Managerial Economics

PGDBM 2006-08 (Term – I)

Graduate School of Business
Institute
Institute for Integrated
Integrated Learning
Learning In
In Management
Management

Faculty:
Dr. Tarun Das
and
Mr. Sachchidanand Karna
 Introduction to the
Course
“The master economist ... must be a
mathematician, historian, statesman,
philosopher ... He must understand symbols and
speak in words ... He must study the present in
the light of the past for the purposes of the future”
(John Maynard Keynes)
Profile: Dr. Tarun Das
 Professor & Area Chairperson – Economics
 Area of Interest: Econometrics and Research Methodology
 Research Interest: Public Policy, Management of Risk and
Contingent Liabilities, Economic Reforms, etc.
 Qualifications:
 MA in Economics (Gold Medalist), Calcutta University, 1969.
 Ph. D. in Economics, East Anglia Univ., England, 1977.
 Work Experience:
 35 yrs: Economic Advisor, Min. of Fin., (1989-2005) – last
assignment
 Consultant to World Bank, ADB, UN-ESCAP, UNDP, UNITAR,
ILO, etc.
Contact Details:
 Cubicle: #234 Tel Ext.: 234
 Meeting Ours: 04:30 PM – 05:30 PM
 E-mail: tarun.das@iilm.edu

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Profile: Mr. Sachchidanand Karna
 Assistant Professor – Economics
 Area of Interest: Quantitative Techniques
 Research Interest: Econometrics, Forecasting and Estimation
Techniques
 Qualifications:
 M.Sc. (IIT-Kharagpur), 1992
 Master of Business Economics (Delhi Univ.), 2000
 Industry Experience:
 10 yrs in Service and Retail Industry - Gati Limited, Group4
Securitas and Microtex India Limited (Live-In)
 Business and Franchisee Development and Profit Center Head
Contact Details:
 Cubicle #217, 2nd Flr
 9810210702 (cell phone)
 Meeting Ours: 04:30 PM – 05:30 PM
 E-mail: sachchidanand.karna@iilm.edu / karna.s.n@gmail.com

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Managerial Economics: Outline
 Course Introduction
 Discussion of Course Requirements
 Introductions
 Nature and Scope of managerial Economics
 Business Objectives and Constraints of Firms
 Concepts and Tools of Economic Analysis

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Defining Modern Economics[1]
Robbins’ Scarcity Definition
 Robbins considers Economics as a positive science
which describes reality without stating the desirability or
undesirability of the findings.
 “Economics studies human behaviour as relationship
between ends and scarce means which have alternative
uses.” – Lionel Robbins
 “Economic problem is essentially a problem arising from
the necessity of choice, choice of the manner in which
limited resources with alternative uses are disposed off…
Economics studies the activity of husbandry of
resources” - Erich Roll

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Defining Modern Economics [2]
Growth/ Development Oriented Definition
 P. A. Samuelson modified the scarcity definition to
bring in economic growth over a period into
attention.
 “Economics is the study of how man and society
choose, with or without money, to employ scarce
productive resources which could have alternative
uses, to produce various commodities over time and
distribute them for consumption now and in the future
among various people and groups of society. It
analyses the costs and benefits of improving patterns of
resource allocation.” - Samuelson

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Central Problems of an Economy:

I. The Problem of Allocation of (Limited)

Resources
II. The Problem of Fuller Utilization of
Resources
III. The Problem of Growth of Resources

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Scope of Economics: Central Problems
I. Problem of Allocation of Resources
 What & How much to Produce
 Military Goods or Public Goods
 Consumption Goods or Capital Goods
 Necessities or Luxury Goods
 How to Produce
 The alternative methods or techniques of production
combine factors in different proportions
 The most efficient method will employ lesser amount
of scarce resources and more of abundant resources

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Problem of Allocation of Resources (contd)
 For Whom to Produce
 How is the output (income generated) being allocated
among factors of production
 Problem of Efficiency
 Allocative Efficiency: Allocation of resources to
competing ends is considered efficient
 if by different allocation we can not increase the
production of any one article without reducing the
production of other articles.
 Distributional Efficiency: The existing allocation of the output
among factor-owners is considered efficiency
 if by a different allocation we cannot make even one
person better off without making other worse off.

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Scope of Economics: Central Problems [2]

II. Fuller Employment of Resources

 Under-utilization of resources
 during depression, or
 under structural / system bottlenecks of the economy
 Unemployment of scarce resources is waste
III. Growth of Resources
 Output of economy can grow only through
 Improvement of efficiency (better allocation)
 Better techniques of production
 Growth of resources (mostly labor and capital)

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 Branches of Economics – Micro Economics
 Microeconomics
 Deals with allocation of resources in a market economy
 Allocation of resources is, in fact, explained in terms of
prices of goods as well as prices of factor of production
Micro-Economic Theory

Product Pricing Factor Pricing Theory of

(Theory of Distribution) Economic Welfare

Theory of (Welfare Economics)

Wages Interest
Production &
Cost
Theory of Rent Profits
Demand

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Micro Economics [2]
 Microeconomic Theory provides the framework
within which the economist
 describes and analyses the behavior patterns and
inter-relationships of the elementary economic units
like consumers, firms, commodities and markets.
 explains and predicts how production, exchange and
distribution of goods respond to incentive structure
operating in a given society. - Quirk

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Branches of Economics – Macro Economics
 Macroeconomics
 deals with fuller employment and growth of
resources
 is concerned with the analysis of economy as a
whole not a particular one economic unit i.e.
aggregates or averages such as total - national
income and output, employment, consumption, etc.
 seeks causes and cures for unemployment, inflation,
BoP, etc.
 Macroeconomics deals with economic affairs at
large

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 Macro Economics [2]

Macro-Economic Theory

Theory of Income & Theory of General Macro Theory of Theory of

Employment Price Level & Inflation Distribution Economic
Growth

(Development
Economics)
Theory of Theory of
Consumption Investment

Theory of Fluctuations
(Business Cycles)

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The Logic Of Economic Theory
 Scientific Approach to Study Complex Economic Life
& Human Behavior
 Economics is not an exact experimental science;
controlled experiments can not be conducted in the real
world complex economic life.
 Economics studies human behavior and hypotheses
are based on statistical propositions and hypotheses.

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The Logic Of Economic Theory
 Methods of Logical Reasoning and Statistical
Deduction & Testing
 Inductive Method:
 Study of facts reveal a pattern in the relationship
between variables.
 Theory of relationship between variables is constructed
 Theory is accepted if the facts are representative,
sufficient and no better logical explanation can be
made.

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The Logic Of Economic Theory
 Deductive Method:
 Begins by making certain basic assumptions
 Followed by general statement on the relation between
variables
 Conclusions and predictions are derived through logical
reasoning
 Theory is valid if actual facts and observations support
the predictions of the theory
 If theory does not stand in the light of facts and
observations, then theory is modified or discarded.

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What is Economics?
 Study of how economic agents choose to use their
scarce resources.
 Scarcity Necessitates Choice

 Who are economic agents?

 We develop theories and models to explain their
behavior.
 Thus, economics is the study of Human Behavior!

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What is Managerial Economics?

 Application of economic theory and analytical tools

to help managers make better decisions.
 Goal of this course is to show how these tools can be
used.
 Draws primarily on applied microeconomics.

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Approach to this class
 Review economic theory
 Discuss relevance of economic theory and its
application to business decision making
 Debate and critically analyze the issues though real
world cases
 Apply economic tools of analysis for decision making
through to hypothetical/ real world examples and
exercises
 Goal is to apply economic theory and tools to
business analysis

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Course Objectives and Learning Outcomes

 Learning Outcomes: You should be able to:

 Develop an understanding of key micro-economic
concepts, theories and tools for decision making
 Develop skills for rigorous economic analysis of
different market structures within which business
decisions are made
 Develop economic reasoning for formulation of
business policies.
 Understand basic economic and government statistics
-their sources, implications and uses for industry.

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Components of Course Assessment
 Three main components:
 Project Work: 20%, Mid Term Exam: 20% and End Term

Exam: 60 %
 Project Report, Presentation/Viva:
 Groups of 4-5 students will select a contemporary topic of

interest.
 Will prepare a broad outline, conduct a literature survey and

make a report
 Assessment Criteria:

 Ability to interpret, critically examine / analyse literature.

 Team working skills

 Written presentation report (by end of 8th week)

 Oral presentation (in the 9th week)

 Individual assessment on the project through viva

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Components of Course Assessment

 Mid Term Examination

 Closed book examination of 60 minutes after 6 weeks
 Syllabus: Module 1 to 4
 Assessment Criteria:
 Depth of understanding

 Ability to apply to business decision-making

 End Term Examination

 Closed book examination of 90 minutes at the end of the
trimester
 Syllabus: All Modules
 Assessment Criteria:
 Depth of understanding and/ or

 Ability to apply to business decision-making

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Course Outline
1. Intro to Managerial Economics:
 Role and Scope of Managerial Economics
 Objectives of Business Firms
 Concepts and Tools of Economic Analysis
1. Analysis of Market Demand and Supply
 Demand: kinds and its determination
 Demand functions and demand curves;
 Law of demand: Demand elasticities and its relation with
revenue
 Supply functions and supply curves
 Price elasticities of supply

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Course Outline (Contd)
2. Analysis of Market Demand and Supply (Contd.)
 Supply-Demand equilibrium
 Impact of tax on price and quantity
 Price effect, substitution and income effects
 Normal, inferior and Geffen goods
2. Production and Cost Analysis:
 Production and Cost Concepts
 Production and Cost Analysis in the Short Run
 Production and Cost Analysis in the Long Run
 Beak-even and shut-down points
 Economies of scale and returns to scale

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Course Outline (Contd)
4. Managerial Decision Making in Different Market
Structures:
 Market Structure – Definitions and Concepts
 Managerial Decision Making for Firms in Competitive
Markets
 Managerial Decision Making for Firms with Market
Power
 Strategic Decision Making for Firms in Oligopoly
4. Industrial Economics
 A Structure-Conduct–Performance (SCP) approach
 Mergers and vertical integrations
 Measures of size of firms, market power and business
concentration
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Course Outline (Contd)
6. Demand Estimation and Projections:
 Demand Estimations, Demand Projections and Engel
Curves
 Consumer Expenditure Surveys
6. Economic and Government Statistics
 Growth rates; Purchasing Power Parity (PPP) adjusted
GDP
 Production Indices
 Inflation and Price Indices
 Measurement of Poverty and Inequality
 Human Development Index (HDI) and the UN
Millennium Development Goals (MDGs)

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Textbooks and Additional Reading:

 Recommended Text Book:

C. R. Thomas and S. C. Maurice: Managerial Economics, Tata McGraw
Hill, N. Delhi, 2005
 Other Books and References:
 Baumol, W. J., (2003) Economic Theory and Operations Analysis,
Prentice Hall, N. Delhi
 D. Salvatore: Managerial Economics in a Global Economy, McGraw
Hill (NY), 1996.
 E. Mansfield, W. B. Allen, N.A. Doherty and K. Weigell- Managerial
Economics, W. W. Norton and Co, New York, 2002.
 L. J Truett & D. B Truett - Managerial Economics: Analysis,
Problems & Cases, 8th Ed., John Wiley & Sons, 2004
 Ken Heather- The Economics of Industries & Firms, Pearson
Education, 2002
 Economic Survey 2005-06, Ministry of Finance, Govt. of India.
 RBI Annual Report and Currency and Finance (2006).
 UNDP Human Development Report 2005
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