S01 ME Y1011 Economics Scope&Methods

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Indian Institute of Management Lucknow1 July, 2010; Thursday

Session 01

Economics: Scope and Methods

PGP PresentationTime: 90 MinutesSlides: 46

Introduction


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A relevant quote to begin with

Our envy goes to you, setting out to explore the

exciting world of economics for the first t ime.This is a thrill that, alas, you can experience onlyonce in life!

~ Paul A Samuelson (with William D Nordhaus)

Economics, Twelfth Edition, Preface

McGraw-Hill, 1955

[Emphasis Added]


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Plan of the Presentation_____________________________________________________________

Part Topic Time (Min)

Part I: Motivation .. 15Two Examples

What is Economics?Early History and Major Landmarks

Part II: Towards Building a Foundation .. 20 Part III: Managerial Economics .. 20

Economics and the Business EnvironmentIs Learning Economics Useful for Managers?How Should Managers Study Economics?

Part IV: Rules on Evaluation .. 20 Part V: Resources .. 05

Questions & Answers / Discussions?

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Part I: Motivation

Two Examples

Example 1: The Refugee Camp, Corruption and theCensus that Could Not Take Place!

(Source: Statistics and Truth by C.R. Rao)

Example 2: Babur and the Spanish conquistadors

(Source: Tuzuk-i-Baburi)


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What is Economics?Economics is the study of how men and society choose to employ

scarce productive resources, which could have alternative uses,to produce various commodities over time and distribute themfor consumption, now and in the future, among various peopleand groups in the society

Paul A Samuelson (With William D Nordhaus)Economics, McGraw-Hill, 1955, 12th Edition, P. 4, [My emphasis]

Problem in a Rigorous Definition: Expanding Frontier

Economics is not a clearly defined discipline. Its frontiers are

constantly expanding. An Example of Expanding Domain: Experimental Economics

Implication: Any definition of economics could be a subject ofdebate!


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Major Landmarks in Economic Thought

Early History: Mercantilists, Physiocrats etc.

(If you are interested, read A Science in ItsYouth by A. Anikin, Progress Publishers).

Some Benchmark and Influential Studies:

Adam Smith: The Wealth of Nations, 1776.

Karl Marx: Das Capital, 1867.

John Maynard Keynes: The General Theoryof

Employment, Interest and Money, 1936. Milton Friedman and Anna J Schwartz: A Monetary

Historyof the United States, 1867-1960, 1971.


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Evolution of Modern Economics Marxs prediction on market economy and the experience of

great depression in the United States. Market Economy: Emphasis on quantitative aspect of

economic problems:

Evolution of statistics as an independent discipline Two other important but unrelated events

Evolution of econometrics: Formation of Econometric Society(1931) and the journal Econometrica (1933)(Reference Document: First Editorial of Econometrica, RagnarFrisch, January 1933)

Advent of Keynes and General Theory (1936)

Implications: understanding of the market economyimproved greatly.

Why are applications of scientific techniques easier on amarket economy than on a command and control one?


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Part II: Towards Building a Foundation

How to Build a Scientific Theory?

Two types of reasoning: Deductive reasoning

Inductive Reasoning

Deductive reasoning Start with a set of axioms & definitions

With the axioms and definitions, try to derive results.

Example?

Inductive reasoning Start from observations

Try to build a theory that explains those observations.

Example?

Which way of reasoning do you feel is better?


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How to Build a Theoretical Foundation in

Economics?

Microeconomics and Macroeconomics

Microeconomics focuses on explaining

the behavior of individual units(households, firms etc. often termedas economic agents!)

Macroeconomics, in contrast, looks atthe economy as a whole.

What type of reasoning would be bettersuited for microeconomics? Formacroeconomics?


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The Big Picture:

Managers in Economic Policymaking

Managers in Public Sectors:

Have to advise politicians on policies

Entrepreneurs / Managers in Private Sector: Understand the forces that dictate government policy

Business leaders are regularly consulted in policymatters. Often, they are the policymakers.

Any example that you can think of?


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Economic Issues and Common SenseReal life problems are either absurdly simple,

or simply absurd!

Economics is one of the core subjects formanagers, not the only subject.

Some of the greatest leaders of men werenot formally trained in economics.

Real life economic problems, in manycases, just require common sense, which,by the way, is not so common!


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Relevance of the Topics in Economics I to

Other Courses in IIMLSessions Topic in Economics I Other Areas

2-3 Operations of Markets Marketing

4-5 Theory of Consumer Behavior Marketing

6-7 Demand Forecasting All areas of management!

8-10 Theory of Production and Cost MANAC, OperationalManagement, Supply ChainManagement

11-15 Market Structures and Price-Output Determination

Marketing, Strategy,Operational Management,Supply Chain Management

16 Factors of Production HR, Strategy

17 Information Asymmetry HR (Organizational Behavior)

18 Government Regulations All areas of management


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Part IV: Rules on Evaluation

Individual and Team Performance

Significance of team activities in a business school Importance of teamwork Problems created by free riders

Form ten teams among yourselves Each team should not have more than seven persons. The teams should be heterogeneous and should cover all

societal and academic cleavages to the extent possible.

Action: Class Representative!


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Allocation between Individual and Team

Performance

Individual Performance (Weight: 80.0 per cent): Individual class performance (10.0) Written examinations (60.0)

Quizzes (10.0) Team Performance (Weight 20.0 per cent):

Performance of a team in class discussions andpreparations of briefings and reviews and solvingproblems (8.0)

Project (12.0)


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Individual Class Performance Classes should, to the extent possible, be

interactive and participatory!

Individual class performance carries 10.0 per centweight. The break up is:

Attendance: 3.0 Attendance record in the range of18 - 20 | 3.0 marks With each absence after second time, you loose 1.0

mark

Discipline and Alertness: 1.0 Good Questions:3.0

Good questions carry rewards!

Judge a man by his questions rather than by his answers~ Voltaire

Instructors Judgment: 3.0


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Written Examinations: Syllabus etc.

Mid-Term Examination (Weight: 20.0 per cent): Pindyck and Rubinfeld, Chapters 1-6.

Petersen and Lewis, Chapters 4-5.

End-Term Examination (Weight 40.0 per cent): Syllabus of Mid-Term Examination

Pindyck and Rubinfeld, Chapters 7,9,11-13,17 .

Petersen and Lewis, Chapter 12.

Materials from www.cci.gov.in

(Details on the syllabus will be revealed as we progress.)

In both mid-term and end-term examinations,questions will be short answer type.


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Quizzes: Syllabus etc. Quiz 1(Weight: 5.0 per cent)

Syllabus: Sessions 01-05

Quiz 2(Weight: 5.0 per cent) Syllabus: Sessions 11-15

In both the quizzes, you have to write a single essayor a critical review (Time: 15 - 30 Minutes)

Note: Syllabi for written examinations and quizzes do notinclude polycopy articles!

Why are then so many articles in the polycopy?


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Typical Questions that I Shall Ask on EachPolycopy Article

Give us a brief (about 2 minutes)! What are the useful points in the article from an academic

perspective? In what way has the article improved your understanding of

economics?

Is the article relevant for business? If so, in what way? What are the limitations of the article? Does it need any

improvement? If it is an empirical article and the data analyzed do not cover

India, are the conclusions applicable for India? If the article is an old one, are the conclusions valid in the

current context? Related concepts: treasure hunt!

Can you think of some interesting questions on thearticle?


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Additional Teamwork on Review

Write a critical review on a paper / article

Deadline of submission: Each team has to submit the

review within seventy two hours after the paper /article is circulated.

How to write critical reviews? A critical review is not just a summary!

Clue: Look at the list of questions!


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Team Performance: Projects

Project carries 12.0 per cent weight. Written report and/or presentation : 10.0

Independent thinking and performance: 1.0

Leadership: 1.0

Size of the project report should not exceed six typewrittenpages.

Deadline of submission of the written report:

One week before the last class in Term I Exact dateto be announced later.

Anymemberofanygroup may be questioned separatelyontheir workin anyof the last two sessions.


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Project Topics

1. Price variations in India

2. Engel curve estimation for a particular region in India

3. Forecast of cellphone subscription in a particular region inIndia

4. Project on sales forecasting

5. Estimation of cost function

6. Estimation of production function

Notes on Projects:

Each group will work on one particular city / region / groupof firms.

Details on city/region/group etc. will be given later.


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Grades: Indicative Cut-Off Points

Marks (In Per Cent) Grade Comments

00.00 - 34.99 F The range of failure.

35.00 44.99 D

45.00 49.99 C-

50.00 54.99 C

55.00 59.99 C+

60.00 64.99 B-

65.00 69.99 B

70.00 74.99 B+75.00 77.49 A- 1. IIML convention restricts the percentage

of students in this range.

2. The cut-off points are indicative onlyand may change a bit later.

77.50 79.99 A

80.00 100.00 A+


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Part V: Resources

Books

Pindyck Rs and DL Rubinfeld and PL Mehta:Microeconomics, Pearson Education.(Please Follow the Seventh Edition)

Petersen HC and WC Lewis:Managerial Economics,

Prentice-Hallof India.

Additional Reference Books: Samuelson PA and WD Nordhaus:Economics, McGraw-Hill. Salvatore D (Adapted by R Srivastava):Managerial

Economics: Principles and Worldwide Applications, Oxford

UniversityPress. Henderson JM and RE Quandt:Microeconomic Theory: A

Mathematical Approach, McGraw-Hill. Palgrave Dictionary on Economics, Volumes I-III.


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Journals

Important International Journals: Journal of Economic Literature (JEL)

Every issue contains a few surveys written by experts.

Lists the current contents of every important journals on

economics JEL category of issues and subjects in economics

Journal of Economic Perspectives

Important Indian Journals Economic and Political Weekly

Journal of Quantitative Economics Indian Economic Review

Indian Journal of Economics

Sankhya: The Indian Journal of Statistics


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Websites I (International)

Inomics: (http://www.inomics.com)

American Economic Association:(http://www.aeaweb.org)

NBER: (http://www.nber.org)

IMF: http://www.imf.org

[Contains separate country pages]

World Bank: http://www.worldbank.org

[Contains separate country pages]

BIS: http://www.bis.org[Contains a page that has links for more than 80 centralbanks in the world, e.g., European Central Bank (ECB)and Federal Reserves (Fed)]


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Websites II (Indian)

Reserve Bank of India (http://www.rbi.org.in)

(Contains links to websites of banks and otherfinancial institutions)

Government of India Website (http://www.nic.in) Planning Commission

(http://planningcommission.nic.in)


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Major Microeconomic Data Sources in India*

National Sample Survey Surveys on Consumption Surveys on Employment and Unemployment Annual Survey of Industries All India Debt and Investment Survey

National Family Health Surveys Prowess Database Reserve Bank of India

Panel Database on Companies Panel Database on Banks

Office of the Economic Adviser, Ministry of Commerce and Industry,Government of India

Labour Bureau, Government of India

* For some major US microeconomic data sources, see Cameron ACand PK Trivedi, 2005:Microeconometrics: Methods andApplications, Cambridge UniversityPress.


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Annexure

Keywords, Important Concepts and AdditionalReferences

Keywords and Important Concepts: Economics, Deductive and Inductive Reasoning, Microeconomics,

Macroeconomics, Concept of a Model in Science, ConstrainedOptimization Problems, Managerial Economics

Additional References: As indicated in the texts and slides.


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Acknowledgements

All slides in this presentation have beenprepared by the instructor himself.


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Dedication

When you share your wealth with others, yourown wealth shrinks.

When you share your knowledge with others, yourown knowledge increases.

~ Chanaky

These slides are dedicated to you all. You arefree to use it and to distribute it to any studentof economics; but for heavens sake, though youall are students of a business school, do notmake any business out of it!

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S01 ME Y1011 Economics Scope&Methods