Microeconomics for

Managers

Biresh Sahoo, Ph.D.

Full Professor, XIM Bhubaneswar

Lectures: 1 and 2
 MEM COURSE DESCRIPTION,
OBJECTIVES, MODULES,
EVALUATION CRITERIA &
READING LISTS

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COURSE DESCRIPTION
The course deals with an application of
microeconomics principles to business decision
making. It examines the factors underlying
demand and supply, behavior of firms under
various market structures and the role of price
system in the economy.

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LEARNING OBJECTIVES
To provide the students a conceptual
framework for effective decision-making
To enable the students to apply quantitative
skills such as constrained and unconstrained
optimization and estimation techniques
To inculcate the analytical skills, thereby
enhance the ability to apply the concepts in
solving economic problems faced by the firms

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COURSE MODULES
Module I: Theory of the consumer and
demand analysis (8 sessions)
Module II: Theory of the producer and
demand analysis (8 sessions)
Module III: Pricing under the different
market structures (4 sessions)

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EVALUATION CRITERIA
Quizzes (Four) : 40 points(= 4 10)
Assignment : 10 points
Attendance & CP : 10 points
End-term examination : 40 points
Total : 100 points

Minimum points to pass: 40 points

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READING LISTS
Text Books:
 Baye, M.R. and Prince, J.T., Managerial Economics and Business
Strategy, New Delhi: McGraw Hill Education (India) Pvt. Ltd.
 McEachern, William A. and Kaur, S. MICRO ECON, New Delhi:
CENGAGE Learning.
  Reference Books:
 Varian, H.R., Intermediate Microeconomics: A Modern Approach,
New York: W. W. Norton & Company.
 Frank, R.H., Microeconomics and Behavior, New York: McGraw-
Hill Publishing Company.
 Salvatore, D. and Srivastav, R., Managerial Economics: Principles
and Worldwide Applications, New Delhi: Oxford University Press.

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 What is Economics?
Economics is a broad-ranging discipline, both in terms
of the questions it asks and the methods it uses to seek
answers.
What is the fundamental economic problem we face?
- Scarcity and Choice
Efficient allocation of scarce resources requires:
1) How to utilize resources efficiently
2) One must decide which of the possible
combination of goods to produce
3) How much the total output of each good to
distribute to each person
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 What is Microeconomics?

Microeconomics deals with the study of (1)

how individuals (i.e., households and firms)
make decisions and (2) how they interact in
markets.

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Because the functioning of market reflects the behavior of
the individuals (consumers and producers) who all
comprise the market, we study Microeconomics with the
following principles of individual decision making:
People face trade-offs in their decisions
The cost of something is what you give up to get it, i.e.,
opportunity cost
People think at the margin
People respond to incentives
Markets are usually a good way to organize economic
activity
Governments can sometimes improve market outcomes
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 What is the Rationality?
 Example 1. How do we know that a
consumer/producer’s purchase decision is
rational?

Day Price per Price per Quantity Quantity of

apple (p1) orange of apple orange (x2)
(p2) (x1)
1 ₹1 ₹2 1 2
2 ₹1 ₹1 2 2

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Rationality ….
Example 2. Which tax is better? Income
tax or sales tax
Example 3. A builder today purchased a
house for ₹ 40 lac, and tomorrow the
prices of all houses, including the one the
builder just bought, just fall by half. Is the
builder better off or worse off?

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Rationality ….
Example 4. Does dearness allowance (DA)
make everybody better off?
Example 5. Why do some tennis clubs have an
annual membership charge in addition to their
hourly court fees?
Example 6. When government imposes sales
tax on producer, who actually bears burden of
tax - consumer or producer or both?

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Rationality ….

Example 7. Can a good news for farming be

bad news for farmers?
 Example 8. Does drug interdiction / education
increase or decrease drug-related crimes?
Example 9. How is wealth created?

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 HOW TO STUDY THIS
SUBJECT

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 Getting Started …
Students often tell us, “I read the text book and
I thought I understood it, but when I try to do
the problems, I don’t know where to start.”
Indeed, it is a lot easier to passively ‘learn’ a
concept than to try to apply it. But the main
reason for learning the tools of economic
theory is so that you can apply them, and the
best way we know to develop the skill of
applying ideas is to do lots of problems.

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- Hall Varian 16
How is then Teaching defined in the context of
higher education?
“A teacher is the one who is to acquire
knowledge and construct ideas and keep them
a secret. It is improbable scientifically to ask
an individual to be competent in understanding
a work in which he has no part in
constructing.” - George J Stigler
Successful teaching is a joint product arising
out of research because these two are
inseparable.
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How wealth is created? (example 9)

Is it created by doing business?

If yes, then what is business?
First lesson of business: How to make
money?

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 Business: money making opportunities
To identify it, one needs to understand how wealth is
created and destroyed.
Wealth is created when assets are moved from
lower-to higher-valued uses.
A person’s value for a good/service is the amount of
money he/she is willing to pay for it.
This willingness requires both desire for the good
and the ability to pay for it.
Value a product – how buyer and seller perceive it?
While a buyer’s value for an item is how much he
will pay for it, a seller won’t accept less than her
value, i.e., cost.
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 Capitalism creates wealth by letting people follow
their self-interest (How?)
A buyer willingly buys if the price is below his/her
value, and a seller sells if the price is above her value
– both buyer and seller gain; otherwise, they won’t
transact.
Voluntary transactions creates wealth.
An Example: Suppose that a buyer values a house at
₹20 lakh and a seller at ₹15 lakh. If they can agree on
a price – say, ₹18 lakh – the seller receives ₹3 lakh
more (producer surplus) and the consumer receives it
worth ₹2 lakh more than he is willing to pay for it
(consumer surplus).
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 First lesson of business (How to make money): find
an asset employed in lower-valued use, buy it, and then
sell it to someone who puts a higher value on it. Each
underemployed asset represents a potential wealth-
creating transaction.

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 Thank you
for your patience

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