Managerial Economics- Scope And Objectives

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: 

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35 yrs: Economic Advisor, Min. of Fin., (1989-2005) – last assignment Consultant to World Bank, ADB, UN-ESCAP, UNDP, UNITAR, ILO, etc.

Contact Details:   

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Cubicle: #234 Tel Ext.: 234 Meeting Ours: 04:30 PM – 05:30 PM E-mail: [email protected] S. Karna/PG06/IILM/Mgrl Eco/Course Intro/1

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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: 

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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:     Jul-06

Cubicle #217, 2nd Flr 9810210702 (cell phone) Meeting Ours: 04:30 PM – 05:30 PM E-mail: [email protected] / [email protected] S. Karna/PG06/IILM/Mgrl Eco/Course Intro/1

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Managerial Economics: Outline      

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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.

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“Economics studies human behaviour as relationship between ends and scarce means which have alternative uses.” – Lionel Robbins

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“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.

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“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 

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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 

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Distributional Efficiency: The existing allocation of the output among factor-owners is considered efficiency 

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if by different allocation we can not increase the production of any one article without reducing the production of other articles.

if by a different allocation we cannot make even one person better off without making other worse off. S. Karna/PG06/IILM/Mgrl Eco/Course Intro/1

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Scope of Economics: Central Problems [2] II. Fuller Employment of Resources  Under-utilization of resources 

during depression, or

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under structural / system bottlenecks of the economy 

Unemployment of scarce resources is waste

III. Growth of Resources  Output of economy can grow only through

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Improvement of efficiency (better allocation)

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Better techniques of production

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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

Theory of Production & Cost Theory of Demand Jul-06

Factor Pricing (Theory of Distribution)

Theory of Economic Welfare (Welfare Economics)

Interest

Wages Rent

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Profits

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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.

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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 

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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 & Employment

Theory of Consumption

Theory of General Macro Theory of Price Level & Inflation Distribution

Theory of Investment

Theory of Economic Growth (Development Economics)

Theory of Fluctuations (Business Cycles) Jul-06

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The Logic Of Economic Theory  Scientific Approach to Study Complex Economic Life

& Human Behavior 

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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.

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Theory of relationship between variables is constructed

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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:  

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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: 

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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 Jul-06

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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 

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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 S. Karna/PG06/IILM/Mgrl Eco/Course Intro/1

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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   

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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 S. Karna/PG06/IILM/Mgrl Eco/Course Intro/1

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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:     

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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:  

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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   

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A Structure-Conduct–Performance (SCP) approach Mergers and vertical integrations Measures of size of firms, market power and business concentration S. Karna/PG06/IILM/Mgrl Eco/Course Intro/1

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Course Outline (Contd) 6. Demand Estimation and Projections: 

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Demand Estimations, Demand Projections and Engel Curves Consumer Expenditure Surveys

6. Economic and Government Statistics 

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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) S. Karna/PG06/IILM/Mgrl Eco/Course Intro/1

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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: 

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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 S. Karna/PG06/IILM/Mgrl Eco/Course Intro/1

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