Managerial Economics (MBA ZC416)

Session 01: Introduction

Instructor
Monika Gupta
Assistant Professor
Economics and Finance Department
monika.gupta@pilani.bits-pilani.ac.in
Session Plan
• A Brief Introduction of the Course
• Introduction
• What is Economics?
• What is Managerial Economics and how is it useful?
• Some Basics Concepts
• Positive vs. Normative Economics
• Inductive vs. Deductive Economics
• Opportunity Costs
• The Ten Economic Principles for Managers

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A Brief Introduction of the Course
• Managerial economics is the "application of the economic concepts and
economic analysis to the problems of formulating rational managerial
decisions".
• “Flipped mode” structure of the course
• Follow the CONTACT HOUR schedule given in the course handout
• Please listen prerecorded lectures before attending the live classes
• Live classes will focus on important and advanced topics, case studies,
excel exercises for experiential learning
• The basic objective of the course is to understand the economic concepts
with the help of analytical tools in order to improve the decision making
skills for business policy
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A Brief Introduction of the Course:
Reading Materials

Text Book
• T1 Truett & Truett, "Managerial Economics", John Wiley & Sons, 8th edition, Singapore, 2004

Reference Book(s) & other resources

• R1 Samuelson & Nordhus, "Economics", Tata McGraw-Hill Edition, 16th edition, New
Delhi, 1998
• R2 Petersen, Lewis and Jain, “Managerial Economics”, Pearson Education, New Delhi,
2006.
• R3 Hirschey, “Economics for Managers”, Thompson, New Delhi, 2006
• R4 Suma Damodaran, "Managerial Economics", Oxford University Press, 2006

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A Brief Introduction of the Course:
Other Relevant Sources
Other Books
• Pindyck Rs and DL Rubinfeld and PL Mehta: “Microeconomics”, Pearson Education.
(Please Follow the Seventh Edition)

• Petersen HC and WC Lewis: “Managerial Economics”, Prentice-Hall of India.

• Michael Baye: Managerial Economics and Business Strategy, McGraw-Hill/Irwin

Few websites and data sources

• RBI (http://www.rbi.org.in)
• Different Government websites (http://www.nic.in)
• World Bank: http://www.worldbank.org

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A Brief Introduction of the Course:
Evaluation Scheme
No Name Type Duration Weight Day, Date, Session, Time
EC-1 Quiz-I Online - 5% August 26 to September 4,
2017
Quiz-II Online - 5% September 26 to October 4,
2017
Experiential Report - 15% October 20 to 30, 2017
Learning -
Assignment
EC-2 Mid-Semester Closed 2 hours 30% 23/09/2017 (FN) 10 AM – 12
Test Book Noon
EC-3 Comprehensive Open Book 3 hours 45% 04/11/2017 (FN) 9 AM – 12
Exam Noon
Legend: EC = Evaluation Component; AN = After Noon Session; FN = Fore Noon Session
All other details are given in the course handout

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Introduction
• What is Economics?
• Management and optimal utilization of resources which are scarce
to maximize utility
• Adam Smith (1776)
• "an inquiry into the nature and causes of the wealth of nations”
• Lionel Robbins (1932)
• Economics is a science which studies human behaviour as a relationship
between ends and scarce means which have alternative uses

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Introduction
What is managerial Economics?
• Applied micro-economics from the perspective of managers with a
focus on decision making,
• Mansfield defines, “Managerial economics is concerned with the
application of economic concepts and economic analysis to the
problems of formulating rational managerial decisions”
• “What shall a manager do in this and that situation?”

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Introduction
• How would it be useful for you?
• The decision making power – analyzing the problems, finding out the
alternative solutions and then decide the best choice
• Pricing decisions in different circumstances
• Market entry, advertising, innovation, …
• Organization of the firm
• Personnel policy, how to motivate workers …
• In understanding the day to day Economics…

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Introduction
• Two major branches of Economics – Micro and Macro Economics
• Microeconomics - focuses on the individual parts of the economy and
studies individual decision makers and their interaction in the market
• Households, firms, government
• Macroeconomics - looks at the economy as a whole and focuses on
economic aggregates such as
• National Income
• Inflation
• Unemployment

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Some Basic Economic Concepts
• Positive and Normative Economics
• Positive Economics
• Factual statements, without making judgments
• Describes what exists and how it works
• Deals with what is
• Focuses on facts and cause-and-effect behavioral relationships
• Normative Economics
• Value judgements - good or bad, and may prescribe courses of action
• Deals with what ought to be
• Expresses value or normative judgments about economic fairness
• Role of the government and public policy
• Example??
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Some Basic Economic Concepts
• Inductive and Deductive method
• Inductive method of reasoning
• Also called empirical method was adopted by the “historical school of
economists
• From particulars to generals
• Method derives economic generalizations on the basis of (I) experimentations
(ii) observations and (iii) statistical methods
• Deductive method of reasoning
• Also named as analytical or prior method
• From general to particular
• Steps – problem definition, hypothesis formulation, testing of the hypothesis

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Some Basic Economic Concepts:
Opportunity Cost

• Opportunity Costs – the implicit value of a resource in its best

alternative use or the opportunity foregone.
• Examples
• A player attends baseball training to be a better player instead of taking
a vacation. The opportunity cost was the vacation.
• Jill decides to drive to work instead of taking the bus. It takes her 90
minutes to get there and the bus ride would have been 40, so her
opportunity cost is the extra time she is devoting when not taking the
bus.
• When the government spends $15 billion on interest for the national
debt, the opportunity cost is the program the money might have been
spent on, like education or healthcare.
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Ten Economic Principles for Managers
• Three basic questions must be answered in order to understand an
economic system:
• What gets produced?
• Allocation of Resources
• How is it produced?
• Production function
• Who gets what is produced?
• Distribution of output
• Nothing but how to attain Economic Efficiency
• Ten Economic Principles for Managers are based on Ten Principles of
Economics given by Gregory Mankiw

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Ten Principles of Economics:
How People Make Decisions?

1. People face tradeoffs.

• To get one thing, you have to give up something else
• Making decisions requires trading off one goal against another
• Having more of one good means having less of another
• You face tradeoffs in how best to allocate your time; the choice to attend B-School
rather than being in labor force
2. People face opportunity cost (cost of something is what you give up to
get it).
• Decision-makers have to consider both the obvious and implicit costs of their
actions
• What is the opportunity cost of your BITS education?
• What is the opportunity cost of attending this lecture?
Undertake an activity if the benefit  its opportunity cost
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Ten Principles of Economics:
How People Make Decisions?

3. Rational people think at the margin (The Marginal Principle) i.e., the
relevant benefits and costs to consider are marginal.
• A rational decision-maker takes action if and only if the marginal benefit of the action
exceeds the marginal cost
• Marginal cost is the additional cost of one unit increase in an activity (MC)
• Marginal benefit is the extra benefit resulting from one unit increase in an activity (MB)
• If the marginal benefit of an activity exceeds its marginal cost, do it
• If the marginal benefit of an activity is less than its marginal cost, don’t do it
• Keep doing the activity until the marginal benefit just equals the marginal cost

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Ten Principles of Economics:
How People Make Decisions?

4. People respond to incentives.

People’s behavior may change if costs/benefits change
• As petrol / diesel prices rise, people drive less, walk more, use public
transportation more often; purchase fuel-efficient cars, …
But, sometime, government policy may have unforeseen consequences or
incentive may have both positive and negative effects
• Do seat belts reduce auto deaths/improve auto safety?
Seat belt laws encourage drivers to drive faster, since risk of death gets reduced
(cost of poor driving falls). There is a higher risk of accidents, but lower risk of
death if you’re in an accident and wearing your seat belt. Although driver fatality
may be reduced due to seat belt laws, pedestrian fatality is likely to increase.

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Ten Principles of Economics:
How People Interact?

5. Trade can make everyone better off.

• Trade allows each person to specialize in the activities he or she does best. By trading
with others, people can buy a greater variety of goods or services.
• Produce and export a good in which you have a comparative advantage (if the
opportunity cost of producing that good is lower in the country than it is in other
countries).

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Ten Principles of Economics:
How People Interact?

6. Markets are usually a good way to organize economic activity.

• Households and firms that interact in market economies act as if they are
guided by an "invisible hand" that leads the market to allocate resources
efficiently.
• The opposite of this is economic activity that is organized by a central planner
within the government.
7. Governments can sometimes improve economic outcomes.
• When a market fails to allocate resources efficiently, the government can
change the outcome through public policy. Examples are regulations against
monopolies and pollution.

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Ten Principles of Economics:
How the Economy as a Whole Works?

8. The standard of living depends on a country’s ability to produce goods and

services.
• Countries whose workers produce a large quantity of goods and services per unit of time
enjoy a high standard of living. Similarly, as a nation's productivity grows, so does its
average income.
9. Prices rise when the government prints too much money.
• When a government creates large quantities of the nation's money, the value of the
money falls. As a result, prices increase, requiring more of the same money to buy goods
and services.
10. Society faces a short-run tradeoff between inflation and unemployment.
• Reducing inflation often causes a temporary rise in unemployment. This tradeoff is
crucial for understanding the short-run effects of changes in taxes, government spending
and monetary policy.

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Ten Economic Principles for Managers
1. The Role of Managers is to Make Decisions
2. Decisions are always among alternatives
3. Decision alternatives always have costs and benefits
4. The anticipated objective of management is to increase the firm’s value
5. The firm value is measured by its expected profits
6. The firm’s sales revenue depends on demand for its product
7. The firm must minimize cost for each level of output
8. The firm must develop a strategy consistent with its market
9. The firm’s growth depends on rational investment decisions
10. Successful firms deal rationally and ethically with laws and regulations

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Annexure
• If you have any expectations from the course or some feedback, you can send me
an e-mail at monika.gupta@pilani.bits-pilani.ac.in

• Keywords – Microeconomics, Scarcity, Ten principles of economics, Deductive and

inductive methods, Positive and normative economics.
• Readings - Chapter 1 from the prescribed text book.
• Other Sources – As mentioned in slide no. 4 and 5
• Please listen pre-recorded lecture 1.1 and 1.2

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Plan for the Next Session
• Topics
• Theory of the firm: neoclassical and others
• How market operate – the market forces
• Readings - Chapter 2 from the prescribed text book
• Please listen pre-recorded lecture 2.1 and 2.2
• Next session is on 29th July

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Acknowledgements
• All slides in this presentation have been prepared by the instructor
herself. Assistance is taken from the following text books -
• Truett & Truett, "Managerial Economics", John Wiley & Sons, 8th edition, Singapore, 2004
• Pindyck Rs and DL Rubinfeld and PL Mehta: “Microeconomics”, Pearson Education, 7th edition.

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Thank you

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