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Adjunct / Visiting Faculty
B.A (Economics) : Miranda HouseMA (Economics) : Gokhale Institute, PunePhD Aspirant : June’15
Renewable Energy: Suzlon
Thermal Energy: GE
Yoga
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Why Do You
Want To
Study
Economics?It’s a part of the course, that’s why
Managers need to know a little bit of economicsEconomics is about prices, and demand and supply… and you know… all that
Can it be a lot of fun? .. We’ll find out
I get to learn something new
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It helps me to make sense of the newspaper articles!
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Economics: All about these 4!
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What is Managerial Economics all about?
Decision Making
But Why?
Because there are so many paths!
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Steps in Decision Making
ProblemDifferent
ApproachesCollect Data &
Analyse
Select BestImplementFollow up to
Improve 9
Who is a Manager?
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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?
So much to do.. In so less time!
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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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Economics: 2 Main Branches
• 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
What these 2 branches tell us?
• 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 15
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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!
• It may not make sense to hire
people internally, but employ
consultants
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Objective of the firm?
Flipkart reported a loss of 281 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,Sofina SA 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
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
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Substitution Effect
Since X is now cheaper – demand
more
Demand for X increases
Income Effect
You can buy more – Real Income
Increases
Demand for X increases
Assume the Price of a Commodity Falls
Both the SE and IE ensure that as Px falls, Demand Increases
~ Hence the downward sloping demand curve
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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 GoodA special type of inferior good : As Price rises, demand also rises
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 meat was even more expensive)
Thus as Price Increased, Demand also increased!
http://www.economist.com/blogs/freeexchange/2007/07/as_price_goes_up_so_does_deman
Key: Major portion of your budget is spent on this good!
• Upward Sloping
• Reflects the producers
willingness to sell at a
price
• Increase in price leads to
Increase in Supply
Supply Curve
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Price($ per slice)
4
2
3
8 12
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Supply
Demand
Market Equilibrium
• Intersection of demand and supply for
the product
• Equilibrium is at Rs. 3
• No one is left unsatisfied –
demands are met with supply
• What happens when there is
excess of either?
Quantity
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Price($ per slice)
4
2
3
8 16
Supply
Demand
Excess Demand
• Excess demand of 8 Nos.
• Since there is more demand that market
can supply, price starts increasing
• Leads to reduction in demand
• Ultimately equilibrium is restored at
Rs. 3, by moving along the demand
curve
Quantity
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Excess Supply
Price($ per slice)
4
2
3
8 12
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Supply
Demand
• Excess supply of 8 Nos.
• Price starts falling – supply also reduces
• Ultimately equilibrium is restored
at Rs. 3, by moving along the
supply curve (only we move
downwards!)
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 manager’s 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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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!
A Brief Example
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Average & Marginal
Quantity Total Average Marginal1 100 100 1002 180 90 803 210 70 304 220 55 105 230 46 10
• “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
markets that you may work in
• Change in total benefits arising from a change in the control variable, Q:
MB = DB / DQ• Slope (calculus derivative) of the total benefit
curve
Marginal Benefit/ Marginal Revenue
• Change in total costs arising from a change in the control variable, Q:
MC = DC / DQ• Slope (calculus derivative) of the total cost
curve
Marginal Cost
• 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
Equilibrium In Marginal Quantities
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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.