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FIRMS & MARKETS

LECTURE 1 - INTRODUCTION

Prof. THIAGU RANGANATHAN


AGENDA

SCARCITY, CHOICE, AND OPPORTUNITY COSTS

OPTIMIZATION

MARGINAL ANALYSIS

EQUILIBRIUM
SCARCITY, CHOICE AND OPPORTUNITY COSTS

This course is a study of behaviour of consumers, firms, and markets

It will deal with the choices these economic agents make, the context in which they
make these choices, and the implications of these on society

The Course will also introduce you to the interventions that the Regulator/Government
can make in the markets when they fail
SCARCITY, CHOICE AND OPPORTUNITY COSTS

What is the opportunity cost of you attending a two year PGP course in IIM Nagpur?

What is the opportunity cost of you not sitting through placements?

If you start a manufacturing firm after your MBA, spend Rs. 1 crore on inputs and earn Rs.
1.08 crores in Revenues, what is your accounting profit? What is your economic profit?

Do you think there were more entrepreneurs from the past batches of older IIMs(A,B,C)
than the present batch? Why?
More on Opportunity Costs

Do you think MBA will sought out more when economy is in good shape or when it is in a bad
shape?
Hint: The number of applicants to MBA Programs for class of 2008-09 increased over the previous
year by 79% in the US, 77% in the UK, and 69% in the other European programs
Eisenhowers chance for peace speech from 1953:
The cost of one modern heavy bomber is this:
- a modern brick school in more than 30 cities.
- It is two electric power plants, each serving a town of 60,000 population.
- It is two fine, fully equipped hospitals.
- It is some 50 miles of concrete highway.
- We pay for a single fighter plane with a half million bushels of wheat.
- We pay for a single destroyer with new homes that could have housed more than 8,000 people.
SCARCITY, OPPORTUNITY COSTS, AND CHOICE FOR THE
FIRM AND A CONSUMER
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Scarcity is reflected by the fact that the points beyond the
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production possibility frontier (for the firm) and the budget line
Apple iPods

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(for the consumer) are unattainable
10

5 Opportunity cost is reflected in two ways:


0
Making more or consuming more of one product comes at
0 2 4 6 the cost of making less or consuming less of the other
Apple Watches
product.
Any point inside the PPF curve or the budget line is
9 inefficient as we forego opportunity of making more of at
8
7
least one product
6
Shoes

5
4
In this context choices are made by consumers and firms on
3 the boundary. Even on the boundary, there are multiple
2
1
choices. Our course is about studying how firms and
0 consumers choose a particular point on the boundary
0 5 10 15 20 25 30
Shirts
OPTIMIZATION

Firms are assumed to maximize profits; Consumers are


assumed to maximize their level of satisfaction; They choose
alternatives that will maximize their net benefits
Marginal Analysis

As a manager, what is the value of the


Control Gross Total Net Marginal Marginal Net Marginal control variable you will finalize upon?
Variable Revenue Costs Revenue Revenue Costs Benefits

0 0 0 0 --- --- ---

1 90 10 80 90 10 80 As a manager, you will want to push


2 170 30 140 80 20 60 yourself till you receive a marginal
benefits that exceeds you marginal costs
3 240 60 180 70 30 40

4 300 100 200 60 40 20

5 350 150 200 50 50 0


In deciding on which control variable to
6 390 210 180 40 60 -20 change (participation), the manager has
7 420 280 140 30 70 -40
to consider net revenue while to decide
how much of the selected variable to
8 440 360 80 20 80 -60 change (extent), the manager should use
9 450 450 0 10 90 -80
marginal analysis
10 450 550 -10 0 100 -100
EQUILIBRIUM

Equilibrium arises as you are not the only


one optimizing in an economy

An analogy for equilibrium is the


checkout lines in a supermarket

People will avoid queues with longer wait


times and move to queues with shorter
wait times. At equilibrium, you will not
expect people to move between queues

Source: David Acemoglu, David Laibson and John A. List. (2016). Microeconomics. Pearson Education
Limited Global Edition
SUMMARY

Consumers
maximize
their levels
of
Opportunity satisfaction
Time, Money, and Costs Markets allow
other resources are
scarce While we do so, we interaction of
We make choices in account for opportunity the two and
presence of this costs (cost of the best we obtain an
scarcity foregone alternative) equilibrium

Scarcity
Producers
maximize
their profits