Slides: Teaching

Time: 90 Minutes
Slides: 33
Introduction

Session 01
Economics: Scope and Methods

Indian Institute of Management Lucknow

08 Apr 2019; Monday
A relevant quote to begin with …

“Our envy goes to you, setting out to

explore the exciting world of economics for
the first time. This is a thrill that, alas, you
can experience only once in life!”
~ Paul A Samuelson (with William D Nordhaus)
Economics, Twelfth Edition, Preface
McGraw-Hill, 1955
[Emphasis Added]

Paul A Samuelson

(Photo copied through

Google search from the
internet.)

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Plan of the Presentation
_____________________________________________________________
Part Topic

 Part I: Motivation
Two Examples
What is Economics?
Early History and Major Landmarks
 Part II: Towards Building a Foundation
 Part III: Managerial Economics
Economics and the Business Environment
Is Learning Economics Useful for Managers?
How Should Managers Study Economics?
 Part IV: Rules on Evaluation
 Part V: Resources

 Questions & Answers / Discussions?

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Part I: Motivation
Two Examples

 Example 1: The Refugee Camp, Corruption and the

Census that Could Not Take Place!
(Source: “Statistics and Truth” by C.R. Rao)
 Example 2: Babur and the Spanish conquistadors
(Source: Tuzuk-i-Baburi)

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What is Economics?
“Economics is the study of how men and society choose to employ
scarce productive resources, which could have alternative uses,
to produce various commodities over time and distribute them
for consumption, now and in the future, among various people
and groups in the society”
Paul A Samuelson (With William D Nordhaus)
Economics, McGraw-Hill, 1955, 12th Edition, P. 4, [My emphasis]

 Problem in a Rigorous Definition: Expanding Frontier

 Economics is not a clearly defined discipline. Its frontiers are
constantly expanding.
 An Example of Expanding Domain: Experimental Economics

 Implication: Any definition of economics could be a subject of

debate!

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Major Landmarks in Economic Thought

 Early History: Mercantilists, Physiocrats etc.

(If you are interested, read “A Science in Its Youth” by A. Anikin,
Progress Publishers).
 Some Benchmark and Influential Studies:
 Adam Smith: ‘The Wealth of Nations’, 1776.
 Karl Marx: ‘Das Capital’, 1867.
 John Maynard Keynes: ‘The General Theory of Employment,
Interest and Money’, 1936.
 John R Hicks: Value and Capital, 1939.
 Friedrich von Hayek: The Road to Serfdom, 1944.
 Paul A Samuelson: Economics, 1948.
 Milton Friedman and Anna J Schwartz: ‘A Monetary History of the
United States, 1867-1960’, 1963.

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Evolution of Modern Economics
 Marx’s prediction on market economy and the experience
of great depression in the United States.
 Market Economy: Emphasis on “quantitative aspect of
economic problems”:
 Evolution of statistics as an independent discipline
 Two other important but unrelated events
 Evolution of econometrics: Formation of Econometric Society
(1931) and the journal Econometrica (1933)
(Reference Document: First Editorial of Econometrica, Ragnar
Frisch, January 1933)
 Advent of Keynes and General Theory (1936)
 Implications: understanding of the market economy
improved greatly.
 Why are applications of scientific techniques easier on a
market economy than on a command and control one?

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Influence of Economists in Modern Society

“The ideas of economists and political

philosophers, both when they are right and
when they are wrong, are more powerful than
is commonly understood. Indeed the world is
ruled by little else. Practical men, who
believe themselves to be quite exempt
from any intellectual influence, are usually
the slaves of some defunct economist.”
John Maynard Keynes (1883-1946)
[Emphasis Added]
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Part II: Towards Building a Foundation
How to Build a Scientific Theory?

 Two types of reasoning:

 Deductive reasoning
 Inductive Reasoning
 Deductive reasoning
 Start with a set of axioms & definitions
 With the axioms and definitions, try to derive results.
 Example?
 Inductive reasoning
 Start from observations
 Try to build a theory that explains those observations.
 Example?

 Which way of reasoning do you feel is better?

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How to Build a Theoretical Foundation in
Economics?

 What do we mean by the terms

Microeconomics and Macroeconomics?
 Microeconomics focuses on explaining the behavior of
individual units (households, firms etc. – often
termed as economic agents!)
 Macroeconomics, in contrast, looks at the economy
as a whole.

 What type of reasoning would be better suited

for microeconomics? For macroeconomics?

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Role of Models in Economics

 Role of axioms / assumptions and definitions

 Models in science are mathematical approximations of
reality. Economics is no exception!
 Models should tell you the “essential features” of aspects
of reality that are being studied.
 Analogy:
 Maps
 Photographs

 A model in science must be falsifiable.

 In microeconomics, we shall try to model the economic
decision making of an individual or a firm.
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Please Do Not Feel Intimidated by This Slide!
Economics and Optimization under Constraints

Nearly all problems in economics can be expressed

as a constrained optimization problem:

Here, a multi-variable objective

Max F(X1, X2, …, Xn) function F() is optimized under a
subject to set of constraints. Note that, if F()
G1(X1, X2, …, Xn)  0 and G1(), G2(), GK() are linear in
X1, X2, …, Xn, then it becomes a
G2(X1, X2, …, Xn)  0
linear programming problem.
……………………………….. However, in typical economic
GK(X1, X2, …, Xn)  0 problems, F() and G1(), G2(), GK()
may or may not be linear!
Note: The above, when some of the Xs are random variables , is
perhaps the most general specification of any economic problem!

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Implications
 Depending upon your confidence in mathematics, you can look
at economics either as a threat or as an opportunity!
 Threat: “Oh! It is so complex! We, managers, should be
taught more PRACTICAL things!! ”
 Opportunity: To master economics like a real scholar, I need
to master only a few types of mathematical problems!

Instructor’s Guarantee: If you know how to specify and

solve general constrained optimization problems, none
(including me!) can stop you from doing well in
economics in any university of the world.

 At the end of the day, mathematical models in economics

teach would-be-managers the art of simplification!
 Example of Absurd Level of Simplification: The story of a
physicist, a chemist and an economist
 The KISS principle of modelling!

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Limitations of Economics
 Assumptions on Rationality
 Lack of scope of controlled experiments
 Experimental economics: attempts to remove
some of the lacunae
 Precise measurement is difficult
 Example 1: Collection of data on income
 Example 2: Discrepancy in international trade
data
 Normative Issues
 Equity-efficiency debate
 Positive and Normative Economics

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Part III: Managerial Economics
Economics and the Business Environment
“The business of America is business”
-- Calvin Coolidge (in the 1920s)

 The world of business is the most important part of the

economy.
 Economics helps us to understand the environment in which all
businesses operate.

 Executive Training and Economics:

 Does learning economics help?
 Views of business school dons
(“LEARNING ECONOMICS HELPS IN OTHER MORE PRACTICAL SUBJECTS!”)
 Career path of businessmen
Good many top CEOs were students of Economics. Many more mastered it while on
job.
 Role of economics in the decisions managers have to make
 Our approach of teaching Economics to executives in IIM Lucknow

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Desirability of Economics: Common Reasons Cited

 Analytical and Problem solving skill

 Knowledge of Markets
 The “Big Picture” Perspective (“Bird’s Eye View”):
 For any event in any part of the world, a good manager
must answer
 How shall it affect the world economy?
 How shall it affect the economy in which I am operating?
 How shall it affect the sector in which I am operating?
 How shall it affect my company?
 Visionary Role: To Foresee Demand for a Good or a
Service before Others!

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Some Major Points of Interest of Managers
 How can I sell more? Will a price cut help?
 Output market
 Who are my consumers / potential consumers?
 Can I cut my cost of production more?
 Input market
 Labor market
 Capital market
 Market for “raw materials”
 Technology
 What will be my sources of fund?
 Debt or Equity?
 How shall I use my fund?
 How do I manage risk effectively?

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Managers and Economics
 Managers need to be familiar with both the input and the output
market.
 In a few industries, say Fashion Garments Industry, total number of
products could be more than 62,000.
 In a few industries, say Airline Industry, the number of “raw materials”
could be more than 10,000.
(What are the common features / elements in these industries?)
 Most features of labor and capital market will be common across
industries.
 Implications:
 Managers need to be aware of the general economic environment
in which they operate.
 In case of domestic firms, managers must be aware of all major
economic developments taking place in the economy.
 In case of multinational firms, such awareness should extend to
the entire world.

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The Big Picture:
Managers in Economic Policymaking

 Managers in Public Sectors:

 Have to advise politicians on policies

 Entrepreneurs / Managers in Private Sector:

 Understand the forces that dictate government policy
 Business leaders are regularly consulted in policy matters. Often,
they are the policymakers.
 Well known business leaders in the RBI Central Board:
 Shri Azim S Premji
 Shri Kumar Mangalam Birla
 Shri Suresh Neotia
 Ratan Tata
 Narayana Murthy

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Economic Issues and Common Sense
Real life problems are either absurdly simple,
or … simply absurd!

 Fact 1: Economics is one among many core subjects for managers!

 Fact 2: Many great leaders were not formally trained in economics.
 Fact 3: Real life economic problems, in many cases, just require
“common sense”, which, by the way, is not so common!
 The Most Frequently Articulated Grievance (FAG):
If the above is indeed so, why do we need to go through a relatively
abstract route? Why are we not exposed to “real life problems” from
the very beginning?
No case study, limited “practical” inputs etc etc

 Important Points to ponder

 Economics is to managers what weight training is to footballers!

 Studying Economics helps you to prepare for more effective participation in
“cases” later on
 The Mathematics in Economics is like a step ladder to fit a light bulb!
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Part IV: Rules on Evaluation
Individual and Team Performance

 Significance of team activities in a business school

 Importance of teamwork
 Problems created by free riders
 Ten teams will be formed among yourselves
 Each team will typically have Int(Class Size/10) members. In some cases,
there will be one more member in a team.
 Your Team No (Y)
 X = Last Digit of Your Role No
 If X ≠0, then Y=X; Else Y=10:

Allocation between Individual and Team Performance

 Individual Performance (Weight: 80.0 per cent):
 Commitment to the course (10.0)
 End-Term examination (50.0)
 Quizzes (10.0)
 Assignment Type II (10.0)
 Team Performance (Weight 20.0 per cent):
 Assignment Type I: Critical Review of Articles (15.0)
 Assignment Type III: Case Study (5.0)

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Detailed Break-Up of Individual Components

 Commitment to the Course (Weight: 10.0 per cent)

 Attendance (3.0 per cent), Discipline (2.0 per cent), “Good” Questions (2.0 per cent) and
Instructors Judgment (3.0 per cent)
(“Judge a man by his questions rather than by his answers” ~ Voltaire)

 Quizzes (Weight: 10.0 per cent)

 There will be two quizzes
 In all quizzes, you have to write a single essay
(Time: About 15 Minutes, Format: Like the WAT in admission)
 Sample Questions: Study the “Questions for Review” at the end of the chapters of your
textbook

 Assignment Type II (Weight 10.0 per cent)

 End-Term Examination (Weight 50.0 per cent)
 Syllabus as described in the course outline, would be refined subsequently.
 The end-term examination, most questions will be problems that will need half a page to
one page of writing.
 For sample questions: Solve the problems in Assignments and “Exercises” at the end of the
chapters of your textbook!
 About 10.0 to 20.0 per cent questions in the end-term examination could be essay type
questions (e.g. like quizzes).

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Team Performance: Assignment Type I and Type III
(Weight: 20.0 per cent)

 Do NOT attempt to memorize the articles for further

reading in the course outline!
 But … you still have to read them together and assimilate these
articles! (How?)
 Emphasis on Critical reading and writing!

 Managerial Reading: How is it different from an academic reading?

 A part of your marks will depend on how well you grasp the
articles as a team and write / present your reviews!

 How to write critical reviews?

 A critical review is not just a summary!
 Clue: Look at the list of questions in the next slide!

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Questions that You Should Prepare on an Article

 A brief (about 150 words / to be presented in 2 minutes)!

 What are the useful points in the article from an academic
perspective?
 In what way has the article improved your understanding of
economics?
 Is the article relevant for business? If so, in what way?
 What are the limitations of the article? Does it need any
improvement?
 If it is an empirical article and the data analyzed do not cover
India, are the conclusions applicable for India?
 If the article is an old one, are the conclusions valid in the
current context?
 Related concepts: treasure hunt!

 Can you think of some “interesting” questions on the

article?

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Grades: Indicative Cut-Off Points
Marks (In Per Cent) Grade Comments
00.00 - 34.99 F The range of failure.

35.00 – 44.99 D
45.00 – 49.99 C-
50.00 – 54.99 C
55.00 – 59.99 C+
60.00 – 64.99 B-
65.00 – 69.99 B
70.00 – 74.99 B+
75.00 – 77.49 A- 1. IIML convention restricts the percentage
of students in this range.
77.50 – 79.99 A 2. The cut-off points are indicative only
80.00 – 100.00 A+ and may change a bit later.

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 Part V: Resources
Additional Reference Books

 Samuelson PA and WD Nordhaus: “Economics”,

McGraw-Hill.
 Petersen CH, WC Lewis and SK Jain: “Managerial
Economics”, Pearson.
 Salvatore D (Adapted by R Srivastava): “Managerial
Economics: Principles and Worldwide Applications”,
Oxford University Press.
 Henderson JM and RE Quandt: “Microeconomic
Theory: A Mathematical Approach”, McGraw-Hill.
 Palgrave Dictionary on Economics, Volumes I-III.

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Journals
 Important International Journals:
 Journal of Economic Literature (JEL)
 Every issue contains a few surveys written by experts.
 Lists the current contents of every important journals on
economics
 JEL category of issues and subjects in economics
 Journal of Economic Perspectives
 Important Indian Journals
 Economic and Political Weekly
 Journal of Quantitative Economics
 Indian Economic Review
 Indian Journal of Economics
 Sankhya: The Indian Journal of Statistics

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Websites
 Important International Websites
 Inomics: (http://www.inomics.com)
 American Economic Association: (http://www.aeaweb.org)
 NBER: (http://www.nber.org)
 IMF: http://www.imf.org
[Contains separate country pages]
 World Bank: http://www.worldbank.org
[Contains separate country pages]
 BIS: http://www.bis.org
[Contains a page that has links for more than 80 central banks in the world, e.g., European
Central Bank (ECB) and Federal Reserves (Fed)]
 Important Indian Websites
 Reserve Bank of India (http://www.rbi.org.in)
(Contains links to websites of banks and other financial institutions)
 Government of India Website (http://www.nic.in)
 Niti Ayog (http://www.niti.gov.in)
 Competition Commission of India (http://www.cci.gov.in)

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Major Microeconomic Data Sources in India*
 National Sample Survey
 Surveys on Consumption
 Surveys on Employment and Unemployment
 Annual Survey of Industries
 All India Debt and Investment Survey
 National Family Health Surveys
 Prowess Database
 Reserve Bank of India
 Panel Database on Companies
 Panel Database on Banks
 Office of the Economic Adviser, Ministry of Commerce and Industry,
Government of India
 Labour Bureau, Government of India

* For some major US microeconomic data sources, see Cameron AC

and PK Trivedi, 2005: “Microeconometrics: Methods and
Applications”, Cambridge University Press.

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Annexure
Keywords, Important Concepts and Additional
References

 Keywords and Important Concepts:

 Economics, Deductive and Inductive Reasoning, Microeconomics,
Macroeconomics, Concept of a Model in Science, Constrained
Optimization Problems, Managerial Economics

 Additional References:
 As indicated in the texts and slides.

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 Plan for the Next Session

 Demand, Supply, Equilibrium and Price

Formation

 Read: Chapter 2 of PR

 Treasure Hunt:
 Stocks and Flows
 Linear Expenditure System
 The Latin phrase: Ceteris paribus

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Acknowledgements

 All slides in this presentation have been prepared by the

instructor himself.
 The slides are pedagogical in nature. While preparing
these slides, the instructor has used material from
several sources, in particular from the textbook chosen
by IIM Lucknow for this course [e.g., Pindyck and
Rubinfeld].
 Wherever material other than the textbooks were used,
references have been given. Any omission is totally
unintentional.

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Dedication

When you share your wealth with others, your own wealth shrinks.
When you share your knowledge with others, your own knowledge increases.
~ Chanakyā

These slides are dedicated to you all. You are free

to use it and to distribute it to any student of
economics; but for heaven’s sake, though you all
are students of a business school, do not make
any business out of it!

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