Professional Documents
Culture Documents
MBA ZC 416
Sidharth Mishra
BITS Pilani Associate Professor, Department of Management
sidharth.mishra@pilani.bits-pilani.ac.in
Pilani Campus
BITS Pilani
Pilani|Dubai|Goa|Hyderabad
Managerial Economics
Introduction - Part 1
Agenda
• Introductions
• Flipped classroom
• Course objectives
• Textbooks/ Resources
• Evaluation scheme
Sidharth Mishra
• BE (NIT, Rourkela), PGDM (IIM,Ahmedabad)
• 25 years in the corporate sector in the consumer and the start up sector with
tenures in leading companies like LG, Samsung and HCL.
• Associate Professor (Department of Management), BITS, Pilani since
November, 2018.
• sidharth.mishra@pilani.bits-pilani.ac.in
• Scope
• Cost
• Nature of Costs (Fixed, Variable), Marginal costs, Cost Variation
• Revenue
• Demand, Demand Variation
• Profit
• Profit Trends, Conditions for Maximum Profit
• Customer
• Utility, Choice
• Production
• Stages of Production, Economic Production
• Market
• Monopoly, Oligopoly, Perfect Competition etc.
• Business Models
• Collusion, Cartels etc.
• Decision Process
• Game Theory
Quiz-II Online - 5%
Fundamental Questions
– What is Managerial Economics?
– Why Managerial Economics?
– What kind of issues does it help
address?
– How can it help managers to make
better decisions?
Managerial Economics (MBAZC416)
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
Fundamental economic problems
• Three questions that managers face:
– What to produce?
– How to produce?
– How to distribute?
• Scarcity of resources
• How does economics answer these questions?
• Imagine a car manufacturer producing only one model of car (Model T) priced at
US 10,000 at which they were able to find 5000 customers.
• For selling additional volumes they have to start giving freebies (additional
warranty, 0% finance, free services)
• For selling more they have to initiate price-cuts. After the given volume they would
be able to sell by lowering price.
• At the same time their costs would also change (material cost would go down
because of bulk discounts, service and repair costs would go up etc.). There would
be an ideal level of production where they would be able to make maximum profit.
• How many Model Ts should I produce? Should I develop new models with my
spare resources?
• The concept applies equally well to your neighborhood burgher joint or dosa seller.
• Traditional Economy
• People centric
• Little division of labor
• Limited Resources
• Little Surpluses and Little wastages
• RURAL ECONOMY
• Command Economy
• Dominant central authority (Government) takes production decisions
• Many Resources
• Works well under enlightened leadership
• Rigid, slow to change and hence prone to crises.
• COMMUNIST SOCIETY
• Market Economy
• Little Government regulation
• Regulation through supply and demand
• Growth Oriented
• Unequal distribution of economic power
• Prone to recessions
• CAPITALISM
• Mixed System
• Combines the characteristics of market and command economies
• Most industries are private while public services (law and order, health, education etc.) are under government
control.
• Economy is REGULATED (not controlled) by the Government
• Challenges of right balance between the Government and market forces.
• GLOBAL NORM (Most countries in the world follow this system)
Managerial Economics (MBAZC416) BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
What is the best “choice”
• Understand the economic environment in which firms operate
– We will be exploring several case studies throughout the course
• Consider alternatives
• Make optimal choices to maximize (objective)
Profit
Market share = Sale/ Market Size
At different points of time,
Managerial interests firms can have differing
Brand Value, Check the competition, Employee Retention Objectives.
Government influence Often firms follow multiple
National interests Objectives.
Providing employment, Inflation under check.
Social Entrepreneurship
Social and environmental benefits
Monopoly
• One dominant player (Indian Railways)
• No substitute
• High Barriers of entry
• Seller is price maker (seller decides the price)
• Firm can charge any price to its customer without giving any notice.
Oligopoly
• A few sellers but many buyers (Steel Companies, Oil companies,
Ecommerce)
• High Entry Barrier
• Firms set price collectively (cartelization)
Monopolistic competition
• Many sellers who offer similar but not substitute products (products are
differentiated)
• Low Entry Barriers
• Firms are price makers
• Overall business decision of one company does not affect the competition
• Restaurants
Monopsony
Many sellers, but one or only a few buyers
Armament industry, Tobacco farmers
Perfect Competition
• Many firms produce identical products
• Sellers and buyers have all relevant information to make rational decisions
about the product being bought or sold.
• Many buyers are available to buy a product and many sellers to sell a
product.
• Firms can enter and exit the market without any restrictions.
• The neighborhood vegetable vendor.
• Land
• Labor
• Capital
• Entrepreneurs
1. Ram chose to start a business ignoring two job offers. The first one would
have offered a salary of Rs. 100,000 per month. The figure for the second
one is Rs. 150,000 per month. What is his opportunity cost of starting the
business?
Answer: Rs. 150,000 per month
2. Dr. Usha started her clinic for which she had to vacate a part of her
residential premise from which she was getting a rent of Rs. 20000 per
month. She also chose to quit her job at a local hospital where she was
getting a salary of Rs. 100,000 per month. What is her opportunity cost?
Ans: Rs. 120,000 per month
35
BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
Illustration
At the end of the year, Dr. Usha found that she has made a revenue of Rs. 10 Lakh. Her
expenses on electricity, consumable and the salary of one assistant is Rs. 6 lakh. What her
accounting profit / loss? What is her economic profit or loss?
Ans: Revenue =
Explicit Cost =
Implicit (Opportunity) Cost = Rent + Salary = 20000*12+100000*12 = 14.4 L
Accounting Profit = Revenue – Explicit Cost = 10L – 6L = 4L
Economic Profit = Revenue – Implicit cost-Explicit Cost = 10L – 14.4L – 6L = -10.4L
Dr. Usha started her clinic for which she had to vacate a part of
her residential premise from which she was getting a rent of Rs.
20000 per month. She also chose to quit her job at a local
hospital where she was getting a salary of Rs. 100,000 per
month. What is her opportunity cost?
1 2 n n
t
PV
(1 r ) (1 r )
1 2
(1 r ) n
t 1 (1 r ) t
n
t n
TRt TCt
Value of Firm
t 1 (1 r ) t
t 1 (1 r ) t
No Course Objectives
CO1 Gain insights into the scientific and analytical methods, techniques
and tools of economics.
In “Live” Class
•Review important and advanced/ difficult concepts
•Active Learning - Application/ Problem solving
•Experiential learning – Excel modelling, Case study discussion, Simulation
After Class
•Active learning - problem solving
•Discussion forums
•Peer learning
1. Concise Thinker
2. Problem Solver
3. Focus
4. Ability to correlate
1. Across subjects (economics to finance, physics to chemistry)
2. Real Life
5. Discipline
6. Enjoy
7. Inspiration