Managerial Economics

PGDM -HR : 2019 – 2021

Term 1 (July – September, 2019)
(Lecture 01,02,03)
Course Description

• This course seeks to provide students with a

rigorous exposure to underlying economic
concepts and principles, explaining both the
strengths and limitations of these theories

• Such a holistic understanding is important for

managers to be able to meaningfully apply the
tools of economic analysis to real life situations.
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Course Objectives/Expectations

• This course makes no claim to train students to become

professional economists

• Be familiar with the basic principles of economic decision-

making

• Comprehend the methods, content and scope of economic

principles in managerial decision-making

• Apply the principles and concepts discussed to real life

problems

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Pedagogy

• The class will be centered around the class lectures

• Students are however strongly encouraged to participate in

proceedings, both by feeling free to seek clarification and
asking pertinent questions.

• Students are required to regularly review the material covered

in class, stay in-step with readings and complete assignments,
where applicable.

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Text Book & References
Text:
Pindyck, Rubinfeld, Microeconomics, 8th Edition, Pearson
Education (PR, hereafter)

• Dominick Salvatore, Managerial Economics in a Global Economy,8th Edition, OUP USA, 2011
(ISBN:978-93-8509-6)
• Datta, Debabrata, “Managerial Economics”, PHI learning Pvt. Ltd, 2017 [ISBN No. 978-81-
2135241-4] (DD, hereafter)
• N. Gregory Mankiw, Principles of Microeconomics, Cengage Learning
• Besanko, D., Dranove, D., Shanley, M., Schaefer, S., Economics of Strategy, 3 rd Edition, Wiley
India
• Allen, Bruce, W., Weigelt, Keith, Doherty, Neil and Mansfield, Edwin, "Managerial Economics:
Theory, Applications and Cases", 7th Edition, Viva-Norton Student Edition, 2013.
• James Brickley, Clifford W Smith, Jerold Zimmerman, Managerial Economics & Organizational
Architecture, 4th Edition, McGraw-Hill Companies, Incorporated, 2007 (ISBN-13
9780073523019)
• McGuigan, Moyer and Harris, Economics for Managers, 12th Edition, Cengage Learning, India
Latest Edition 5
Quizzes & Exams

• Grades for the course will be mainly based on a weighted

average of quizzes, a midterm and a final exam.

• There will be no “make-up quizzes” or “extra-credit”

opportunities.

• Make-up opportunity for missed mid-term/end-term will be

allowed only for genuine reasons (as per the rules defined in
the Student Handbook) with prior approval from Dean,
Academic.

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Grading Method

Components Weight (%)

End Term 35

Mid Term 25

Quizzes (3) 30

Class Participation 10

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Class Rules

• Class rules include

– Punctuality,

– No bilateral communication in class,

– Texting is strictly prohibited, and

– Using laptops in class is strictly forbidden (unless and

otherwise required).
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What is Economics?

• Economy – “oikonomos” (Greek)

– “One who manages a household”

• Household - many decisions

– Allocate scarce resources
• Ability, effort, and desire

• Society - many decisions

– Allocate resources
– Allocate output

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 What is Economics?

• Scarcity - limited nature of society’s resources

• Economics
– Study of how society manages its scarce resources

• Economists study:
– How people make decisions;
– How people interact with one another; and
– Analyze forces and trends that affect the economy as a whole.

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Decision Making

Principle 1: People face trade-offs

• Making decisions
– Trade off one goal against another
– Student – time
– Parents – income
– Society
• National defense vs. consumer goods
• Clean environment vs. high level of income
• Efficiency vs. equality

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Decision Making

Principle 1: People face trade-offs

• Efficiency
– Society - maximum benefits from its scarce resources
– Size of the economic pie

• Equality
– Benefits - uniformly distributed among society’s members
– How the pie is divided into individual slices

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Decision Making

Principle 2: The cost of something is what you give

up to get it

• People face trade-offs

– Make decisions
• Compare cost with benefits of alternatives: Cost-Benefit
Analysis

– Opportunity cost
• Whatever must be given up to obtain one item

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Decision Making

Principle 3: Rational people think at the margin

• Rational people
– Systematically & purposefully do the best they can to
achieve their objectives

• Marginal changes
– Small incremental adjustments to a plan of action

• Rational decision maker – take action only if

– Marginal benefits > Marginal costs – The Golden Rule
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Decision Making

Principle 4: People respond to incentives

• Incentive
– Something that induces a person to act

– Higher price
• Buyers - consume less
• Sellers - produce more

– Public policy
• Change costs or benefits
• Change people’s behavior
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Decision Making

Principle 4: People respond to incentives

– Gasoline tax
• Car size & fuel efficiency; carpool; public
transportation

– Unintended consequences
• Policymakers fail to consider how their policies affect
incentives

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 Interaction

Principle 5: Markets are ‘usually’ a good way to organize

economic activity

• Communist countries – central planning

– Government officials (central planners)
• Allocate economy’s scarce resources
– Decided
» What goods & services were produced
» How much was produced
» Who produced & consumed these goods & services

• Theory: only the government could organize economic activity to promote

economic well-being for the country as a whole 17
 Interaction

Principle 6: Governments can sometimes improve

market outcomes

• We need government
– Enforce the rules
– Maintain institutions - key to market economy
• Enforce property rights

• Property rights
– Ability of an individual to own and exercise control over
scarce resources

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 Interaction

Principle 6: Governments can sometimes improve market

outcomes

• Government intervention
– Change allocation of resources

– To promote efficiency
• Avoid market failure

– To promote equality
• Avoid disparities in economic wellbeing

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What is Microeconomics?

• Principles 1 through 6 can be considered as the basic principles

of Microeconomics.

• However, these principles are not confined to Microeconomics

only.

• Based on these principles Microeconomics deals with the

behavior of an
‘Individual Agent’ or ‘Decision Making Unit (DMU)’.

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What is Managerial Economics

Managerial Economics refers to the

1) application of Economic Theory and

2) application of Statistics, Mathematical Economics,
and Econometrics

to examine
how an organization can achieve its aims or objectives in
the most efficient manner.
What is Managerial Economics

• Application of Microeconomic Theory

– Study of the economic behavior of individual

decision-making units through
• understanding of consumer behavior,
• decision making in firms, and
• market structure.

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• Knowledge of Macroeconomic Theory and Policy

– Study of the total or aggregate level of

• output,
• income,
• employment,
• consumption,
• investment, and
• prices for the economy viewed as a whole.
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What is Managerial Economics
• Application of Economic Theory

– Economic Models
• Abstract from details
• Focus on most important determinants of economic
behavior – cause and effect
– For example, Model of Demand and Supply, Utility Maximization
Model, Cost Minimization Model, Dynamic General Equilibrium
Model etc.

– Evaluating Economic Models

• A model is accepted if it predicts accurately and if the
predictions follow logically from the assumptions. 24
What is Managerial Economics
• How to evaluate Economic Models

– Mathematical Economics
• Expresses and analyzes economic models using the tools of
mathematics.
– Use of Linear Algebra, Calculus, Real Analysis, Coordinate
Geometry
– Econometrics
• Employs statistical methods to estimate and test economic
models using empirical data.
– Depending on the hypothesis we are testing and type of data that
best represents the model following are the basic econometric
models: Cross Sectional Modeling, Time Series Modeling, Panel
Data Modeling 25