Managerial Economics

Why?!!!

Term I

Sumit Sarkar, XLRI Jamshedpur

A market game
 The program allocated your role – Buyer or Seller. The role remained
unchanged throughout.
 The program allocated you the number of units of a hypothetical
good to buy or to sell.
 The program allocated your value for different units if you were a
Buyer, and your cost of producing different units of the good if you
were a Seller.
 Buyers were not allowed to buy at a price higher than their value, and
sellers to sell at a price lower than their cost.
 Buyers had to bid a price for the good and sellers had to ask for a
price.
 The program displayed the highest bid price and the lowest ask price.
 When a bid price was greater than or equal to an ask price, a
transaction was done.
 Buyer’s earning = (Value – Price) and seller’s payoff = (Price – Cost).
 Game outcome - Sec A
Price

Round 1 ( 2 uts) Round 2 ( 2 uts)

Quantity
 Game outcome - Sec B
Price

Round 1 ( 2 uts) Round 2 ( 2 uts)

Quantity
 Game outcome - Sec C
Price

Round 1 ( 2 uts) Round 2 ( 2 uts)

Quantity
 Game outcome - Sec D
Price

Round 1 ( 2 uts) Round 2 ( 2 uts)

Quantity
Course Objective

 To provide the students an overview of

microeconomic analysis required for
managerial decision making in the domain of
business.
 Helps understand
Economic environment Helps in firm level
(Govt. policies, strategic decision-making
International economic (choice of technology, finance,
linkages, price, quantity, quality,
Financial crisis) incentives, so on)
Macroeconomics Microeconomics
Economics
The discipline of economic science
Role of managers
 Identify goals

 Identify constraints

 Take decision to achieve the goal in the most

efficient manner
Fundamental questions of a firm
 Product selection
◦ Market selection and segmentation
◦ How competitive is the market?
 Process of production
◦ Choice of technology – to produce at least cost
 Price
◦ How much to produce and what price to charge?
◦ Objective (generally) is profit maximization
 External Factors
Competitors (costs, strategy)
Customers (demand)
Decisions
Internal Factors
Costs, Strategy
Decisions
Factors Affecting Microeconomic
What you need to understand at the
microeconomic level?

 Behavior of (rational) individuals (homo economicus) –

consumers, employees etc.
 Factors affecting firm behavior – production technology
and costs
 Market forces and industry structure – revenue,
contribution and profit
 Conflicts, incentives and strategic decision-making
 Role of information in business and possibility of market
failure in absence of perfect information
Mathematics prerequisite
 Co-ordinate geometry
◦ How do you geometrically represent an
equation?

 Calculus
◦ Functions
◦ Derivatives
 First order
 Second order
◦ Maxima and minima

 Probability and expectation (very basic)

Any microeconomic problem is an
optimization problem
 General form of any microeconomic problem
Max f (x, y, z,…)
Subject to φ (x, y, z,...) < F
Or Min φ (x, y, z,…)
Subject to f (x, y, z,...) > F

 Solving the optimization problem we get conditions which

are useful in decision making.

 How do we arrive at the optimization problem?

 “Models”
 Axioms
◦ A statement that is regarded as self-evidently true.
◦ E.g., “economic agents are rational”, “choices are transitive” etc.

 Laws and assumptions

◦ Stylized facts based on empirical truth
◦ E.g., “input productivity increases with increase in output at low levels
of output and decreases with increase in output at high levels of output.”

 Mathematical structure
◦ Representing the assumptions in form of mathematical expressions
◦ E.g., y = f (x1, x2,…, xk) where f’ > 0 and f’’ > 0 for y < y* and f’ > 0
and f’’ < 0 for y > y*
How are “Models” useful in decision
making?
 Analysis
◦ Solving the model using the mathematical structure

 Results and conclusions

◦ The solution typically generates some conditions / conditional statements

 Decision
◦ Based on the results.

 What if an assumption does not hold true?

◦ Need to reconstruct the model.
 Markets change,
fundamentals don’t
Purpose of models is to get an analytical framework
for making decisions
Evaluation schedule
 2 unit tests - [2 x 30] 60 marks
◦ Unit test 1 on 21st July Thursday (6.00 PM to 7.15 PM)
◦ Unit test 2 on 26th August Friday (6.00 PM to 7.15 PM)

 End-term – 40 marks

 Written (pen and paper) exam

◦ In each of the exams, 10 marks are allocated for non-
numerical / non-mathematical questions (objective, but
not MCQ) based on theoretical concepts.
◦ Remaining 70 (20 + 20 + 30) marks are on problems.
Grading
You’ll score marks in the quizzes and exams. Scores will be
converted to grades following the conversion rule given below.

 A+ if 90 percentile and above (conditional on score >

79.5)
 A 70 to 89.99 percentile (conditional on score > 69.5)
 B+ 45 to 69.99 percentile (conditional on score >
59.5)
 B 20 to 44.99 percentile (conditional on score > 49.5)
 C+ if below 20 percentile (conditional on score > 39.5.
 C if absolute score is in [29.5, 39.5)
 D+ if absolute score is in [19.5, 29.5)
 D if absolute score is in [9.5, 19.5)
 F if absolute score < 9.5