Managerial Economics: PGP - 1, Section A Term 1

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Managerial Economics

PGP - 1, Section A
Term 1

Lecture 1
Instructor: Tirthatanmoy Das
Indian Institute of Management Bangalore
June 17, 2019
Why this course?
Are you interested in understanding stories such as the
following?….

§ In 1991, flying first class from San Francisco – Tokyo –


London – San Francisco was cheaper than flying San
Francisco – Tokyo – San Francisco in business class.

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Why this course?
§ After pioneering plain paper copying technology,
Xerox leased their copiers to high-value users rather
than selling the copiers.

§ And many more stories like these…

…and planning a career in management?: Then, this


course will provide you the tools you need.

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What is economics?

“Economics is a study of how men 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 in societies.”
… Paul Samuelson

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What is economics- an alternative
description?
“Economics is concerned with modelling the behavior of
individuals and organizations – for profit firms, non-
profit organizations, government entities, and so on – in
market and non-market settings. Its models almost
always assume that behaviors are purposeful – directed
at some clear goal – and it usually studies how diverse
behaviors that have conflicting objectives are brought
into equilibrium by market and non-market
institutions…”
….David M. Kreps
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What is economics?

The key words are ‘scarcity’ and ‘choice’

…But what do these words mean?

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What is economics?

Scarcity: Why?

…because resources are limited and wants are unlimited.

Examples: income, land etc.

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What is economics?

Choice: Choice from available alternatives.

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What is economics?
‘Scarcity’ and ‘Choice’? What is the connection?

§ Available resources are limited and have alternative uses.

§ Need to choose from alternatives that the limited resources


allow for.

§ Trade-off: forgo something to get something.


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What is economics?

Economics describes the trade-offs and shows how these


trade-offs are best made.

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Consumers’ trade-off

Consumers: consumers have limited incomes, which they


spend on a wide variety of goods and services, or save for
the future.

Example: Suppose you have Rs. 50,000 to buy a laptop.


There are many available brands with different technical
specifications. Think about your choice process.

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Firms’ trade-off

Firms: firms may have limited available resource;


technological constraints or may face restrictions on the
kinds and quantity of products they can produce.

Example: General Motors is very good at producing cars


and trucks. But does not have ability to produce
airplanes.
Also, with given resources, any increase in production of
car leads to decline in production of truck.
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Theory and model

Purposeful behavior: entities behave purposefully.

Equilibrium: Achieving the balance when entities have


conflicting objectives (why conflicting?).

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Theory and model

Theories and models represents how people, firms,


institutions act:

Example:
Models for consumers: Consumers maximize utility
subject to their budget constraints.

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Theory and model

Theories and models represent how people, firms,


institutions act:

Example:
Models for firms: Firms maximize profit from a given set
of feasible production plan.

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Theory and model

Theories and models represents how people, firms,


institutions act:

Examples:
Models of market: Shows how price and quantity
determined by supply and demand.

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Microeconomics

§ Microeconomics studies the behavior of individual


consumer and individual firm, as well as the market
and environment where they operate and interact.

§ Macroeconomics, in contrast, studies the working of


national and international economics as a whole.

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Managerial Economics

Primarily, application of microeconomic principles,


theory and models, and related empirical methods to
address and analyze issues in business and management.

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What I will emphasize

§ Applications of microeconomics to issues confronting


managers, particularly general managers.

§ To do so, I may discuss relationships between


microeconomics and disciplines of management (e.g.
finance, marketing, operations, human resource
management, strategic management etc.)

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A Roadmap with an Example

Toyota Prius: Introduced in Japan in 1997, and sold


worldwide in 2001.

What are some of Toyota’s possible economic and


management considerations?

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Demand considerations
§ How public would react to this new product?

§ How would the demand change with changes in price?

§ How will the demand grow over time?

- in Chapters 3, 4, 5.

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Production and cost considerations
§ How high would the production cost be?
§ How cost per car depends on total number of cars
produced each year?
§ How the costs of labor, raw materials affect costs?
§ How many car should Toyota produce every year to
maximize profit. And many more…

- in Chapters 6, 7, 8, 10.
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Pricing strategy considerations

§ How competitors would react to Toyota’s pricing?

§ Price differently for different models (basic vs. luxury)?


And many more…

- in Chapters 10, 11, 12, 13.

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Uncertainty considerations

§ What will happen to price of oil in future?

§ How the market of oil and other commodity function?


And many more …

- in Chapters 2, 9, 5.

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Regulatory policy considerations

§ How might regulations and standards change over


time?

§ How regulations influence the cost of production? And


many more …

- in Chapters 18.

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Summary

§ What is Economics?
§ What does the word ‘trade-off’ mean?
§ What does the word ‘scarcity’ mean?
§ What do economic models do?

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