Managerial Economics

PGDM : 2015 17
Term 1 (June September, 2015)
(Lecture 01 and 02)

Course Description

This course seeks to provide students with a

rigorous exposure to underlying economic
concepts and principles, explaining both the
strengths and limitations of these theories
Such a holistic understanding is important for
managers to be able to meaningfully apply the
tools of economic analysis to real life situations.
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Course Objectives/Expectations
This course makes no claim to train students to become
professional economists
Be familiar with the basic principles of economic decisionmaking
Comprehend the methods, content and scope of economic
principles in managerial decision-making
Apply the principles and concepts discussed to real life
problems
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Pedagogy
The class will be centered around the class lectures
Students are however strongly encouraged to participate in
proceedings, both by feeling free to seek clarification and
asking pertinent questions.
Students are required to regularly review the material covered
in class, stay in-step with readings and complete assignments,
where applicable.

Text Book & References

Text:
Salvatore and Srivastava, Managerial Economics, 7th Edition
References:
Besanko et al., Economics of Strategy
Allen, Bruce, W., Weigelt, Keith, Doherty, Neil and Mansfield, Edwin,
"Managerial Economics: Theory, Applications and Cases", 7th
Edition, Viva-Norton Student Edition, 2013.
McGuigan, Moyer and Harris (MMH), Economics for Managers, 12th
Edition, Cengage Learning, India
Dominick Salvatore, Managerial Economics in a Global Economy, 7th
Edition
James Brickley, Clifford W Smith, Jerold Zimmerman, Managerial
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Economics & Organizational Architecture, 4th Edition,

Quizzes & Exams

Grades for the course will be mainly based on a weighted
average of quizzes, a midterm and a final exam.
There will be no make-up quizzes or extra-credit
opportunities.
Make-up opportunity for missed mid-term/end-term will be
allowed only for genuine reasons (as per the rules defined in
the Student Handbook) with prior approval from Dean,
Academic.

Grading Method

Components

Weight (%)

End Term

35

Mid Term

20

Quizzes (4)

40

Class Participation

Class Rules
Class rules include
Punctuality,
No bilateral communication in class,
Texting is strictly prohibited, and
Using laptops in class is strictly forbidden (unless and
otherwise required).
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Topical Outline & Tentative Teaching Plan

Module 1:
Introduction to Managerial Economics: Lecture 1
Rationale and Objectives of a firm, Concept of Profit : Lectures 2 and 3

Module 2: Analysis of Demand and Supply: Lectures 4 through

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** Quiz 1: On Materials Covered from 1st through 3rd Session
** Quiz 2: On Materials Covered from 1st through 4th Session
Module 3: Production and Cost Analysis : Lectures 9 through 13
MID TERM EXAMINATION : Covers up to 10th Lecture

Topical Outline & Tentative Teaching Plan

Module 4: Market Structure and Pricing Strategy : Lectures 14

through 20
**Quiz 2: On Materials Covered from 11th through 15th Session
**Quiz 3: On Materials Covered from 16th through 19th Session
END TERM EXAMINATION : Cumulative

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What is Economics?
Economy oikonomos (Greek)
One who manages a household
Household - many decisions
Allocate scarce resources
Ability, effort, and desire
Society - many decisions
Allocate resources
Allocate output
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What is Economics?
Scarcity - limited nature of societys resources
Economics
Study of how society manages its scarce resources
Economists study:
How people make decisions;
How people interact with one another; and
Analyze forces and trends that affect the economy as a whole.

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Decision Making
Principle 1: People face trade-offs
Making decisions
Trade off one goal against another
Student time
Parents income
Society
National defense vs. consumer goods
Clean environment vs. high level of income
Efficiency vs. equality
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Decision Making
Principle 1: People face trade-offs
Efficiency
Society - maximum benefits from its scarce resources
Size of the economic pie
Equality
Benefits - uniformly distributed among societys members
How the pie is divided into individual slices

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Decision Making
Principle 2: The cost of something is what you give
up to get it
People face trade-offs
Make decisions
Compare cost with benefits of alternatives: Cost-Benefit
Analysis
Opportunity cost
Whatever must be given up to obtain one item
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Decision Making
Principle 3: Rational people think at the margin
Rational people
Systematically & purposefully do the best they can to achieve
their objectives
Marginal changes
Small incremental adjustments to a plan of action
Rational decision maker take action only if
Marginal benefits > Marginal costs The Golden Rule
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Decision Making
Principle 4: People respond to incentives
Incentive
Something that induces a person to act
Higher price
Buyers - consume less
Sellers - produce more
Public policy
Change costs or benefits
Change peoples behavior
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Decision Making
Principle 4: People respond to incentives
Gasoline tax
Car size & fuel efficiency; carpool; public
transportation
Unintended consequences
Policymakers fail to consider how their policies affect
incentives

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Interaction
Principle 5: Trade can make everyone better off
Trade
Specialization
Allows each person/country to specialize in the
activities he/she does best
People/countries can buy a greater variety of goods and
services at lower cost

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Interaction
Principle 6: Markets are usually a good way to organize
economic activity
Communist countries central planning
Government officials (central planners)
Allocate economys scarce resources
Decided
What goods & services were produced
How much was produced
Who produced & consumed these goods & services
Theory: only the government could organize economic activity to promote
economic well-being for the country as a whole
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Market Failure

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Market Failure
Market Failure is Pervasive and It Comes in Four
Main Varieties

Monopoly
Public Goods
Externalities
Information

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Interaction
Principle 6: Markets are usually a good way to organize
economic activity
Communist countries central planning
Government officials (central planners)
Allocate economys scarce resources
Decided
What goods & services were produced
How much was produced
Who produced & consumed these goods & services
Theory: only the government could organize economic activity to promote
economic well-being for the country as a whole
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Interaction
Principle 7: Governments can sometimes improve
market outcomes
We need government
Enforce the rules
Maintain institutions - key to market economy
Enforce property rights
Property rights
Ability of an individual to own and exercise control over
scarce resources
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Interaction
Principle 7: Governments can sometimes improve market
outcomes
Government intervention
Change allocation of resources
To promote efficiency
Avoid market failure
To promote equality
Avoid disparities in economic wellbeing
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Market Failure and Government

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What is Microeconomics?
Principles 1 through 7 can be considered as the basic principles
of Microeconomics.
However, these principles are not confined to Microeconomics
only.
Based on these principles Microeconomics deals with the
behavior of an
Individual Agent or Decision Making Unit (DMU).
The Utilitarianism of Jeremy Bentham [1748-1832] is the
foundation of modern microeconomic theory

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How the Economy as a Whole Works

Principle 8: A countrys standard of living depends
on its ability to produce goods and services
Large differences in living standards
Among countries
Over time
Explanation: differences in productivity

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How the Economy as a Whole Works

Principle 9: Prices rise when the government prints
too much money
Inflation
An increase in the overall level of prices in the economy

Causes for large / persistent inflation

Growth in quantity of money
Value of money falls

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How the Economy as a Whole Works

Principle 10: Society faces a short-run trade-off between
inflation and unemployment
Short-run effects of monetary injections:
Stimulates - overall level of spending
Higher demand for goods and services
Firms raise prices; hire more workers; produce more goods and
services
Lower unemployment

Short-run tradeoff between inflation and unemployment

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What is Macroeconomics?
Principles 8 through 10 are more aligned with the scope of
Macroeconomics.
Macroeconomics deals with the overall economy/country.
Remember, it is impossible to study Macroeconomics ignoring
the principles of Microeconomics.

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What is Managerial Economics

Managerial Economics refers to the
1)

2)

application of Economic Theory (both Microeconomics

and Macroeconomics) and
application of Statistics, Mathematical Economics,
and Econometrics

to examine
how an organization can achieve its aims or
the most efficient manner.

objectives in

What is Managerial Economics

Application of Microeconomic Theory
Study of the economic behavior of individual
decision-making units through
understanding of consumer behavior,
decision making in firms, and
market structure.

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What is Managerial Economics

Knowledge of Macroeconomic Theory and Policy
Study of the total or aggregate level of
output,
income,
employment,
consumption,
investment, and
prices for the economy viewed as a whole.
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What is Managerial Economics

Application of Economic Theory
Economic Models
Abstract from details
Focus on most important determinants of economic
behavior cause and effect
For example, Model of Demand and Supply, Utility
Maximization Model, Cost Minimization Model, Dynamic
General Equilibrium Model etc.

Evaluating Economic Models

A model is accepted if it predicts accurately and if the
predictions follow logically from the assumptions.

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What is Managerial Economics

How to evaluate Economic Models
Mathematical Economics
Expresses and analyzes economic models using the tools of
mathematics.
Use of Linear Algebra, Calculus, Real Analysis, Coordinate
Geometry

Econometrics
Employs statistical methods to estimate and test economic
models using empirical data.
Depending on the hypothesis we are testing and type of data that
best represents the model following are the basic econometric
models: Cross Sectional Modeling, Time Series Modeling, Panel
Data Modeling
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