JAIPURIA INSTITUTE OF MANAGEMENT, NOIDA PGDM , TRIMESTER I (2011-13)

Course Title: Managerial Economics (Course Code EC501)

Course Instructor: Prof. Ritika Gugnani Number of Sessions: 24 Course Overview Economics is all pervasive, it offers explanations for behaviour in almost every walks of life. This is because economics is a fundamental body of knowledge, derived from ex-post behaviour of individuals, society and market. Economics is also one of the oldest behavioural sciences. There are two broad division of economics science, such as microeconomics and macroeconomics. Microeconomics deals with the behaviour of individual consumer and producer. Macroeconomics deals with the aggregate variables, such as national income, inflation etc. While microeconomics would help managers in identifying how economic forces affect organization and more so what will be the economic consequences of managerial behaviour, macroeconomics helps identify, explain and adjust to the entire gamut of macroeconomic context in which business would operate. Managerial economics deals with the applications of microeconomic theory and postulates which would be relevant in understanding the economics of business in a better way. Managerial economics becomes a handy tool for improving management decision making. Managerial economics course applies comprehensive application of economic theory and methods to business and administrative decision making. It prescribes rules for improving managerial decisions. As a discipline it helps managers to recognize how economic forces affect organizations and describes the economic consequences of managerial behavior. It links traditional economics with the decision sciences to develop vital tools for managerial decision making. This course will increase understanding of economics and students would be able to learn a variety of techniques that will allow them to solve business problems relating to costs, prices, revenues, profits, and competitive strategies. This course covers all the main aspects of managerial economics. Initially it provides an overview of the subject matter, and is particularly concerned with the objectives and theory of firm and manager. This course also provides considerable attention to examining statistical techniques of estimation. It examines Production theory and cost in detail along with their statistical aspects of estimation. In the last course examines strategy analysis which covers market structure and pricing decision. The over-riding goal of the course is to make students better decision- makers in a business or institutional context but the principles and techniques are also applicable to personal financial and economic decisions. A subsidiary purpose of the course is to sharpen analytical skills so that students will be better able to recognize and solve decision problems in different contexts. It is as relevant to the management of non-business, nonprofit organizations such as government agencies, cooperatives, schools, hospitals, museums, and similar institutions, as it is to the management of profit-oriented businesses. Course Credit: 3 Office Ext No: 357

Learning Outcomes After completing the course student should be able to:
1.

2. 3.

4.

5.

Apply the economic way of thinking to individual and business decisions. They should be able to list the different goals and constraints that firms face. They should be able to conceptualize why there is a role for the government to play in market economies. Measure the responsiveness of consumers' demand to changes in the price of a good or service, the price of other goods and services, and income Differentiate between the different costs of production and how they affect short and long run decisions and derive the equilibrium conditions for cost minimization and profit maximization Apply concept of economies of scale, diseconomies of scale, economies of scope, and cost complementarities, and how each affects the cost of production in different industries. Analyse the four basic market models of perfect competition, monopoly, monopolistic competition, and oligopoly, and how price and quantity are determined in each model .Explain different pricing practices such as discrimination, block pricing, commodity bundling, transfer pricing, and peak load pricing

Pedagogy The class time shall be used to make the students understand the concepts and practices and learn to implement them in practical life. The course is taught through a combination of lecture and classroom discussion. Group and individual exercises are used to develop the skills and techniques needed for a successful life and career. Lectures, case discussion and submission, individual assignment/exercises, news analysis and corporate examples will constitute the learning tools of this course. Students are responsible to come prepared for the class both by reading the prescribed materials as well as by obtaining insights through library research, field study and personal observations. *Class Discussion: This method would entail thematic presentation by the course instructor followed by general discussion by the class. The class needs to come prepared on the topic after going through the essential readings. *Exercises: Class exercises will be undertaken on application part of the concept discussed in the course. This would involve numerical exercises and finding solutions for managerial decisions. *You Tube Video: Select You Tube videos will be used in the class for discussion on selected topics. *Case Discussion: The case discussion is an important tool of learning and assessment expected to be participated by all. Therefore, students are advised to come equipped with sufficient preparation of the case. *Group study Project Group study Project is a group report prepared by a group of 5-6 students. Each group will be allocated certain area related to concepts studied in the course e.g. demand , supply or market structures. Group will prepare a report as well as present on the topic assigned. It is necessary to follow the guidelines prepared for group study project. The group is strongly advised to discuss with course instructor on the guidelines and to finalize the blue print for the report. The following guidelines must be following while preparing the report. The 2

written report can be submitted two week after the presentation (in case of last week of the completion of the course this would be reduced to two days only).The Presentation based on the completed information will be presented first . The dates will be allotted by the course instructor. The tentative schedule can be seen in detail teaching plan. The reports will be submitted later. URGENT ATTENTION Students are advised to come prepared in the class. They need to go through the essential reading as indicated in the course outline for each session. Failure to do so may attract punitive action as decided by the course instructor. Text Book: Hirschey, Mark, Managerial Economics, Cengage Learning, India References: 1. Christopher R Thomas& Maurice, Managerial Economics: Concepts and Applications, The Mc Graw Hill Companies. Indian Adapted Edition, Eighth Edition 2. Salvatore, D, Managerial Economics, Thompson 2003 3. Keat ,P and Young ,P, Managerial Economics: Economic Tools for todays Decision Makers: Prentice Hall, Latest addition 4. Adhikary , M, Managerial Economics, Khosla & Co, 2005 5. Trivedi M.l. , Managerial Economics : Theory and Applications, Tata Mc Graw Hill , 2003 6. Suma Damodaran ,Managerial Economics, , Oxford Publications 7. Peterson Craig H., Lewis Cris W. and Jain Kumar S., Managerial Economics, Pearson Education Web Resources 1. http://economics.about.com 2. http://www.amosweb.com/cgi-bin/awb_nav.pl?s=awb 3. http://ese.rfe.org Assessment Sl. 01 02 02 03 04 05 Components Presentation based on group study project Group study report Case Discussion Quizzes Mid Term End-term Examination Weightage % 10 10 10 20 20 30

Group study Project Report and Presentation: This includes Project Report preparation and presentation based on Group study project. This group project will be based on various concepts taught in the course and their application in day to day life or in business situation. This will be group exercise. As part of group exercise, each group has to make a presentation based on the report prepared. Each group needs to select a project from the topics listed in the course outline. No viva-voce or individual presentations will be done in case of absent students. In case of medical emergency prior information is necessary. 3

The guidelines for submitting the report are given below. Group Study Report Guidelines 1. First Page should contain Title of the Project Study Group Number Study Group Members Name, Roll Number with signature Outline of the Study (in 50 words) Key words (at least 5 in numbers) 2. Second Page should contain the Background/Purpose of the Study. This should explain what you want to study and why you want to study. This should also explain in brief which concepts of managerial economics you would use in the study. 3. Third to fourth page should explain the methodology you will be adopting to collect the information. 4. Fifth to ninth Pages should explain the findings from the data, including a detail explanation of various concepts used in the context of the study. 5. Tenth Page should contain Discussion & Conclusion. Your conclusion must be related to and flow from the main study. 6. Eleventh page should highlight your learnings from business point of view or how it has helped in understanding of the concept or develop a larger perspective 7. The last page should list the complete references. Report without complete references will be rejected. 8. The report must be typed and properly clipped/stapled. The main text used should be 12 size, Times New Roman, single line spacing. 9. In case you have tables/graphs/picture, they should be placed at the end of the report as Appendix with proper numbering. 10. The report is expected to be an outcome of contribution made by all members in the group. This must be written in original language. Cut and Paste of text (plagiarism) is strictly prohibited and such attempt will result in reduction of marks/grade. Case Discussion: There are seven cases in the course. Assessment will be done on the basis of overall performance in seven cases. Participating in the case does not mean just summarizing the case facts. The emphasis would be on logical application of the concept and reaching a decision making point. Quizzes: There will be four quizzes conducted. Your best three marks will be considered for grading. This is also to ensure that if you have missed one quiz for some unavoidable reason, you can still make it up. Quiz timing will not be declared and it can come as a surprise test. Quiz will not be repeated for any student. The nature of quiz will be true/false or objective questions with options given. Mid-term examination: This will consist of application based situational questions and conceptual questions. End-term examination: This will consist of case study, application based situational questions and theoretical & conceptual questions. Missed Term Work or Examinations Exemption or deferral of a quiz, study report is not permitted. Any student who either misses a quiz, Presentation or does not hand in report will have the missed percentage of the course mark added to the weighting of the final grade. There will be no make up quiz or presentation. In case of absence from mid term or end term, course instructor must be notified within three days of examination. It is expected that all students will make a significant contribution to the group assignment. If not, marks may be adjusted accordingly. Project report not submitted on the due date will not be accepted later. 4

Session Plan
Session Topic Methods/Case Text Book & Readings Chapter No. Module 1: Introduction to Managerial Economics 1

Managerial Economics- Introduction About the course Readings Learning approaches How to earn good credit in this course? Introduction to Economic Problems Rationale and Objectives of Firms; Principal-Agent Problem Economic Profit: Economics and Decision Making

Discussion

on

Discussion
Video and Exercise based pg15 and 21 from PLJ
L

Text book

Ch-1 18-23

Ch-2, 24-28

Functional Relationship & Economic Exercise based: Models

Pg38 PLJ

Text Book Study material/ Handout1

Chapter2, 34-47

Economic Optimization: Use of Calculus in Managerial Economics Revenue maximization Cost Minimization Profit maximization
4 5 6

Exercise based: Video for Profit maximization TR & TC approach Pg49-54 Study material / Handout 3 Study material/ handout 2 59-70

Discussion Marginal analysis and incremental analysis Case Discussion Case1: Marginal analysis and Noise and Analysis Pollution Regression and Managerial Economics Exercise based Estimating demand for burgers

Study material/ handout 4

Module 2: Demand Supply Analysis 7

Demand and supply Function, Exception to Law of Demand and supply, Movement and shift in the demand and supply curve, Consumer Surplus

Interactive game Followed by Discussion Video on consumer surplus

Text book

Chapter3, 79-94 Chapter4, Pg-106117 Chapter 3, Appendix

8 9 10 11 12

Theory of consumer choice

Discussion

Textbook Exercise Based Textbook

Discussion Price, Income, Cross Elasticity, exercise revenue and elasticity Discussion Price, Income, Cross Elasticity, Exercise revenue and elasticity Case Discussion Case2: The price of potatoes and Analysis Case Discussion and Analysis Discussion

Chapter4, 123-125 Chapter4, 126-137 Chapter4,

Case 3: Pricing Game by A game Marketer Module 3: Demand Forecasting 13 Demand Forecasting: Module 4: Production and Cost Analysis 14 Production Function; Production with One and Two Variable Inputs
15

Textbook

Chapter6, 175-185 Chapter7, 210-218 Chapter7, 218-231

Discussion Interactive game

Discussion Exercises textbook 233236 Case Discussion and Analysis

Textbook

Production Isoquants, MRTS, Optimal level employment, expansion path Case4 : Production jewellery manufacturer designs for

Textbook

16 17

Cost Concepts; Cost Function; Short Run and Long Run Cost Function economies of scale and scope Empirical Production and Cost Functions

Discussion

Textbook

Chapter8, 244-266

Video Cost volume analysis : Break even Exercise( textbook analysis, Degree of Leverage, 271-273) Contribution margin 19 Case 5 : Production Decisions at Case Discussion and Analysis Harding Silicon Enterprises, Inc Module 5: Market Structure and Pricing Decisions 20 Market structures : Price and output Interactive Game Followed by decision perfect competition Discussion

18

Textbook

Chapter8, 266-270

Textbook

Chapter10, 316-333 Chapter 11 & 13, 343-347

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22

Price and output decision in Monopoly Discussion Market; Discriminating Monopoly News analysis Market Price and output Monopolistic Competition Oligopoly Market Discussion Case 6: Cartel Formation by the OPEC Special pricing decision and practices Concluding class Discussion

Textbook

Chapter12, 378-391 Chapter 13, 414-423

Textbook

23 24

Textbook

Chapter13, 423428,434-435 Chapter15, 481-496

Case Questions Case1: Marginal analysis and Noise Pollution Q1. Q2 Which options should be excluded on the basis that total cost is higher than total benefits? Does the economic solution to the problem mean that the residents will suffer no noise pollution?

Case2: The price of potatoes Q1: Q2 If Group A were correct, what would be the effect on revenue of their recommended reduction in their price? If group B would be correct what would be the effect of their recommended increase in price?

Case 3: Pricing Game by A game Marketer Q.1 Q.2 Do you think games in this case present an exception to law of demand or not? Give logic in support of your answer On the basis of the case can it be concluded that the demand for games was not elastic to price, rather some other variables were important? If yes then identify the other variables.

Case 4: Production designs for jewellery manufacturer Q.1 Given the continuation of current market prices and production schedules , please advise if, any activity should be expanded, contracted or eliminated in the short run

Case 5: CONSULTING PROJECT; Production Decisions at Harding Silicon Enterprises, Inc. Q.1 Compute total variable cost (TVC) by adding the appropriate columns of cost items. Compute average variable cost (AVC). [Remember that you are given an estimate of HSEs future total fixed costs ($6,500 per month).] Print out the 19 months of data on output (Q) and total variable cost (TVC) and average variable cost (AVC). 7

Q.2.

a.

How many chips should be produced (monthly) if world chip prices are $62 per chip? Forecast the HSEs profit at this output level. The estimated How many chips should be produced (monthly) if world chip prices are $35 per chip? Forecast the profit at this output level.

AVC = 32.0448 0.00108Q + 0.00000031Q 2

b.

Q.3.

At what price should Harding shut down and produce no chips in the short run?

Case 6: Cartel Formation by OPEC 1. What are the pre- requisites for cartel formation? Is it possible to have cartels under all kinds of Market Structures? 2. What will be likely behaviour of OPEC be if analysis predicts a shortage of Petroleum?

Suggested Topics for Group Study Projects

1. Topic: Demand Analysis Demand of rose cut-flower The market for cut-flower is a very short period market. Due to the shorter time period, price is largely demand driven on a given day. However, there is an element of seasonality in supply which also plays an important role. Of late, the market for cut-flower has become quite competitive due to the import of several varieties which has added to the availability of substitutes. Visit the cut-flower market near Hanuman Temple in CP area of New Delhi. This market starts in the early morning and finishes around 9 am. Observe the market, collect some required data for addressing the following questions: A. What is the demand pattern of rose cut-flower? B. What are the prices at which various quality of rose cut-flowers are sold? C. What are the substitutes available for rose cut-flower and at what prices? With the help of the above the data you may like to explain the working of demand law and empirical example of demand function. 2. Topic: Supply Analysis Supply of fresh vegetables The fresh vegetable local market is largely supply driven. This market is not a very short period market as happens in case of cut-flower; however, they are also not a long period market. It is rather a short-period market which is to an extent supply driven. Visit the Sabji Mandi in Noida area. Observe the market and collect some required data for addressing the following questions: A. What kind of vegetables suppliers are bringing to the market for sale? B. What are the prices at which these vegetables are being sold out? 8

C. What is the volume sellers are able to sell on a given day? With the help of the above data you may like to the working of supply law and an empirical example of supply function. 3. Topic: Willingness-to-pay for public service Why to pay for open access park? Open access resources such as Public Park is enjoyed by all apparently free of cost. However, maintenance of the park and creation of additional services in the park requires money. Due to poor fund availability sometime, the condition of open access Public Park gets deteriorated. Also, due to free access, congestion in such park increases which risks the health factor. This is why people with paying ability prefer to visit paid parks. Paid parks are also the one with good maintenance. Visit Childrens Park in India Gate area of New Delhi. This park is a good example of open access park having the problem of congestion. Gather information about the visitors and ask some of them whether they would be willing-to-pay for maintenance of the park and also for creating additional facility in the park. 4. Topic: Gas in Understanding Price Mechanism and Market structure of Natural India

Natural gas has emerged as the most preferred fuel due to its inherent environmentally benign nature, greater efficiency and cost effectiveness. The demand of natural gas has sharply increased in the last two decades at the global level. In India too, the natural gas sector has gained importance, particularly over the last decade, and is being termed as the Fuel of the 21st Century. Gather information for primary and secondary data about following questions 1. 2. 3. What is the Proportion of natural gas in the total energy Mix of India? Name the market players in exploration and production (E&P) space and transmission and distribution (T&D) sector. Explain Price Mechanism in this sector?

5. Topic:

Understanding the market structure for Food chains in India with special reference to International players

Market structure for International Fast Food chains India With the increase in the consumer base and the change in the food habits, especially in the urban areas, foreign companies and food chains are entering the Indian market with their food and snacks products. Most of the food chains in India cater to the urban and cosmopolitan population who has a high standard of living. In fact recent surveys have shown that over the last year, around 400 fast food restaurants and snacks parlors have been set in various cities and tourist destinations of the country under various well known domestic and international food chains. In the year 2008, around Rs 400 crores of business has taken place in the fast food sector. 9

Think about the degree of concentration in this market, how many firms there are, what kind of products they produce relative to each other and so on to explain its market structure

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