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MANAGERIAL ECONOMICS-I

Course code: 10MT12 Credits: 2.50 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: Basic Concepts in Economics Choice as an economic problem- Basic postulates- Economic concepts-Factors of production-The circular flow of economic activity-The nature of the firmEconomics and decision making-Economic models Unit II: Demand and Supply Demand theory and analysis- Supply theory and analysis- Application of price, income and cross elasticity of demand- The theory of consumer choice-Demand forecasting techniques Unit III: Theory of Production and Costs The production function-Economies of scale and scope- Cost analysis-Profit contribution analysis Unit IV: Market Structure Perfect competition-Monopoly-Monopolistic competition-Oligopoly-Game theory and strategic behaviour Unit V: Pricing Decisions and Other Issues Pricing of goods and services- Pricing of factors of production- Ethics and Economics
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Suggested Books for Reading


Text Books:
H. Craig Petersen and W. Cris Lewis, Managerial Economics, 4th Edition, Pearson Education Inc., 2009 Reference Books: Samuelson and Nordhaus, Economics, Tata McGraw-Hill Publishing Company Limited New Delhi, 19th Edition, 2010 Ravindra H. Dholakia and Ajay N. Oza, Microeconomics for Management Students, 2nd Edition, Oxford University Press, 2008 Tim Harford, The Undercover Economist, Abacus, 2006
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Suggested Websites for Regular Reference


http://www.hindu.com/biz/2010/08/02/stories/20100802522516 00.htm http://www.thehindu.com/news/national/article490453.ece http://www.hindu.com/2010/07/15/stories/2010071555101800. htm http://www.thehindu.com/opinion/columns/Chandrasekhar/artic le520543.ece https://www.cia.gov/library/publications/the-worldfactbook/geos/in.html http://www.rbi.org.in/home.aspx

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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.

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Guide to Economics Reasoning


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?

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Should graduate student sell a car to his fatherin-law?


$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?

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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: 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


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 Microeconomi cs Production/Outp ut in Individual Industries and Businesses How much steel How many offices How many cars Prices Price of Individual Goods and Services Income Distribution of Income and Wealth Employment Employment by Individual Businesses & Industries Jobs in the steel industry Number of employees in a firm

Price of medical care Price of gasoline Food prices Apartment rents

Wages in the auto industry Minimum wages Executive salaries Poverty


National Income Total wages and salaries Total corporate profits

Macroeconomi cs

National Production/Outp ut

Aggregate Price Level Consumer price index Producer Price index Rate of Inflation
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Employment and Unemployment in the Economy Total number of jobs Unemployment 20 rate

Total Industrial Output Gross Domestic Product 10 December 2013Growth of Output

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

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Economic Concepts
Factors of production: P = f( land , labour, capital, enterprise) 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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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

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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
Maximizing versus satisficing

Economic profit refers to revenues minus all relevant costs, both explicit and implicit.

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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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