MGT 203:Microeconomics

Faculty of Management
Bachelor of Business Studies Program (BBS)Curriculum

Office of the Dean

Faculty of Management
Tribhuvan University
Kathmandu, Nepal
 2013
 The First Year Programme

The purpose of the first year programme is to build a strong

foundation in students to prepare them to comprehend the
business concepts, theories and practices. The first year
programme is organized into the following compulsory and
core courses:
First Year (500)
MGT 201: Business English 100
MGT 202: Business Statistics 100
MGT 203: Microeconomics 100
MGT 211: Accounting for Financial Analysis 100
MGT 213: Principles of Management 100
 MGT 203:Microeconomics

Full Marks: 100 Pass Marks: 35

Lecture hours: 150

Course Objectives
This course of Business Economics-I aims to enhance
understanding of the microeconomic theories and develop
skills of students in using these theories in business
decision making.
Course Description
• This course of Business Economics-I consists of the
introduction to microeconomics, theory of demand, supply
and equilibrium price, elasticity of demand and supply,
theory of consumers behavior, theory of production, cost
and revenue curves, theory of product pricing and factor
pricing.
 
Course Details
 
Unit 1: Introduction LH 5
 
Concept of business (managerial) economics; Relation of business economics with
traditional economics; Meaning, scope, use and limitations of microeconomics.
 
Unit 2: Theory of Demand and Supply and Equilibrium Price LH 20
 
Demand function, determinants of demand, movement and shift in demand curve;
Supply function, determinants of supply, movement and shift in supply curve; Market
equilibrium; Change in equilibrium due to shift in demand curve and supply
curve.(Numerical exercise)
 
Unit 3: Elasticity of demand and supply LH 20
Concept and types of price, income and cross elasticity of demand; Measurement of
price, income and cross elasticity of demand: Total outlay, point and arc method; Uses
of price, income and cross elasticity; Concept of elasticity of supply; Measurement of
elasticity of supply.(Numerical exercise)
 
Unit 4: Theory of Consumer Behavior LH 20
 
Concept of cardinal and ordinal utility analysis; Cardinal approach: Assumptions, consumer's equilibrium,
criticisms and derivation of demand curve (cardinal approach); Ordinal approach: Indifference curve:
Concept, properties, marginal rate of substitution, price line and consumer's equilibrium; Price effect:
Derivation of PCC; Income effect: Derivation of ICC; Substitution effect: Hicksian approach; Decomposition
of price effect into income and substitution effect: Hicksian approach; Derivation of demand curve: (ordinal
approach).(Numerical exercise)
 
Unit 5: Theory of Production LH 16
Production function: Meaning, long run and short run production function and concept of Cobb-Douglas
production function; Concept of total product, average and marginal product; Law of variable proportions;
Iso-quant: Meaning and properties; Marginal rate of technical substitution. Iso-cost curve. Optimal
combination of inputs. Laws of return to scale.(Numerical exercise)
 
Unit 6: Cost and Revenue Curves LH 17

Concept of cost: Actual cost and opportunity cost, implicit cost and explicit cost, accounting and economic
cost, historical cost and replacement cost, separable cost and common cost. Derivation of short run cost
curves. Reason for the 'U' shape of short run average cost curve. Derivation of long run cost curves.
Relationship between short run and long run AC and MC curve. Shape of the long run average cost curve:
Theoretical reason and empirical evidence. Concept of economies of scale and economies of scope.
Concept of revenue: Total revenue, average revenue, and marginal revenue. Revenue curves under perfect
and imperfect competition. Relation between average and marginal revenue curves. Relationship between
price elasticity and marginal revenue and total revenue.(Numerical exercise)
Unit 7: Theory of Product Pricing LH 30

 
Perfect competition: Meaning and characteristic of perfect competition; Pricing under perfect
competition: Equilibrium of firm and industry in short run and long run (TR-TC approach and
MC-MR approach); Derivation of short run and long run supply curve of a firm and industry
Monopoly: Meaning and characteristic of monopoly; Pricing under monopoly: Equilibrium of
firm in short run and long run (TR-TC approach and MC-MR approach); Price discrimination:
Degree of price discrimination and price and output determination under discrimination;
Dumping Monopolistic competition: Meaning and characteristics of monopolistic
competition; Pricing under monopolistic competition: equilibrium of firm in short run and
long run; equilibrium of firm under product variation and selling expenses Oligopoly:
Meaning and characteristic of oligopoly; Pricing under cartel (aiming at joint profit
maximization).(Numerical exercise)
 
Unit 8: Theory of Factor Pricing LH 22
Pricing of inputs in perfect competition and imperfect competition market. Rent: Modern
theory of rent. Wages: Marginal productivity theory of wages, Concept of collective
bargaining and minimum wages fixation. Interest: Loan able fund theory and Liquidity
Preference Theory of interest. Profit: Economic and Business Profit, Dynamic Theory and
Innovation Theory of Prof It
 UNIT ONE
INTRODUCTION
 Introduction of Economics
• What is Economics?

Economics is a study of human activities which

are related with economic activities. In other
Words, economics is the study of how individual
and societies choose to utilize scare resources to
satisfy unlimited human wants. The economics
studies with the production, consumption,
distribution, exchange etc which are fundamental
variable of economics subject. Another main subject
matter of economics is scare resources and unlimited
human wants. Specially, economics is divided into two types;
Microeconomics and Macroeconomics. Business economics is closely related
with microeconomics so here discuss about only micro economics in this
class.
 Concept of Micro economics
The term Microeconomics has been derived from
Greek word ‘ mickros’ it means small. Most of the
traditional divisions of subject matters of
economics covered by microeconomics.
Microeconomics is the study of actions of
individual units and small units of economic
activities. It studies the behavior of producer (firm)
and industry, allocation of scare resources. it deals
with individual production, individual consumption,
individual wage, expenditure etc. it explains how price of
product is determined by an interaction of a supply and
demand.
According to K.E. Boulding, ‘’ Microeconomics is the
study of particular firms, particular household,
individual price, wage, income, expenditure,
individual industry, individual commodity’’.

There are some features of microeconomics;

# it is individual economics.
# It assumes full employment in economy.
# It is theory of price.
# It is concerned with optimum allocation of available
resources.
# It deals with individual economic variable.
 The scope of Microeconomics
There are some scope of microeconomics;
• Theory of demand: Microeconomics studies how a consumer distributes his limit
income on the purchase of different goods at different price to get maximum
satisfaction.
• Theory of production: It studies how to produce more goods and services by
using available resources. And how to minimizing the cost in production process.
• Theory of product pricing: The price of good is determined by force of demand
and supply. Demand is influence by consumer income, habit, interest, behavior ,
price of commodity etc and supply influence by individual price of commodity.
• Theory of economic welfare: welfare economics is a special branch of
microeconomics. It is concerned with problem and importance of economic
efficiency.
• |Theory of factor pricing: Microeconomics studies with the price of factor. It is
related with the determinant price of factor according to supply and demand of
factor.
 Role of microeconomics in business decision making

The role of microeconomics in business decision making are given

bellow.
• Optimum utilization of resources: All resources are limited and
microeconomics studies how to optimum utilizes the available
resources.
• Demand analysis: All producer wants to produce more goods
and services which have high demand in the market. So it
studies about demand of goods.
• Cost analysis: microeconomics is very important in the cost
analysis of productive goods. Every producer wants to produce
goods in low cost. It explains the cost analysis so producer can
make to easily decision.
• Optimum production decision:
• Optimum production decision: Microeconomics
deals with different techniques that help to find
out the optimum production decision. So
producer can choose optimum production level.
• Pricing policy: microeconomics studies the
pricing policy. It studies the determination of
price according to the demand and supply of
goods.
 Limitation of microeconomics
Microeconomics is very important in business decision making
but it has some limitations.
• Wrong conclusions: According to the view point of
economics the conclusion drown from the study of
microeconomics in many cases are not valid.
• Static: mostly static analysis is used in the study of
microeconomics. In microeconomics many variables are
assumed to be constant which makes it unrealistic.
• Unrealistic assumptions: microeconomics analysis is based
on many unrealistic assumptions. like full employment and
perfect competition in the economy but we have not found
in our real life.
• Limited scope: micro economics has limit
scope as it can not study many economic
policy and problem. Like unemployment,
inflation, deflation, fiscal policy, monetary
policy etc which are very important variable of
economy.
• Ignore the role of government:
microeconomics studies the free market
economy. Which are related with how to earn
profit. It cannot studies the role of
government.
 Types of microeconomics
Micro static:
micro static deals with the final position of
equilibrium of different microeconomic variable
at a particular point of time. However, it does
not deals with the process by which the force of
demand and supply have reached the
equilibrium position. It can be cleared by
following diagram.
Y

x
In the given diagram DD is the market demand
curve and SS is the market supply curve. E is the
point where the quantity demanded and
supplied is equal to OQ. The price OP is
determined by the interaction of the forces of
demand and supply. Here demand, supply and
price refer to the same time period. And this
timeless economic analysis is called static
economic analysis.
 Comparative micro statics
• Comparative micro static is a the comparative
study of different equilibrium position at different
points of time. In other words, when there is a
change in the factors which establish equilibrium
of demand and supply, a new equilibrium position
comes into being. Comparative static economics
studies the comparison of the old and new
equilibrium positions. It does not study the path of
change. It can be cleared by following diagram.
Y

X
The diagram shows the determination of equilibrium price
through the interaction of the forces of demand and
supply. E is the point where demand for and supply of the
good are equal and OP price is determined. Now due to
some reason or the other, demand for the commodity
increases. That is why the DD demand curve shifts to D 1D1.
The new demand curve D1D1 intersects the supply curve SS
on point E1. Here the equilibrium price is determined at the
level OP1 In comparative static economics the old and the
new equilibrium positions are compared. In the above
figure, we can compare E and E1 points of equilibrium. But
it does not show how the new point of equilibrium.
 Micro Dynamics
Micro Dynamic analysis is the process by which
the system moves from one equilibrium point
to another equilibrium. It studies how to get
equilibrium of any economic variables or path
of the equilibrium point.
Y

X
 Concept of Business (Managerial) Economics
Managerial economics is a special branch of economics which
provides the link between traditional economics and decision science,
in managerial decision making. After the publication of Joel Dean’s
‘’Managerial economics in 1951 . It developed as a popular subject in
business management . It is said to be applied micro economics & it is
part of traditional economics. It applies micro economics theory &
methodology to business & administrative decision making . It uses
tools & technique of economic analysis to solve the managerial
problems .Its covers the study of demand analysis , business &
economic forecasting, production , profit , pricing ,investment etc.
theories relating to them are applied in management decision . Its
bridges economic theory & economics in practice .
According to Joel Dean, ’’ The purpose of managerial economics is to
show how economic analysis can be used in formulating business
policies .’’
 Business Administrative/Management Decision

Traditional economics & Decision Science tools &

Methodology techniques analysis

Business / Managerial Economics

Application of economic theory & Methodology for
solving specific problems of the business organization.

Optimal solution to business problems.

 Features of Business economics
There are some feature of business economics, which are given
bellow.
1, Based on microeconomics: It is mainly related with micro
economics analysis. It studies business units , not as a whole. It is
concerned with the analysis of problem and their solution of
individual firms. It covers the related theories demand and supply
analysis. It is related to the pricing, output, investment etc.
2, use of microeconomic parameters: Business economics studies
with the microeconomic parameters which are related to issue of
business. The business man consider the importance the national
income. General price level, taxation , industrial policies,
government budged etc.
3, Application of theory of firm: economic theory such as
theory of firm and profit are used in analyzing and saving
the problem relating to price determination, market
structure, output, cost condition, employment of firm and
industry.
4, link between traditional and business economics:
managerial economics is mainly related with the
application of economic theory to the business decision. It
can be considered as a link between traditional and
business economics.
5, normative perspective: business economics deals with the
normative perspective. It makes the value judgment
concerning better business decision. It is related with the
suggestion of what should be done? And how to utilization
of natural resources. And future planning.
 The Scope of Business Economics
1. Analyzing Demand and Forecasting
Analyzing demand is all about understanding buyer behavior. It studies
the preferences of consumers along with the effects of changes in the
determinants of demand. Also, these determinants include the price of
the good, consumer’s income, tastes/ preferences, etc. Forecasting
demand is a technique used to predict the future demand for a good
and/or service. Further, this prediction is based on the past behavior of
2. Production and Cost Analysis.
By production analysis, the firm can choose the appropriate technology
offering a technically efficient way of producing the output. Cost
analysis, on the other hand, enables the firm to identify the behavior of
costs when factors like output, time period, and the size of plant
change. Further, by using both these analyses, a firm can maximize
profits by producing optimum output at the least possible cost.
3. Resource Allocation
Business economics uses advanced tools like linear programming to create the
best course of action for an optimal utilization of available resources.
4 Profit Analysis
Profits depend on many factors like changing prices, market conditions, etc.
The profit theories help firms in measuring and managing profits under
such uncertain conditions. Further, they also help in planning future profits.
5. Risk and Uncertainty Analysis
Most businesses operate under a certain amount of risk and uncertainty. Also,
analyzing these risks and uncertainties can help firms in making efficient
decisions and formulating pl
6  Inventory Management
Firms can use certain rules to reduce costs associated with maintaining
inventory in the form of raw materials, work in progress, and finished
goods. Further, it is important to understand that the inventory policies
affect the profitability of a firm. Hence, economists use methods like the
ABC analysis and mathematical models to help the firm in maintaining an
optimum stock of inventories.
Difference between traditional and business
economics
Traditional economics
1. The traditional Economics has
both micro and macro aspect
2. Traditional Economics is both
positive and normative science
3. Economics deals mainly with
the theoretical aspect only.
4. Economics analyzes problems
both from micro and macro
point of views.
5. Economics studies human
behavior on the basis of
certain assumption .
Business economics
1.Managerial Economics is essentially
micro in character.
2 Managerial Economics is essentially
normative in nature.
3 Managerial Economics deals with
the practical aspect.
4. Managerial Economics studies the
activities of an individual firm or
unit. Its analysis of problems is
micro in nature.
5. these assumptions sometimes do
not hold good in Managerial
Economics as it concerns mainly
with practical problems.
6. Under Economics we study
only the economic aspect
of the problems.
7. Economics studies
principles underlying rent,
wages, interest and profits.
8. In traditional Economics
deals with the theory of
the economic variables.
9. Traditional economics has
large scope.
6 under Managerial Economics we
have to study both the economic
and non-economic aspects of the
problems.
7 in Managerial Economics we study
mainly the principles of profit only.
8. Sound decision-making in
Managerial Economics is
considered to be the most
important task for the
improvement of efficiency of the
business firm.
9. The scope of Managerial Economics
is limited and not so wide .
 Production possibility curve (PPC)
• A production possibilities curve is the graphical presentation of
all the combinations of goods and services that can be
produced in a available resources at a given time, if all the
available resources in the economy are fully and efficiently
employed. All points on PPC are points of maximum production
efficiency or minimum production inefficiency; resources are
allotted in such a way that it is impossible to increase the
output of one commodity without reducing the output of other.
In other words, production possibility curve is a graph that shows
the combination of output that the economy can possibly
produce given the available factor of production and available
production technology.
The PPC has following assumptions and features:-

•  It is based upon two commodities or two goods model

•  There is no change in technology and production technique
•  All the resources are utilized
•  PPC is downwardly sloped concave curve.
• PPC  shifts upward if the new resources are explored or
technology is advanced

To explain the concept of production possibility curve lat

assume the country can produce one of the following
combinations of goods utilizing all of the resources available
as shown in the table below.
 Production possibility computer mobile phone
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0

In the above table shows six different possible combinations computer

and mobile. If producer uses all available resources to produce mobile
phone , there will be produce 15 units of mobile only and no computer
at combination A. on the other hand, the producer uses all available
resources to produce computer , there will be produce 5 units of
computer only on combination F. in combination B,C,D and E the
producer can produce 14,12,9,and 5 units of mobile and 1,2,3 and 4
units of computer respectively. It can be expressed by following
diagram.
DIAGRAM LOOK AT THE BOARD
 Shift in PPC curve
• Upward shift in PPC curve: if there is increase in
production capacity in the economy the PPC curve is shift
upward to the right. The increase in the size of labor,
labor productivity and technology progress are main
factor of shift in PPC curve.
• Downward shift in PPC curve: if there is decrease in
production capacity in the economy , the PPC curve shift
downward to left. The decrease in size of labor, decrease
in labor productivity and other resources are decreases it
bring downward shift in PPC curve .
• The shift in PPC curve is expressed by following diagram.
 Ten principles economics
• Economics is the study of human behavior which
are related with economic activities. It is the study
of how to utilize limit resources and fulfill human
needs. Every human has limit resources but their
wants are unlimited but they want to fulfill their
needs by using limit resources.
• The principle of economics given by N.G Mankew
consists of many central ideas of economics. The
some economics principles are given bellow.
 Principle 1: people face trade-off

Principle 2: the cost of something is

How people make what you give up to get it
decisions

Principle 3: rational people think at

margin

Principle 4: people respond to incentive

 Principle 5: trade can
make everyone better off

Principle 6: market are usually

How people a good way to organize
economic activity
interact

Principle 7: government can

sometime improve market
outcomes.
 Principle 8: country’s stander
of living is depend on their
productivity

How economy as a
whole works Principle 9: price level
increases due to increase in
money supply

Principle 10: society faces

short run trade off of inflation
and unemployment