Session-1

Introduction to Managerial Economics Economic Concepts Relevant To Business

Prof. Tushar Ranjan Panigrahi

Topics to be Discussed
Difference between Managerial Economics and Economics Nature of Managerial Economics Scope of Managerial Economics Significance of Managerial Economics.

Course Objectives
To present the core of microeconomic theory To show how the theoretical concepts can actually be implemented

To demonstrate the relation of managerial economics to the other courses in business

Can men wear such an outfit?

But Women can .

Product Range
Women's Clothing: Dresses, salwar suit, Shrugs & Jackets Shirts, Tops & Tees, Jackets & Blazers, Kurtis, Jeans & Jeggings, Shorts & Skirts Leggings & Capris Pants / Trousers, Lehenga, Ghaghra ,Sari
Bandhani Patola Gujarati brocade Men's Clothing: Casual Shirts Paithani Formal Shirts TChanderi shirts & Collared Gadawal Tees Sweaters & Banaras brocade Sweatshirts Kota doria Jackets & Blazers Kanjeevaram Kurtas Jeans Pants Konrad / Trousers Shorts Pashmina silk Kota silk Puttapakshi Baluchari

Some Managerial Brainstorming

Why in garments a seller can offer up to 70% discount why cant he give the same on Sugar or salt? India Gate Super Basmati Rice sells rice at Rs.110 /Kg and offers 5Kg super saver Packate at Rs.350. So it is Rs.70/Kg. Why HMT Regular can not provide such type of offer(from Rs.32/Kg to Rs.24/Kg)? Why does air India charge Rs. 8000 per person for a trip from Mumbai to Bangalore for the bookings two days prior to fly and Rs.2200 when the booking is done before two months in the same flight?

INTRODUCTION
How does managerial economics differ from regular economics? There is no difference in the theory; standard economic theory provides the basis for managerial economics.

The difference is in the way the economic theory is applied. Managerial Economics is essentially applied economics in the field of business management. It pertains to all economic aspects of managerial decision making.

What is managerial economics?

Managerial economics is the use of economic analysis to make business decisions involving the best use (allocation) of an organizations scarce resources

Managerial economics is (mostly) applied microeconomics (normative microeconomics)

Managerial economics deals with

How decisions should be made by managers to achieve the firms goals - in particular, how to maximize profit.
(Also government agencies and nonprofit institutions benefit from knowledge of economics, i.e. efficient resource allocation is important for them too...)

What is Managerial Economics?

Applied micro-economics, but with a focus on decision making What shall a manager do in this and that situation? Pricing decisions in different circumstances Market entry, innovation, auction theory Organization of the firm Personnel policy, how to motivate workers

Relationship between Managerial Economics and Related Disciplines Management Decision Problems

Economic Concepts

Decision Sciences

Managerial Economics Optimal Solutions to Managerial Decision Problems

 Management Decision Problems

Management Decision Problems

Product Price and Output

Make or Buy Economic Concepts Decision Sciences Production Technique Managerial Stock Levels Economics Advertising Media and Intensity Labor Hiring and Training Optimal Solutions to Managerial Investment and Financing Decision Problems

Management Decision Problems

Decision Sciences
Economic Concepts Decision Sciences Managerial Economics Optimal Solutions to Managerial Decision Problems

Tools and Techniques of Analysis Numerical Analysis Statistical Estimation Forecasting Game Theory Optimization Simulation

 Economic Concepts

Management Decision Problems

Framework for Decisions Economic Concepts Decision Sciences Theory of Consumer Managerial Behaviour Economics Theory of the Firm Theory of Market Structure Optimal Solutions to Managerial and Pricing Decision Problems

 Managerial Economics
Use of Economic Concepts and Decision Science Methodology to Solve Managerial Decision Problems

Management Decision Problems

Economic Concepts

Decision Sciences

Managerial Economics Optimal Solutions to Managerial Decision Problems

THE GOALS OF A FIRM

Economic Goals: Maximizing or Satisfying
1. Profit 2. Market share 3. Revenue growth 4. Return on investment 5. Technology 6. Customer satisfaction 7. Shareholder value

Optimal Decision:
Given the goal(s) that the firm is pursuing, the optimal decision in managerial economics is one that brings the firm closest to this goal.

 Business moves where economy is sound; and economy is sound where business happens. Stronger the nation economically, world gives greater weight to it. Large market/ cheap labour/ qualified personnel/ stable interest rates and tax rates/ committed workforce/ low corruption/ law and order, etc. create good business climate.

Economic Concepts Relevant to Business

Demand Supply Production Distribution Consumption Consumption function Cost Price Competition Monopoly Profit Optimization Marginal-Average Elasticity Macro and Micro analysis

Demand
Two conditions must be there in a given point of time or for a given period:
Willingness to buy Ability to pay

Both of them must exist simultaneously Potential demand Actual demand

Demand
Potential demand Actual demand How accurate are demand forecasts? Reasons Can any firm afford NOT to forecast? Why recessions occur? What happens to the output? Planned & unplanned inventory

Supply
Supply refers to the amount of quantity of a good/ service willing and able to offer for sale by producers at a given price, during a given time and at a given place. Supply function relates quantity supplied with own price, related goods prices, Technology, input prices, weather/ Road conditions, transportation, movement restrictions, so on). Supply Curve shows a positive association between Qs and P, ceteris paribus. Difference between Output and Supply

Shape of Supply Curve

The normal shape of supply curve is upward slopping from left to right. It indicates, cost of production remaining constant/ decreasing, higher the price, larger is the profit. Hence, greater incentive to raise supply. Based on the time period, namely Market Period, short period, long period and secular period, shape of supply curve may be vertical, steeper or flatter

Price

S0

S0

Quantity Supplied

Market Clearance
Both demand and supply interact to determine the market equilibrium. While demand and supply are influenced by a number of factors,
In very short run or market period, supply is given, In short run there is some scope for increase and in long run, it is fully flexible.

Production
Conversion of inputs into output (Ag/ Ind/ Mfg) Creation of utility (services) Traditional factors of production
Land, Labor, Capital, Organization

Consumption
An unavoidable human activity which satisfies individuals by fulfilling wants-both economic and non-economic. Goods and services possess utility or want satisfying quality in them. Since goods and services cost us, we COMPARE the benefit (utility) and costs (price). Two laws of consumption Diminishing utility Equi-marginal utility

Exercise
Swadeshi Fabric Ltd. manufactures cotton cloth for industrial usage. During the previous year, Swadeshi sold 5 million square yards of cotton cloth at an average price of Rs.6 per yard. During the current year, percapita GDP is expected to increase to Rs.20,000 from Rs.18,500 during the last year. The marketing director expects that the increase in the per capita GDP would increase the sales to 7 million square yards. The marketing director believes that expected increase in the percapita GDP would enable him to maintain the sales at previous years sales level even if the price is increased to Rs.6.50 per yard. Required: a. Calculate the income elasticity and price elasticity of demand

for cotton. b. If Swadeshi Fabric would like to reach a sales level of 7.5 million square yards of cloth for the current year, what should be the new price? c. Based on your answer in (a) above i. Explain whether cotton is a luxury or a necessity ii. Explain the impact of increase in price on the total revenue.