as Science
decision as to what type of follow up ➢ Science is an organized body of knowledge
action is to be taken. pertaining to a particular field of enquiry, which
2. Facilitates discipline and order accommodates general facts explaining a
▪ The existence of control system has a phenomenon (Stoner et.al, 2015).
positive impact on the behavior of the ➢ Science is systematized in the sense that is
employees. They are cautious while establishes a cause-and-effect relationship
performing their duties as they know between various variables.
they are being observed by their ➢ Beasley (2014) and Luthans (2011) observed
superiors. that science is characterized by the following
3. Facilitates Coordination features:
▪ Control helps in Coordination of the ▪ Universal Acceptability and Validity
activities of various departments of the ❖ Scientific principles and
enterprise. It provides them unity of conventions have global genuine
direction. and are capable of universal
4. Facilitates motivation applications.
▪ A control system is most effective when ❖ These principles typify basic truths
it motivates people to high that are capable of being applied
performance. Since most people at any time, any where in the world
respond to a challenge, successfully in any prevailing situation.
meeting a tough standard may provide ▪ Organized body of Knowledge
a greater sense of accomplishment. ❖ Science contains concepts, theories
5. Effective plan Implementation and principles which help explain past
▪ Controlling and planning are events and can also be used to predict
interdependent. Control is the only the future outcome of specific actions.
means to ensure that the plans are ▪ Experimenting and Observation
being implemented control points out ❖ Scientific conventions (fundamental
short comings of not only planning but truths) are derived through empirical
also other functions of management. results. These truths are developed
Comparison can be done through through scientific methods of
various Performance report, Personal continuous experiments, observations
Observation. and testing.
▪ Cause and Effect Relationship
MANAGEMENT IS INTANGIBLE ❖ Scientific principles identify, establish
and explain a cause-and-effect
• It is abstract and cannot be seen. It is evidenced by
relationship between two or more
the quality of organization and through its results.
variables.
• Management is intangible, it cannot be seen, it
• Management is both Science and Art
presence can be felt by the results of its efforts in
➢ Essentially science and art are not mutually
the form of efficiency , productivity, sales and return
exclusive but are complementary to each other.
on investment.
In fact they can be seen as two faces of one
• It is unseen force. Its presence can be felt
coin. Management is more effective when there
everywhere by the results of its effort which comes
is a combination of both science and art
in the form of adequate work output, satisfactory
(Robbins et.al, 2017).
working climate, employees satisfaction and others
➢ Many scholars have noted that in management,
MANAGEMENT IS BOTH SCIENCE AND AN ART science provides the knowledge while art deals
with application of the knowledge and skills.
• Management has certain universally applicable ➢ Therefore, successful managers are likely to be
principles, laws etc. Hence, it is a science. It is also those who have mastered the ‘know-how’ –
an art, because it is concerned with application of from science and the application of ‘doing’ –
knowledge for the solution of organizational from art
problems.
• Management as Art MANAGEMENT IS A PROFESSION
➢ Art is the systematic and personalized • It is becoming a profession because there is
application of theoretical principles and established principles of management which being
personal skills to achieve desired results applied in practice.
(Anthony, 2015).
• Management as a Profession:
➢ Basically, art is a personalized application of
➢ A profession may be defined as an occupation
knowledge, because every artist has their own
that requires specialized knowledge and
way of expressing their creativity and skills.
 intensive academic preparations to which entry • Additionally, it will allow you to better understand the
is regulated by a representative body. world around you, including how businesses and
➢ The essentials of a profession are: governments operate.
1. Specialized Knowledge
2. Formal Education & Training WE USE ECONOMICS IN OUR EVERY DAY LIVES.
3. Social Obligations
4. Code of Conduct • Everyday, people make choices that affect their
5. Representative Association lives, in big or small ways. When making a decision,
6. License Requirement people tend to choose the option that makes the
7. Independent Office best use of their resources in order to achieve the
8. Fees best possible outcome. That is what economics is
all about.
MANAGEMENT IS DYNAMIC AND NOT STATIC
YOU ARE EMPLOYING ECONOMICS WHEN YOU ASK
• Management adopts itself to the social changes and QUESTIONS SUCH AS:
also introduces innovation in methodology.
• Should I do homework tonight or watch a movie? •
• Management has to make changes in goal,
objectives and other activities according to changes • Should I make coffee at home or buy it at a coffee
taking place in the environment. shop?
• The external environment such as social, • Should I go to university right after high school or
economical, technical and political environment has get a job?
great influence over the management. • Should I drive to work or take the bus?
• As changes take place in these environments, same • Every decision made utilizes economic methods by
are implemented in organization to survive in the analyzing the costs and benefits of each option (or
competitive world. pros and cons).
• A rational person will choose the option that yields
WHAT IS ECONOMICS? the highest net benefit for themselves.
• Clearly, economics is everywhere; it helps us make
• Economics, being a social science, uses empirical logical decisions and achieve outcomes that make
evidence and scientific methods to study people and us, as individuals or a society, better off.
the choices they make.
• In particular, it studies how agents (such as THERE ARE MANY WAYS TO APPLY ECONOMICS.
businesses and consumers) make strategic THERE ARE MANY FIELDS WITHIN THE BROAD
decisions and respond to incentives. DISCIPLINE OF ECONOMICS
• It analyzes how individuals or societies can
efficiently allocate their resources, such as time, • Economic History
money, personal health, human capital, food or the ➢ Labor
earth itself, in order to achieve a higher standard of ➢ Health
living. ➢ Urban Economics
• The tools learned in economics can help individuals • Economics and the law
spend money more efficiently or make sensible ➢ Financial Economic
business decisions, but this is only one of many ➢ Economic Development
applications of the discipline. ➢ International Trade
• Economics provides the insights and analytical • A health economist may use statistical models to
framework required to understand the way our world determine the causal effect of education on health
operates, from the choices we make in our everyday in order to determine how obtaining more schooling
lives to how businesses or governments achieve can benefit your health. Some of these fields are
their desired objectives commonly used to help the government make
policies.
WHY STUDY ECONOMICS? • For example, environmental economists can
determine the correct tax to charge pollution-
• Understanding economics will make you a better emitting corporations. The goal of this type of policy
thinker and problem solver. The concepts learned is to reduce the negative externality (pollution)
will help explain your own behaviors when it comes created by the corporation, thereby making society
to allocating your time, money and other resources, (as a whole) better off.
and will help you make intelligent and rational • As another example, monetary economists can
decisions. determine the best time to increase or decrease the
• Without a good understanding of economics, people interest rate, based on how the economy is
may unintentionally make irrational decisions. performing.
• For example, people tend to buy things when they
go on sale, even if they wouldn’t normally buy that
item, even at the sale price.
• Economics helps correct these fallacies by teaching
sound decision making.
DEFINITION OF MANAGERIAL ECONOMICS AND ITS • Managerial economist should have an art to put in
NATURE practice his theoretical knowledge regarding
elements of economic environment.
• Is the study of production, distribution, and
consumption of goods and services. MANAGERIAL ECONOMICS FOR ADMINISTRATION OF
• Is the study of choice related to the allocation of ORGANIZATION
scarce resources.
• Is a branch of economics that applies • Managerial economics helps the management in
microeconomics concepts, methods, and analysis decision making.
to examine how organization or business can • These decisions are based on the economic
achieve its aims and objectives most efficiently rationale and are valid in the existing economic
through decision making. environment.
• The purpose of managerial economics is to provide MANAGERIAL ECONOMICS IS HELPFUL IN OPTIMUM
economic method and scientific reasoning to solve RESOURCE ALLOCATION
managerial decision problems.
• Managerial is the study of economics, theories, • The resources are scarce with alternative uses.
principles and concepts which is used in managerial • Managers need to use these limited resources
decision making. optimally.
• Managerial Economics is the application of various • Each resource has several uses.
theories, concepts and principles of economics in • It is manager who decides with his knowledge of
the business decisions. economics that which one is the preeminent use of
• It Includes the application of mathematical and the resource.
statistical tools in management decisions.
MANAGERIAL ECONOMICS HAS COMPONENTS OF
WHY MANAGERIAL ECONOMICS IS RELEVANT FOR MICRO ECONOMICS
MANAGERS?
• Managers study and manage the internal
• Managers should be knowledgeable in terms of environment of the organization and work for the
marketing, production or operations management, profitable and long-term functioning of the
finance, and business strategy. organization. This aspect refers to the micro
• Managers study managerial economics because it economics study.
gives them insight to reign the functioning of the • The managerial economics deals with the problems
organization. faced by the individual organization such as:
➢ main objective of the organization
MANAGER - A person who directs resources to achieve a
➢ demand for its product
stated goal.
➢ price and output determination of the
ECONOMICS - The science of making decisions in the organization available
presence of scare resources. ➢ substitute and complimentary goods
➢ supply of inputs and raw material
MANAGERIAL ECONOMICS - The study of how to direct ➢ target or prospective consumers of its products.
scarce resources in the way that most efficiently achieves a
managerial goal. • Specifically, managerial economics deals with
microeconomic reasoning on real-world problems
Managerial Economics is a Science such as pricing and production decisions in
selecting best strategy in difference competitive
• Managerial Economics is an essential scholastic environments. These business decisions can be
field. analyzed through :
• It can be compared to science in a sense that it
fulfills the criteria of being a science in following 1. Risk Analysis – Various uncertainty models,
sense: decision rules and risk quantification techniques are
used to assess the riskiness of a decision.
SCIENCE IS A SYSTEMATIC BODY OF KNOWLEDGE
2. Production Analysis – Microeconomic techniques
• It is based on the methodical observation. are used to analyze production efficiency, optimum
• A science of making decisions with regard to scarce resource allocation, costs, economies of scale, and
resources with alternative applications. to estimate the firm’s cost of production.
• It is a body of knowledge that determines or
observes the internal and external environment for 3. Pricing Analysis – Microeconomic technique are
decision making. used to examine various pricing decisions including
transfer pricing, joint product- pricing, price
MANAGERIAL ECONOMICS REQUIRES ART discrimination, price elasticity estimations, and
optimal pricing method.
• Managerial economist is required to have an art of
utilizing his capability, knowledge and 4. Budgeting – Investment is used to examine a firm’s
understanding to achieve the organizational capital purchasing decisions.
objective.
 • They are affected by the external environment of the MANAGERIAL IS APPLICABLE TO DIFFERENT TYPES
economy in which it operates such as: OF ORGANIZATION:

➢ government policies, ➢ The organization providing goods and services will

➢ general price level, often be called a "business" or a "firm," terms that
➢ income and employment levels in the economy, connote a for-profit organization.
➢ stage of business cycle in which economy is ➢ Social Responsibility of Business
operating, ➢ Social welfare as well: business production
➢ exchange rate contributes to economic growth, provides
➢ balance of payment widespread employment, and raises standards
➢ general expenditure of living.
➢ saving and investment patterns of the ➢ The objective of value maximization implies that
consumers management’s primary responsibility is to the
➢ market conditions and others firm’s shareholders.
1. Responsibility to shareholder
MANAGERIAL ECONOMICS IS DYNAMIC IN NATURE ❖ Corporate Enterprise must recognize
the rights of shareholders and
➢ Managerial Economics deals with human beings
protect their interests.
(i.e. human resource, consumers, producers etc.).
❖ Should respect shareholders' right to
➢ The nature and attitude differs from person to
information and respect their right to
person.
submit proposals to vote and to ask
➢ Thus to cope up with dynamism and vitality
questions at the annual general body
managerial economics also changes itself over a
meeting.
period of time.
❖ The corporate enterprise should
IMPORTANCE OF MANAGERIAL ECONOMICS observe the best code of conduct in its
dealings with the shareholders.
• The significance or importance of business or 2. Responsibility to employees
managerial economics can be discussed as: ❖ Employees make valuable contribution
to the activities of a business
1. Managerial economics is concerned with those organization
aspects of traditional economics which are ❖ Good and fair employment practices
relevant for business decision making in real and industrial relations to enhance its
life. productivity.
2. It also incorporates useful ideas from other ❖ Recognize the rights of workers or
disciplines such as psychology, sociology, etc. employees to freedom of association
3. Managerial economics helps in reaching a and free collective bargaining.
variety of business decisions in a complicated ❖ Payment of fair wages to them and
environment. Certain examples are: provide healthy and good working
a) What products and services should be conditions.
produced? 3. Responsibility to consumers
b) What input and production technique ❖ The customer is the foundation of a
should be used? business and keeps it inexistence. He
c) How much output should be produced and alone gives employment.
at what prices it should be sold? ❖ The business enterprises should
d) What are the best sizes and locations of recognize the rights of consumers and
new plants? under-stand their needs and wants and
e) When should equipment be replaced? produce goods or services accordingly.
f) How should the available capital be 4. Obligation towards the environment
allocated? ❖ To ensure that they should not damage
4. Managerial economics makes a manager a the environment and for this purpose
more competent model builder. It helps him they should reduce as much as
appreciate the essential relationship possible air and water pollution by their
characterizing a given situation. productive activities.
5. At the level of the firm. Where its operations are ❖ They should not dump their toxic waste
conducted though known focus functional products in rivers and streams to avoid
areas, such as finance, marketing, personnel their pollution.
and production, managerial economics serves ❖ In economic theory pollution of
as an integrating agent by coordinating the environment is regarded as social cost
activities in these different areas. that must be minimized
6. Managerial economics takes cognizance of the 5. Obligation towards the Society
interaction between the firm and society, and ❖ Basic objective of producing goods
accomplishes the key role of an agent in and services to meet the needs of the
achieving the its social and economic welfare society and provide employment to the
goals. people
❖ In the present world where there are
monopolies, oligopolies in product and
 factor markets and there are STEPS TO CONSTRUCT ECONOMIC MODEL
externalities, especially detrimental
externalities such as environment • Defining the problems
pollution by the activities of business • Formulation of Hypothesis
enterprises maximization of private • Data Collection
profits does not always lead to the • Analysis of data using Basic Principles of
maximization of social benefit. economics and quantitative Techniques
• Testing of Hypothesis
OTHER IMPORTANCE OF MANAGERIAL ECONOMICS • Evaluating of results
• Is an effective management tool because it supplies • Conclusion for Decisions
all pertinent information to business executives to MANAGERIAL DECISION PROBLEMS
make informed decisions on product prices.
• Managerial economics help managers plan and Economic theory
manage an organization's capital expenses through
proper evaluations to establish profitable • Microeconomics
investment opportunities. • Macroeconomics
• It directs business executives on how to manage
Decision Sciences
profits made from conducting business activities,
given profits are the primary measure of the • Mathematical Economics
performance and growth of a company. • Econometrics
• Involves assessing existing demand for various
products and services to derive patterns that can MANAGERIAL ECONOMICS
help make a future prediction of market behavior.
• Application of economic theory and decision
OBJECTIVES OF MANAGERIAL ECONOMICS science tools to solve managerial decision problems
• OPTIMAL SOLUTIONS TO MANAGERIAL
• Incorporates useful ideas DECISION PROBLEMS
• Variety decisions
• Acts as an integrating agent Economics Managerial Economics
• Competent Model Builder
• Suitable tool kit 1. Comprehensive and wider 1. Narrow and limited scope

SCOPE OF MANAGERIAL ECONOMICS 2. It has both Micro and Macro 2. It is essentially Micro in nature
in nature and Macro in analysis
• National Income
• Employment 3. It is both Normative and
3. It is Normative science
• Monetary theory positive science
• Business Cycle
4. It is concerned with the 4. It is concerned with the
• International Trade formulation of theories and application of theories and
• Theory of economic growth principles principles of economics
APPLICATION OF MATHEMATICAL AND STATISTICAL 5. It discusses general 5. It discusses individual
TOOLS problems problems
• Economics Theories, Principles and Concepts =
APPLICATION = Managerial Decision Making
DECISION MAKING - Selection of best alternative out of
various possible alternatives.
UNCERTAINTY - Nothing can be expectable because of the
constant changes in the environment both internally as well
as externally.
RISK - It is the situation which comes under uncertainty.
ECONOMIC MODELS

• Is the structural and scientific method of

constructing or developing Solutions by using basic
economic principles, concepts, theories, and
quantitative techniques such as mathematical and
statistical tools.
SCARCITY to be virtually infinite, and you can see why scarcity
• A resource is scarce when there is not enough is a problem.
available to satisfy the various ways a society • Scarcity is a perpetual problem for economic
wants to use it. theory, which often assumes that humans have
• Because wants are unlimited but resources are unlimited wants but must find ways to fulfill these
finite, choice is an unavoidable issue in economics. wants using scarce resources.
• A situation that arises because people have
unlimited wants in the face of limited resources. RESOURCES SCARCITY
• Occurs when there are limited quantities of • Resource scarcity is the lack of availability of
resources to meet unlimited needs or desires supplies required to maintain life, or a certain
• Is the condition that results from society not having quality of life.
enough resources to produce all the things people • An increase in natural resource scarcity is defined
would like to have. as a reduction in economic well-being due to a
• Refers to the basic economic problem, the gap decline in the quality, availability, or productivity of
between limited that is, scarce resources and natural resources.
theoretically limitless wants. • In various ways, these models project increasing
• Is the limited availability of a commodity, which scarcity of food in the future.
may be in demand in the market or by the • Resource scarcity is defined as a situation where
commons. demand for a natural resource is exceeding the
• Includes an individual's lack of resources to buy supply. leading to a decline in available resources
commodities. • Natura resources for example: natural gas, petrol,
• Scarcity, also known as paucity, is an economics coal, gold
term used to refer to a gap between insufficient • and are scarce
resources and the many theoretical needs that • These are made by nature and since so many
people. centuries we are extracting and using mem. Supply
• Scarcity or paucity in economics refers to limitation would not last forever but demand is rising_
– limited supplies, components,
• raw materials, and goods-in an environment with TYPES OF SCARCITY
unlimited human wants. It is the fundamental 1. Supply-Induced Scarcity
economic problem of having what appears to be 2. Demand- Induced Scarcity
limitless human wants in a world with limited 3. Structural Scarcity
resources. 4. Material scarcity
• Is the result of people having "Unlimited Wants and 5. Contrived scarcity
Needs," or always wanting something new, and
having "Limited Resources." SUPPLY-INDUCED SCARCITY
• Limited resources mean that there are never • Environmental degradation decreases the overall
enough resources, or materials, to satisfy, or fulfill, amount of a limited natural resource, decreasing
the wants and needs that every person have. the amount available to each individual.
• The problem of scarcity is regarded as the • A human induced decline in the quantity or quality
fundamental economic problem arising from the of a renewable resource leads to worsening supply
fact that, while resources are finite, society's induced scarcity.
demand for resources is infinite.
• Scarcity is a relative rather than an absolute DEMAND- INDUCED
concept - water is scarcer in the desert and less • Population growth or increasing consumption
scarce in the rainforest. levels decrease the amount of limited natural
• Scarcity implies the resources that we value; time, resources available to each individual.
money, labor, tools, land, and raw materials that • Demand-induced scarcities are caused by the
exist in limited supply. effects of population growth, which reduces a
• There are simply never enough resources to meet resource's per capita availability by dividing it
all our needs and desires. This condition is known among more and more people.
as scarcity.
• Scarcity can involve non-renewable resources, STRUCTURAL SCARCITY
such as oil, precious metals and helium. It can also • It is often caused by a severe imbalance in the
involve potentially renewable resources, which are distribution of wealth and power that results in
being consumed faster than their ability to some groups in a society getting disproportionately
replenish (e.g. over-fishing, excess use of fresh large slices of the resource pie, while others get
water). slices that are too small to sustain their livelihoods.
• At any moment in time, there is a finite amount of • Such unequal distribution or structural scarcity is a
resources available. key factor in virtually every case where scarcity
• Even when the number of resources is very large, contributes to conflict.
it is limited. Because these resources are limited, • Often the imbalance is deeply rooted in institutions
so are the numbers of goods and services we can and class and ethnic relations inherited from the
produce with them. colonial period.
• Combine this with the fact that human wants seem
MATERIAL SCARCITY 5. making it unfit for consumption.
• This reflects a physical rarity of a thing or product. 6. For example, a nuclear power disaster causes
radiation which makes drinking water and farmland
CONTRIVED SCARCITY unusable in the surrounding area.
• Is a reflection of a systemic effort to make a thing
scarcer in the mind of the buyer (eg., diamond STRUCTURAL SCARCITY
industry, loans industry and qualifications 1. This occurs when the problem is one of
industries). distribution.
• On the surface, these are easily described by any 2. There is abundant water in the world, but in certain
set of actions that place artificial barriers to access areas, there may be a shortage of supply due to
for something that is desired. lack of access. A country with great inequality may
cause scarcity for some.
CAUSES OF RESOURCE SCARCITY 3. For example, resources may be owned by a small
• Environmental scarcity is caused by the percentage of the population and the poor may be
degradation and depletion of renewable resources unable to afford to buy the water supply.
(e.g. a specific tract of cropland), the increased 4. Often scarcity is caused by a combination of
demand for these resources, and/or their unequal demand and supply induced effects. A rise in
distribution. demand, e.g. due to rising population causes
• Population growth and increased per capita overcrowding and population migration to other
resource consumption can cause depletion and fragile ecological areas.
degradation, which can in turn produce a decrease 5. The increased farming and use of these fragile
in total resource supply or, in other words, a areas can lead to resource degradation causing a
decrease in the size of the total resource pie‟. further fall in the supply of viable land.
• A shortage occurs when more people want to buy 6. This creates a negative feedback loop with scarcity
a good at the current market price than what is causing more strain on the limited resources and
available. therefore more pressure to cause more scarcity.

THERE ARE THREE MAIN REASONS WHY A Scarcity of FACTORS OF PRODUCTION:

SHORTAGE CAN OCCUR: 1. Land
1. Increase in demand (outward shift in demand 2. Labor
curve) 3. Capital
2. Decrease in supply (inward shift in supply curve). 4. Entrepreneurship
Resource scarcity refers are also caused by the
declining availability of renewable natural Land
resources such as freshwater or soil; and • All natural resources that are used to produce
3. Demand-induced scarcity: Population growth or goods and services.
increasing consumption levels, and the decrease • In economics, land refers to the “gifts of nature,” or
amount of limited natural resources available to natural resources not created by humans.
each individual. • Economists tend to think of land as being fixed, or
in limited supply.
OTHER CAUSES OF SCARCITY INCLUDES: • Because the supply of a productive factor like land
1. Demand-induced – High demand for resource; is relatively fixed, the problem of scarcity is likely to
2. Supply-induced – supply of resource running out; become worse as population grows in the future.
3. Structural scarcity – mismanagement and
inequality; Capital
4. No effective substitutes • Any human-made resource that is used to create
other goods and services.
DEMAND-INDUCED SCARCITY • Another factor of production is capital–the tools,
1. Demand induced scarcity could occur due to: equipment, machinery, and factories used in the
2. Growth in population; production of goods and services.
3. Growth in real GDP and incomes enabling people • Such items also are called capital goods to
to consume more resources than before; and distinguish them from financial capital, the money
4. Changes in preference, e.g. growth in demand for used to buy the tools and equipment used in
mobile phones, places greater demand on certain production.
metals, like cobalt and nickel used in the
production of lithium batteries. Labor
• Any effort a person devotes to a task for which that
SUPPLY-INDUCED SCARCITY person is paid.
1. Supply induced scarcity can also be due to: • Unskilled, Semi-skilled, Skilled, Professional.
2. Bad weather/crop failure: A localized scarcity can • People with all their efforts, abilities, and skills.
occur if there are particular problems.
3. For example, a fungal disease could decimate a Entrepreneurship
crop like olive trees, causing a shortage of olives. • A person who starts a business and takes the risks
4. Degradation of supply. Another form of scarcity is by deciding how to utilize the other three factors of
when the resource is polluted production.
 • Some people are special because they are the
innovators responsible for much of the change in NEEDS
our economy. • Something that, if you do not have it for a long
• A risk-taker in search of profits who does period of time, you may die.
something new with existing resources. • This includes air, food, water, but also some basic
• They provide the initiative that combines the amenities like entertainment and love.
resources of land, labor, and capital into new • Things that you must have in order to survive.
products.
WANTS
The basic economic problem is how to allocate scarce • Something that is non- essential for life his includes
resources among alternate uses. cinema tickets, speedboats, Television and others.
• Economies need to choose what we produce, who • Wants are a step ahead of needs and are largely
we produce for (allocation), and how to produce it dependent on the needs of humans themselves.
(using the economic systems – markets). • It is human nature to have many goods in life.
There would be an endless list of such wishes. Let
THE BASIC ECONOMIC PROBLEM us call these wishes as ‘desires’.
• Unlimited Needs and Wants • One may desire a good house, a car, a computer,
• Limited Supply good food, decent clothes and so on.
• Four Economics Questions:
1. What should an economy produce? How can one get all of these?
2. Who do we produce for? • One may have these things if he/she has money. If
3. How do we provide goods & services? one does not have enough money, then only one
4. Who decides what we produce? or two of these or none of these could be
purchased.
What should an economy produce? • Which of our desires are to be fulfilled depends
• Do we produce necessities or luxury goods? upon our capacity to pay or purchasing power.
• Do we produce one type of car or many types of • That is why not all desires can be met as we need
car? money to satisfy them.
• Do we produce in the short run (consumer goods) • The desires which are backed by money and
or the long run (capital goods)? willingness to purchase may be called wants.
• Is there a point to some goods, like cigarettes or • A beggar may desire to have a car but this desire
PhDs? can not be called a want as it is not backed by
• Is there a use for smaller niche goods and adequate money.
unhealthy mass • However, if a rich man desires to have a car and is
willing to purchase it, the desire can be turned into
Who do we produce for? a want.
• Who gets the better cars and who gets the cheap
cars? HOW DO WANTS AND GROW
• Does anyone want an electric car? • Wants are a part of our living. They arise with the
• How do we allocate university places? birth of man. Man in ancient times was satisfied
• What’s the point in new housing if few can buy it? while living in forests, drinking water from the
streams, plucking fruits from trees or eating animal
How do we provide goods & services? flesh to satisfy hunger.
• What do we believe in – cheap goods or quality • With the discovery of fire man started cooking food.
goods? This led to the discovery of new food items. Man’s
• Do we use machines or people to make goods? taste grew and expanded. A large variety of food
• Do we recycle? stuffs came into existence. Today you can find
• How much damage should we do to the different varieties of tastes, colors and shapes in
environment? (Yes, it’s not possible to keep the food items.
environment damage free!) • As regards clothing, man has moved from
unstitched animal skins and tree leaves to a variety
Problems of scarcity/choice of clothes. In order to live better, man discovered
• Scarcity forces people to make choices. To make and invented new items of clothing. As knowledge,
sure we get the best out of our goods/services, we taste and fashion are increasing, new and better
use rankings (priorities) to give us the best products in clothing are emerging.
happiness from the goods/services. • In a similar fashion, need for housing has also
• This not only works for people, but also businesses undergone a tremendous change. Man has moved
and governments. from caves to huts made of straw and pucca
• We call these choices trade-offs (a balance houses made of bricks. Now a days, houses made
achieved between two desirable but incompatible of wood, pucca houses, bungalows and palaces
outcomes) with fancy doors, windows and all sorts of
• Do we go and see a movie or go bowling? decorative paints and fixtures are in use.
• Over a period of time, these wants have grown.
SCARCITY = Wants > Availability of Resources How did it happen?
 • There are some other wants which make our life
easy and comfortable. These are called comforts. 3. Some Wants arise again and again
• Examples of comforts may be coolers, scooter etc. • Most wants recur. If they are satisfied once,
Some goods give us pleasure but they are very they arise again after a certain period.
costly. • We eat food and hunger is satisfied but after a
• For example, luxurious cars, diamond jewelry etc. few hours, we again feel hungry and we have
such good are called luxuries. to satisfy our hunger again with food.
• Therefore, hunger, thirst etc. are such wants
SATISFACTION OF WANTS which occur again and again.
• No, As soon as one want is satisfied another takes 4. Varying Nature of Wants
its place; our wants increase because we desire to • Wants vary with time, place and person.
live a better and comfortable life. • They are also influenced by many factors like
• As new goods and service are developed, we want income, customs, fashion, advertisement etc.
them. Wants can be satisfied by goods and • Thus, wants have been found to vary and to
services. multiply with the economic development of a
• Goods and services can be produced with the help country
of resources. Land, labor, capital and 5. Presents wants are more important than future
entrepreneurship are called resources which help wants
in the production of goods and services. Wants are • Present wants are more important. A person
unlimited but the resources to satisfy them are uses most of his limited resources for the
scarce. As soon as one want is satisfied, another satisfaction of present wants. He does not
takes its place. worry much about his future wants because
• Some of these wants can be satisfied by man with future is uncertain and less urgent.
his limited income while for others he may not be • For example, providing for the education of
able to do so. It is, therefore, not possible to fulfill children in the present is more important than
all our wants though a single want is satiable. providing for old age security in future.
6. Wants change and expand with development
WANTS AND NEEDS DRIVE THE ECONOMY • A simple example to show how wants are
• Businesses make money by satisfying the wants changing is the telephone.
and needs of consumers and other businesses. • Earlier, in the rural areas there were not many
• In this way, wants and needs drive the economy. telephones, but today telephone has become a
An Abundance of Wants and Needs necessity for everybody for keeping in touch
• Wants and needs determine what products and with their near and dear ones.
services businesses provide. • People using telephone earlier, are now using
mobile phones.
CHARACTERISTICS OF WANTS • They want more and more facilities in their
1. Wants are unlimited mobile phones such as, Camera, Internet and
• Famous economist Marshall has rightly said so on.
that human wants are countless in number and
are varied in kind As soon as one want is Satisfying Wants and Needs
satisfied another want takes its place. • Businesses provide goods and services to satisfy
• This endless circle of wants continues through the wants and needs of businesses and
out life. consumers.
• For example, a person who has never used a
fan would wish to have a fan. When this want How Resources Satisfy Wants
is satisfied, he would wish to get an air cooler • As stated earlier wants are satisfied with the use of
and a scooter. goods and services.
• Once these wants are satisfied, then he would • To produce these goods and services, resources
wish to have an air conditioner, a car and so are used.
on. Thus, we see wants never come to an end. • With ever growing wants, we have been making
• When this want is satisfied, he would wish to greater use of resources.
get an air cooler and a scooter. • Resource may be natural or man-made. All
• Once these wants are satisfied, then he resources can be classified into land, labor, capital
would wish to have an air conditioner, a car and entrepreneurship.
and so on. Thus, we see wants never come to • For example, for the production of wheat, we use
an end. land, labor, tractor pump set etc. (capital). Farmer
2. A single want is satiable organizes all these factors to produce wheat. He
• Each want taken separately can be satisfied. also uses seeds, manure and fertilizers in this
• It has rightly been said that there is a limit to process.
each particular want. • Thus, production of wheat involves the use of
• For example, if a man is thirsty he can satisfy resources. Similarly, production of all other goods
his thirst by taking one, two or three glasses of & services also involves the use of resources.
water and after that he does not want water at
that point of time.