Managerial Economics

PGP - 1, Section A
Term 1

Lecture 2
Instructor: Tirthatanmoy Das
Indian Institute of Management Bangalore
June 18, 2019
 Previous class

…all about trade-offs

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 Economic way of thinking

§ Every choice is a trade-off.

§ Rational choices compare benefits and costs.
§ Benefit is the gain from something or from an action.
§ Cost is what must be given up to get something.
§ Most of ‘how-much’ kind of choices are made at the
margin.
§ Choices responds to incentives.

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 Economic way of thinking
Every choice is a trade-off: we learned that already.

Example 1: Study or have fun (say on a Saturday evening)?

Can’t study and have fun simultaneously (unless study is

fun).

Example 2: General Motors - with given resources, any

increase in production of car leads to decline in production
of truck.
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 Economic way of thinking

Rational choices compare benefits and costs: economic

entities want to achieve the greatest benefits over costs.

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 Economic way of thinking

Benefit is what one gains from getting something.

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 Economic way of thinking
Cost is what one gives up to get something.

Opportunity cost: highest valued alternative that must

be given up.

Example: opportunity cost of going to a concert:

§ Your highest valued thing among things that you can’t
afford to buy because you bought the concert ticket.
§ Your highest valued thing among things that you can’t
do with your time if you attend the concert. 7
 Economic way of thinking
Most of ‘how-much’ kind of choices are made at the
margin.

Decision making compares benefit and cost – choice at the

margin.

Example: Think about a firm’s choice: ’how-much’ to

produce to maximize profit.
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 Economic way of thinking

Choices respond to incentives.

Example: price discount; sale etc.

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 Demand and Supply

The most famous picture in economics…graph of demand

and supply.

Demand and supply model can be applied to marketing,

human resources, operations, service management, and
other functional areas of management.

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 Why study demand
Demand is important for profit determination…

It helps firms to decide:

§ The amount to produce
§ Capacity to invest
§ Whether to enter in the market (new firms)
§ On price/advertising

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 Demand

Consumers demand a product if they:

§ Want it.

§ Can afford it.

§ Have a definite plan to buy it.

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 Law of demand

Law of demand: other things remaining the same, higher

the price of a good smaller is the quantity demanded,
and lower the price of a good larger is the quantity
demanded.

Why?

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 Quantity demanded vs. demand

Quantity demanded: Amount consumers want to buy at a

particular time period at a particular price.

Demand: entire relationship between price and quantity

demanded.

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 Factors influencing market demand

§ Expected future prices.

§ Consumers’ income.
§ Consumers’ taste and preference.
§ Price of related goods.
§ Consumers’ expected future income and credit.
§ Population.

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 Under managers’ control
Can managers influence demand?

Yes, by changing
§ Advertising.
§ Product quality.
§ Distribution strategies…etc.

How?
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 Beyond managers’ control

Availability of substitute and complementary goods,

their prices, competitors advertising strategy ….etc.

Macroeconomic factors such as interest rate, taxes etc.

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 Demand schedule and curve

Market demand schedule: Table showing the total quantity

of the good demanded at each price

Market demand curve: Plot of the market demand schedule

on a graph.

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 Demand curve

Relationship between quantity of goods that consumers

are willing to buy and the price of the good, holding all
other influences same.

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 A demand curve
A demand curve:

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 Movement along the demand curve
Price changes with quantity:

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 Shifts in demand curve
Demand curve shifts when other determinants change:

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 Demand curve: market for Tablet
Market demand schedule: Table showing the total quantity
of tablet demanded at each price

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 Demand curve: market for Tablet
Market demand curve: Plot of the market demand schedule
on a graph.

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 Demand curve: market for Tablet
Some determinants:
Price of the tablets.

Per capital disposable income.

Average price of software.

Amount spent on advertising.

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 Demand (DD) function for Tablet
𝑄 " = 𝑓(𝑃, 𝐼, 𝑆, 𝐴)
P: price
I: per capita income
S: average price of software
A: Amount spent on advertising

A linear DD function: 𝑄 " = 𝑎- + 𝑎/ 𝑃 + 𝑎0 𝐼 + 𝑎1 𝑆 + 𝑎2𝐴

…contd.
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