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Adjunct / Visiting
Faculty
B.A (Economics) : Miranda
House
MA (Economics) : Gokhale
Institute, Pune
PhD Aspirant : June15

Thermal Energy: GE

Renewable Energy:
Suzlon

Yoga

Why Do

You

Want To
Study
Economics?
Its a part of the course, thats why
Managers need to know a little bit of economics
Economics is about prices, and demand and supply and you
know all that
It helps me to make sense of the newspaper articles!
Can it be a lot of fun? .. Well find out
I get to learn something new
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Economics: All about these 4!

What is Managerial Economics

all about?
Decision Making

But Why?

Because there are so

many paths!

Steps in Decision
Making

Problem

Follow up to
Improve

Different
Approaches

Collect Data &

Analyse

Implement

Select Best

Who is a Manager?

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So much to do.. In so less

time!
You are working in a manufacturing company. You want to introduce
a new product. You may need to do few/all of the following:
What should be the price?
What kind of market are you in and how do we get a
competitive edge?
How to maximize profitability?
Maximize Returns/ Minimize Payback period?

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 Not true that all managers must

be economists
But managers who understand the
economic dimensions of business
problems and apply economic
analysis to specific problems often
choose more wisely than those
who do not.

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????????????????

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Economics: 2 Main Branches

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What these 2 branches tell

us?
Economists generally divide their discipline into two main branches:

Macroeconomics is the study of the aggregate economy.

National Income Analysis (GDP)
Unemployment
Inflation
Fiscal and Monetary policy
Trade and Financial relationships among nations

Microeconomics is the study of individual consumers and

producers in specific markets.
Supply and demand
Different type of markets
Pricing of output in these markets
Production processes
Cost structure
Distribution of income and output
Microeconomics forms the basis of managerial economics

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Economics: 2 Main Branches

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Theory of the Firm

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Why do firms exist?

To save on Transactions costs

They Internalize costs

Also to take benefit of many

government regulations, such
as tax etc

Essentially procure resources and

convert them into goods that can
be sold

Create goods/services

Jobs

Should a firm, or can a firm, then

grow indefinitely?

Diseconomies of scale sets in!

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It may not make sense to hire

Objective of the firm?

Flipkart reported a loss of281 crore for the FY 2012-13. [42]In July
2013, Flipkart raised USD 160 million from private equity investors
In October 2013, it was reported that Flipkart had raised an
additional $160 million from new investors Dragoneer Investment
Group,Morgan Stanley Wealth Management,SofinaSA and
Vulcan Inc.with participation from existing investor Tiger Global.
[44][45][46]

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Valuation : Application of NPV

Concepts
A measure of future value of a firm
Independent of its current form
Calculated as follows:
NPV = Sum(TR TC)/(1+r)^t
Importance of r
Rate of discount
Usually the current lending rate/ cost of capital

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Key Takeaways
Managerial Economics is largely the study
of Micro Economics
Within Micro focuses more on the study of
the firm
The firm exists to save on transactional
costs and aims to maximize value
Course will focus on what strategies the
firm/firms take to achieve the above

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Some Basic Economic Terms

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Demand Curve

Downward Sloping

Reflects the consumers willingness to

buy at a price

Increase in price leads to decrease in

Demand

Question: Are there positive

sloping demand curves?

YES!

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Substitution and Income effects

Assume the Price of a Commodity Falls

Substitution
Effect

Income Effect

Since X is now
cheaper demand
more

You can buy more

Real Income
Increases

Demand for X
increases

Demand for X
increases

Both the SE and IE ensure that as Px falls, Demand

Increases
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Inferior Goods
Violates the law of demand

When Price falls, Real Income Increases ~

encourages you to consume less of this
good (Since this is inferior)
Hence if Income Effect > Substitution
Effect with Px falling, Qx is also falling

Results in an upward sloping demand

curve
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Giffen Good
A special type of inferior good : As Price rises,
demand also rises

http://www.eco
nomist.com/blo
gs/freeexchang
e/2007/07/as_p
rice_goes_up_s
o_does_deman

Legend: Great Irish Famine (1845 52)

Poor people largely dependent on potatoes

As potatoes became more exp, poor people

started to substitute meat with potatoes (Since
Key: Major
meat was even more expensive)

portion of
your budget
is spent onThus as Price Increased, Demand also increased!
this good!
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Supply Curve
Upward Sloping
Reflects the producers
willingness to sell at a
price
Increase in price leads to
Increase in Supply

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Market Equilibrium

Intersection of demand and supply for

the product

Price
($ per
slice)

Supply

Equilibrium is at Rs. 3
No one is left unsatisfied
demands are met with supply

What happens when there is

excess of either?

Demand

1
2

1
6

Quantity

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Excess Demand

Price
($ per
slice)

Excess demand of 8 Nos.

Since there is more demand that market

Supply can supply, price starts increasing

Leads to reduction in demand

Ultimately equilibrium is restored

at Rs. 3, by moving along the

demand curve

Demand

1
6

Quantity

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Excess Supply

Excess supply of 8 Nos.

Price

Price starts falling supply also

($ per
slice)

Supply

reduces
Ultimately equilibrium is restored
at Rs. 3, by moving along the
supply curve (only we move

downwards!)

Demand

1
2

1
6

Quantity

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Opposite of Excess Supply?

Scarcity

Limited resources matched with

unlimited wants

What does it do to the price?

How is the equilibrium restored?

Also a managers task Allocating

the scarce resources to the best
possible use!

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Opportunity Cost

What you give up to get what you have!

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A Brief Example
Assuming you have an investible surplus of Rs 1 Lacs. You are
looking at investment options that yield 8% per year. And thus,
looks good and you invest!
BUT : There are so many more investment products in the
market if you diversify your portfolio you may get upto 10%
a year . What is the opportunity cost here?
10% - 8% : 2 %
In effect, you let go of 2% additional benefit that could have
come to you!
Always consider the opportunity cost before
deciding!
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Average & Marginal

Quantity

Total

Average

Marginal

100

100

100

180

90

80

210

70

30

220

55

10

230

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Marginal is equivalent to Incremental.

Depicted above is a classic case of Diminishing Marginal Utility (measure of

satisfaction).

Example: Cup of tea The first cup in the morning is the most tasty!.

DMU is used extensively in economics . Concept of marginal costs/ marginal

revenue will be referred to again while discussing market structures and
costs.
Why is it important for you ? : Marginal costs and revenue
considerations are key in decision making , in different type of

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Marginal Benefit/ Marginal Revenue

Change in total benefits arising from

a change in the control variable, Q:
MB = B / Q

Slope (calculus derivative) of the

total benefit curve

Marginal Cost

Change in total costs arising from a

change in the control variable, Q:
MC = C / Q

Slope (calculus derivative) of the

total cost curve

Equilibrium In Marginal Quantities

To maximize net benefits, the managerial

control variable should be increased up to
the point where MB = MC (Variable could be
output , price etc)
MB > MC means the last unit of the control
variable increased benefits more than it
increased costs
MB < MC means the last unit of the control
variable increased costs more than it
increased benefits

The next 2 hours .. When we meet

again.
More concepts on demand and supply Shifts of
curves
Concepts of Compliments & Substitutes
Concepts of Elasticity
Applications of concept of elasticity in real world

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Your Bible for this subject.

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