MICRO ECONOMICS FOR MANAGERS

Course code: 15MT12

Credits: 3
Total No. of sessions: 25
Course Objectives:
Introduce basic micro-economic concepts such as theories of demand,
supply, pricing and costs etc.
Build a conceptual foundation for courses in the functional areas of
management such as marketing, finance etc. for understanding the behaviour
of consumers, firms and markets.

Student of MBA/PGDM: Will I ever use this?

Professor: Only if your career is successful.
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 Course Content
Unit I: Preliminaries in Economics
Choice as an economic problem- Basic postulates- Economic concepts-Factors of production-The
circular flow of economic activity-The nature of the firm-Concept of Economic Profit- Economics and
decision making-Economic models

Unit II: Demand Management

Demand theory and analysis- Application of price, income, cross and advertisement elasticity of
demand- The theory of consumer choice-Regression techniques and demand estimation & forecasting

Unit III: Production and Cost Management

Supply theory and analysis-Production theory and analysis: The production function-Economies of scale
and scope- Cost analysis-Profit contribution analysis

Unit IV: Profit Maximization in Various Market Structure

Perfect competition-Monopoly-Monopolistic competition-Oligopoly-Game theory and strategic behavior

Unit V: Pricing Practices and Risk Analysis

Pricing of multiple products- Price discrimination- Average cost plus pricing- Marginal cost pricing-
Transfer pricing- Peak load pricing- Principal agent problem- The problem of moral hazard-A symmetric
information

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 Suggested Books for Reading
Text Books:
1.William A. McEachern & Simrit kaur, Micro ECON, 2013 Edition,
Cengage Learning

Reference Books:
1. Tim Harford, The Undercover Economist, Abacus, 2006.
2. Suma Damodaran, Managerial Economics Oxford
University Press
3. Business Line (Newspaper)
4. The Economic Times (Newspaper)
5. Business Economics ( Fortnight magazine)

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 Economic Mysteries
Why is airline food so bad?
Why have paper towels replaced hot-air hand dryers in public restrooms?
Why is CCD charging different than roadside shop
Why is that you pay more for a first day movie show?
Why do prices of some goods, like apples, go down during months of heaviest
consumption
Why cant I increase the price of bidi?
Why is cricket making more money than hockey or other game?
Why is petrol bunk mechanized in US and not in India
Why do color photographs cost less than black and white photographs?
Why are we not selling all the consumer items through PDS?
Why is vegetable cheaper in Ooty?
Why dont you pay for sand in the sea shore?

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 Economics Reasoning Quiz
The best things in life are free. (T/F)
The largest cost of going to college is tuition, room and board.
(T/F)
The purpose of economic activity is to improve the well-being of
some people at the expense of others. (T/F)
Anything worth doing is worth doing well. (T/F)
Life is priceless. (T/F)
Your standard of living is different from that of your parents or
grandparents when they were your age. (T/F)

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 Guide to Economics Reasoning
PEOPLE ECONOMIZE. People choose the alternative which seems best to them
because it involves the least cost and the greatest benefit.
ALL CHOICES INVOLVE COST. Cost is the second best choice given up when people
make their best choice.
PEOPLE RESPOND TO INCENTIVES. Incentives are actions or rewards that
encourage people to act. When incentives change, peoples behavior changes in
predictable ways.
ECONOMIC SYSTEMS INFLUENCE INDIVIDUAL CHOICES AND INCENTIVES.
How people cooperate is governed by written and unwritten rules. As rules change,
incentives change and behavior changes.
VOLUNTARY TRADE CREATES WEALTH. People can produce more in less time by
concentrating on what they do best. The surplus goods or services they produce can be
traded to obtain other valuable goods or services.
THE CONSEQUENCES OF CHOICES LIE IN THE FUTURE. The important costs and
benefits in economic decision making are those which will appear in the future.
Economics stresses making decisions about the future because it is only the future that we
can influence. We cannot influence things that have happened in the past.

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 Cost-Benefit Approach to Decision Making
C(X) = Cost of doing activity X
B(X) = Benefit of doing activity X
If B(X) > C(X) then do X

Should I go for movie today?

B(X) = $50 to you.
C(X) = $30 for ticket & travel.
Should you go to movie?
EXAMPLE
Mr. X must decide whether to go out with your friends to a local Restaurant on a Thursday night.
Thebenefits include spending time with your friends and receiving free treats from the Chef (who
happens to be your best friend). The costs of the night include(at minimum) a cab ride home, missing
class the next day (and possibly missing a surprise quiz), and waking up with a nasty hangover. Costs
could run higher.

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Should graduate student sell a car to his father-
in-law?
EXAMPLE-1:
$10,000 Chevrolet
Car sells for $15,000 in home country.
Estimates he can sell it for $14,000.
Father-in-law wants to pay $10,000.
What is the graduate students opportunity cost if he sells it to his father-in-law?
EXAMPLE-2:
Giving up your favourite movie to study (in order to get good grades).
The opportunity cost is the movie that has been forgone

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 Why Study Economics

Managers need to make

decisions with multiple
choices.

Economics deals with trade,

production, consumption,
external environment
(government..), international
environment, money market,
physical market and so on.

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 Economics as a science
Choice making can be an art.
Can also be viewed as a problem requiring a solution
Scientific inquiry of a problem: This can take a form of
first analyzing the situation by identifying all the
relevant elements, variables, or factors; and then,
investigating the inter-relationships between these
variables.
Investigator makes some postulates
Positive science: concerned with what is
Normative science: what is right and wrong or what
ought to be

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 Economics: Layman Definitions

Economics is a social science concerned chiefly with way the

societies chooses to employ its limited resources, which have
alternative uses to produce goods and services for present ant
future consumption
A social science concerned with proper uses and allocation of
resources for the achievement and maintenance of growth with
stability
It is an art of analyzing, recording, interpretation and
communicating the results of economic transaction

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 Economics from Economists.
Adam Smith (Father of Economics): Economics is science of wealth

JS Smith: He supports the definition of Adam Smith. Economics is

the practical science of production and distribution of wealth.

Marshall: "Economics is study of mans action in ordinary business of

life, it enquires on how he gets his income and how he spends it.
Thus it is on one side its a study of money and on the other and more
important side, a study of man. "In this definition the expression
mans action in ordinary business of life refers to the fact that
economics studies the activities of real, social and normal human
beings. While the expression how he gets income and how he spends
it indicates the study of wealth. Marshall doesnt indicate the nature
of science. He maintained that economic is positive science.

Robbins: "Economics is science which studies human behavior as a

relationship between ends and scare means which have alternative
uses."
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 Choice as an economic problem
Preferred definition of economics: Study of choice under conditions of
scarcity
Scarcity: Situation in which the amount of something available is
insufficient to satisfy the desire for it. And becomes challenging as
scarce resources have alternative uses.
Limitations force each of us to make choices
Economists study choices we make as individuals, and consequences of
those choices.
Economists also study more subtle and indirect effects of individual
choice on our society
Will people work more or less hours if the government cuts taxes?
Will a gasoline tax cut petrol consumption?
The outcome depends on the separate choices of millions of people
The problem of choice becomes complicated if the numerous wants
can be ordered or prioritized

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Economist. Adam Smith (Father of Economics)
Published :The Wealth of Nations
(1776)
The book identified land, labor, and
capital as the three factors of
production and the major
contributors to a nation's wealth.
Smith's view, the ideal economy is
a self-regulating market system that
automatically satisfies the economic
needs of the populace.
He described the market mechanism
as an "invisible hand" that leads all
individuals, in pursuit of their own
self-interests, to produce the greatest
benefit for society as a whole.

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Economist. Thomas Robert Malthus
Used the idea of diminishing returns to
explain low living standards.
Human population, he argued, tended to
increase geometrically, outstripping the
production of food, which increased
arithmetically.
The force of a rapidly growing
population against a limited amount of
land meant diminishing returns to labor.
The result, he claimed, was chronically
low wages, which prevented the
standard of living for most of the
population from rising above the
subsistence level.

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Economist. Karl Marx
Marx argued that capitalism, like
previous socioeconomic systems,
would inevitably produce internal
tensions which would lead to its
destruction.
Just as capitalism replaced feudalism,
he believed socialism would, in its turn,
replace capitalism, and lead to a
stateless, classless society called pure
communism

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 Divisions of Economics
Economics can be divided into two broad categories:
MICRO Economics-
Concealed in the aggregate data are countless changes in the output levels of
individual firms, the consumption decisions of individual consumers, and the
prices of particular goods and services.
It focuses on the behaviour of the individual actors on the economic stage,
that is firms and individuals and their interaction in the markets.
MACRO Economics
Its a study of the economic system as a whole. It includes techniques for
analyzing changes in total output, total employment, the consumer price
index.
The unemployment rate, and exports and imports. It addresses question
about the effect of changes in investment, government spending, and tax
policy on exports, output, employment, and prices.

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 Divisions of Economics
Examples of microeconomic and macroeconomic concerns
Production Prices Income Employment
Microeconomi Production/Outp Price of Distribution of Employment by
cs ut in Individual Individual Goods Income and Individual
Industries and and Services Wealth Businesses &
Businesses Industries
Price of medical Wages in the Jobs in the steel
How much steel care auto industry
How many Price of gasoline industry Number of
offices Food prices Minimum wages employees in a
How many cars Apartment rents Executive firm
salaries
Poverty
Macroeconomi National Aggregate Price National Income Employment
cs Production/Outp Level Total wages and and
ut salaries Unemployment
Consumer price in the Economy
Total Industrial index Total corporate
Output Producer Price profits Total number of
Gross Domestic index jobs
Product Rate of Inflation Unemployment
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November 2017
 POSITIVE vs NORMATIVE ECONOMICS

Positive Economics
It is about what is
e.g. It explains why great depression occurred.
Normative Economics
It is about what should be

e.g. It aims to develop and recommend policies that will prevent another
great depression

The statement
a government deficit will reduce unemployment and cause an increase in prices or
inflation is a positive hypothesis,
while
in setting policy, unemployment ought to matter more than inflation is a normative
hypothesis.

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 What is Managerial Economics
Its a applied microeconomics
It focuses on demand, production, cost, pricing, market structure,
and government regulation.
According to Haynes, Mote and Paul- Managerial Economics is
economics applied in decision-making. It is a special branch of
economics bridging the gap between abstract theory and
managerial practices.
According to Spencer and Seegalman- Managerial Economics is
the integration of economic theory with business practice for the
purpose of facilitating decision-making and forward planning by
management.
Thus, it deals with Decision making and forward planning. Its
Prescriptive in nature.

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 Basic postulates
Economic agent makes choice according to some rules. We do not
deal with behaviour that is inconsistent, illogical and random
He has clarity of purpose. A clear motive which drives him to make
choices under different circumstances
He is lively, intelligent, capable of assimilating whatever
information is available to him from environment

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 Economic Concepts
Economic Activity:
Any activity which involves use of scarce resources to satisfy some human needs or
wants is economic activity.
Consumption activity: direct satisfaction of human wants
Production activity: indirect satisfaction/ future use
Exchange: intermediate activity between production and consumption
Investment: The part of saving which is used for further production

Utility:
The degree of satisfaction derived from the consumption of goods and services is
known as utility.
It is person-time-place-consumption period specific
Utility of sand near sea and in city

Economic goods : utility, scarcity, and transferability

Scarcity: is the central focus of economics. This scarcity gives rise to opportunity cost.
The opportunity cost comes in at every level of economic activity
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 Economic Concepts
Wealth:
Its is a aggregation of all economic goods and services, and includes natural
resources. Its a stock.
Income:
What a person earns by selling or providing services of the resources he owns. Its a
Flow
Price and Value:
The price of a commodity is the value expressed in money terms, and is always
expressed per unit of a commodity.
The ratio of prices of commodities is known as the relative prices. Exchange value
of a commodity is measured.
If the price of rice is Rs.10/kg and price of wheat is Rs.5/kg then exchange value of
rice in terms of wheat is 2
Factors of production:
P = f( land , labour, capital, enterprise)

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 Economic Concepts

Opportunity Cost:
Because of scarcity every action carries an opportunity cost
Opportunity cost: True cost of any choice
Cost of going to a movie
Cost of ticket
Cost of your time

The opportunity cost of any choice is what we must forego when we make that
choice. The opportunity cost of value of the next best alternative.

Opportunity Cost of college: Fees (explicit costs)

What is your next best alternative (implicit costs) Working?

Average income for an 18 year old HS graduate who works full time is about
$24000.

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 Economic Concepts
Production The process by which resources are transformed into
useful forms
Resources/ Inputs Anything provided by nature or previous
generations that can be used directly or indirectly to satisfy human
wants.
Capital Things that have been already been produced that are in turn
used to produce other goods and services
Producers Those people or groups of people, whether private or
public, who transform resources into usable products.
Outputs Usable products

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 Basic Concepts: Economic model
An economic model typically consists of several functional
relationships, conditions, or constraints on one or all of these
functions, and one or more equilibrium conditions.

Generally, economic models are used to demonstrate an economic

principle, to explain an economic phenomenon, or to predict the
economic implications of some change affecting one or more of the
functional relationships.

Models are the replica of the real case. It represents most of the
features of the real life cases.

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 Economics and Decision Making
Nobel prize-winning economist Herbert Simon identifies
the primary activities in decision making:

Finding occasions for making decisions

Identifying possible courses of action
Evaluating the revenues and costs associated with each
course of action.
Choosing that one course that best meets the goal or
objective of the firm (i.e., that maximizes the value of
the firm)

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 The scope and subject-matter of economics can be better
known by answering the following questions

What goods are to be produced and in what quantities?

How are the different goods to be produced? i.e. what production methods
are employed for the production of various goods and services?

How the total output of goods and services of a society is being

distributed among its people?

Whether all available productive resources with a society are being fully
utilized?

Is the economys productive capacity increasing, declining or remaining

static overtime?
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 The scope and subject-matter of economics can be better
known by answering the following questions

WHAT, HOW, AND FOR WHOM

i.e.
allocation of resources,
methods of techniques,
and distribution

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 Circular flow of economic activity
Household: persons living under one roof or occupying a
separate housing unit, having either direct access to the outside (or to a
public area) or a separate cooking facility. HH provides land, labour ,
capital and entrepreneurship to the business. They are supplier of the
factors of production.
Business: Takers of factors of production. An organisation or economic
system where goods and services are produced. They are exchanged for
money.
Capital market: market where buyers and sellers engage in trade of
financial securities like bonds, stocks, etc., HH put their savings and
business borrow for their capital requirements
Government: group of people with the authority to govern a country or
state; a particular ministry in office.
Rest of the world: foreign countries/outside the territory of any nation

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 FACTOR PAYMENT (Rent, Salary, Interest Profit/Loss)
FACTOR SERVICES (Land, Labour, Capital,Entrepreneurship)

SAVINGS LOANS

HOUSEHOLD CAPITAL BUSINESS

INTEREST INTEREST

MONEY
SELLS FINAL GOODS & SERVICES
CAPITAL
FLOW
SUBSIDIES
DIRECT TAX INDIAN
GOVERNMENT CORPORATE TAX
SERVICE,SECURITY,EMPLOYMENT
FLOW OF INVESTMENTS SETTING UP ECONOMIC
E.g.: FII,FDI POLICIES Eg: WTO, SAARC
FACTOR PAYMENT REST OF THE
WORLD
FACTOR SERVICES
IMPORT EXPORT

INDIAN BUSINESS
CIRCULAR FLOW OF ECONOMIC ACTIVITY
 The nature of the firm
Firms exists because of the costs of production are lower and
returns to the owners of labor and capital are higher than if the firm
did not exist.

Profit maximization is the short run or long run process by which a

firm determines the price and output level that returns the
greatest profit. There are several approaches to this problem.

Maximizing versus satisfying

Economic profit refers to revenues minus all relevant costs, both

explicit and implicit.

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 The Economic Problem
Problem of allocation of resources
The problem of allocation of resources arises due to the scarcity of
resources, and refers to the question of which wants should be satisfied
and which should be left unsatisfied; in other words, what to produce
and how much to produce.
The problem of all economic efficiency
Resources are scarce and it is important to use them as efficiently as
possible. Thus, it is essential to know if the production and distribution
of national product made by an economy is maximally efficient.

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