MBA –I

Semester I
CC 102- Economics for Managers (EFM)

1. Course Objective

• Imparts knowledge of the concepts and principles of Economics –

Governs functioning of a firm/organisation – different market conditions.

• Will enhance the understanding capabilities of students about

Macro–economic principles – decision making by business & Govt.

2. Course Duration
The course will have 40 sessions of 75 minutes duration.
3. Pedagogy of the course

(a) Case discussion covering a cross section of decision situations.

(b) Discussions on issues and techniques of Economics.

(c) Projects/ Assignments/ Quizzes/ Class participation etc

4. Text books
Economics is the study of how society manages its scarce
resources.

1. How people make 2. How people

DECISIONS. INTERACT.

3. How the economy

as a whole WORKS.
 GUNS & BUTTER

EFFECIENCY Vs EQUITY
 How people make
DECISIONS.

GUNS & BUTTER: STUDENTS GET 1

• Guns – spending on defense of HOUR:
country. • To study
• Butter – spending on consumer • to play games
goods. • to watch TV
• part time tuitions

PRINCIPLE – 1
PEOPLE FACE
TRADE – OFFS

PARENTS ON SPENDING:
EFFECIENCY Vs • To buy food
EQUITY: • to buy clothing
• family vacation
• children education
Society getting
Equal distribution of
maximum benefit
benefits in the
from scarce
society
resources
Opportunity cost
 PRINCIPLE – 2
COST OF SOMETHING IS
WHAT YOU GIVE UP TO GET
IT

DECISION TO GO TO
Opportunity cost of an item is what COLLEGE:
you give up to obtain that item. • Intellectual enrichment
• better job opportunity
• money for tuitions
• spend on books, hostel/room

Spending on various
Giving up wages to
factors for gaining
study in college
degree

Opportunity cost of an item is what you give up to obtain that item.

 MARGIN – “edge”

Marginal changes

Average cost Marginal cost

 PRINCIPLE – 3
RATIONAL PEOPLE THINK
AT THE MARGIN MARGIN – “edge”

Marginal changes are –

Small
incremental adjustments
to an existing plan of action.
Rational people – decide – based on:

Marginal benefits & marginal costs.

Average cost Marginal cost (tea,

Plane – 200 seater – 500/- snacks, soda – 100
Surat
• 10 seats vacant – about to take off.
Total cost – Rs. 1,00,000 • Passenger ready to pay 300/-
A’ bad • What does a rational person should do ?

Ticket price =
1,00,000/200= 500
 Incentives

Who respond to incentives ?

 PRINCIPLE – 4
PEOPLE RESPOND TO
INCENTIVES

Incentives:
Prospect / reward / punishment inducing a person to act.

Who respond to incentives ?

Rational people respond to incentives.

People eat more pears Apple growers will hire more

Cost of apples people / grow more apples –
& less apple
benefits of selling apples are
higher.

1. More tax on petrol – use of small cars increase & use of public transportation
2. Seat belt – less costly accident – reduces benefits of safe / careful driving.
RESULTING INTO LARGE NUMBER OF ACCIDIENTS.
What is the importance of trade ?
 HOW PEOPLE INTERACT

PRINCIPLE – 5
Trade Can Make
Everyone Better Off.

• Trade allows each person to specialize in core activity

• Trade allows to buy a greater variety at a lower costs.

Hindustan Motors
Fiat
Maruti Suzuki
Ford
M&M
Hyundai ……….
NEW MODELS – COMPTITIVE PRICES – MORE VARIETY.
 Markets – economic activity.

Resources

Joint decision by producers & purchasers

 PRINCIPLE – 6
Markets are a good way to
organize economic activity.

A market economy is an economy that allocates resources through

decentralized decisions

of many firms and households

as they interact in markets for goods and services.

Households decide Firms decide who to

what to buy and who hire and what to
to work for. produce.
 Households and firms interacting in markets act as if guided
by an “invisible hand.”

Because households and

firms look at prices when
deciding what to buy and
sell, they unknowingly
take into account the
social costs of their
actions. As a result, prices guide
decision makers to reach
outcomes that tend to
maximize the welfare of
society as a whole.
Can Government improve market outcomes ?
 PRINCIPLE – 7
Government can
improve market
outcomes.

One purpose of studying economics – review

ROLE & SCOPE of Govt. Policies

Enforcement of property rights.

Enforcement of law and order.
Promote efficiency
Promote equity

EFFICIENCY:
Market failure occurs when the
market fails to allocate resources
efficiently.
 EFFICIENCY:
Market failure occurs when the market fails to allocate resources efficiently.

Externality, which is the impact of When thethe

market fails
When market fails
one person or firm’s actions on government cancan
intervene to to
government intervene
the well-being of a bystander. promote efficiency and equity.
promote efficiency and equity.
POLLUTION

Market power, which is the ability

of a single person or firm to
unduly influence market prices.
Standard of living

Production
 HOW THE ECONOMY AS A WHOLE WORKS

Principle 8:
The Standard of Living Depends on a Country’s Production.

Standard of living Variations in living

measured: standards are explained by
1. By comparing Rising standard of living by
differences in countries’ salary increase –
personal incomes. productivities.
2. By comparing the total 1. LABOUR UNION
market value of a 2. MINIMUM WAGE
nation’s production. LAWS

Rising standard of living by

salary increase –
Debate of CHINA & INDIA 1. Raising productivity
Work force contribution / under any working
comparison. condition.
 Principle 9:
Prices Rise When the Government Prints Too Much Money.

Inflation Too much money – chasing limited

resources.

An increase in the overall level of prices in

the economy.

1. One cause of inflation is the growth in

the quantity of money.

2. When the government creates large

quantities of money, the value of the
money falls.
 Principle 10:
Society Faces a Short-run Tradeoff Between Inflation and Unemployment.

Tradeoff between inflation and unemployment:

òInflation ð ñUnemployment
 2
Overall level of
spending increases

1 3

Increase in amount of Demand for goods /

money in economy service increases

5
4
More hiring – less
unemplloyment 1. Firms raise the prices.
2. Production of goods / services goes
up.
3. More workers are hired for
increased production.