Microeconomics for Managers

Biresh Sahoo, Ph.D

Professor, XIM Bhubaneswar Lecture 1: Module I - Introduction to Microeconomics and Business

About me in brief
Over 13 years of teaching experiences after Ph.D. Recipient of three prestigious postdoctoral fellowships:
JSPS Fellowship by the Ministry of ducation! "apan for 1# consecutive $onths in #%%1&%#. Lise Meitner Fellowship by the 'oard of (ustrian )cience *und! (ustria for 1# consecutive $onths in #%%+&%, -first person fro$ .ndia to receive this fellowship/. Postdoctoral Fellowship by the *R01! 2ovt. of Portugal for 33 $onths in #%%4&%+.

)econd pri5e 6inner for (.M) .nternational 7oung Manage$ent Researcher (ward

in #%%+
8ualified 920 : 1 for ;ectureship in cono$ics -$a<or: cono$etrics/ in 1,,=. Me$ber of the ditorial 'oard of four refereed <ournals:

1/ (.M) .nt. ". of Manage$ent! #/ .nt. ". of .nfor$ation )yste$s and )ocial 0hange! 3/ 1he Open
Manage$ent "ournal! and >/ Prabandhan: .ndian ". of Manage$ent

Post&doc "ob xperience in Research:

#%%1&#%%# -1# $onth/: ")P) *ellow at 2R.P)! 1o?yo! "apan #%%+&#%%, -1# $onths/: ;ise Meitner *ellow at 69&6ien! (ustria #%%> -March/: Research *ellow at 2R.P)! 1o?yo! "apan #%%> -Dec./: Research *ellow at 2R.P)! 1o?yo! "apan #%%3 -"an&*eb./: @isiting )cholar at 2R.P)! 1o?yo! "apan #%%4 -"an&*eb./: @isiting )cholar at 2R.P)! 1o?yo! "apan #%%, -March/: @isiting )cholar at 2R.P)! 1o?yo! "apan #%1# -*eb./: @isiting )cholar at 2R.P)! 1o?yo! "apan #%1# -(pril/: @isiting )cholar at ":9! :ew Delhi 0redited with 3% publications so far in various scholarly <ournals of repute -#3 .nternational A 4 Do$estic/ and two boo?s

)ignificant publications include in <ournals such as

uropean "ournal of Operational Research - Elsevier Science/ O$ega: 1he .nternational "ournal of Manage$ent )cience - Elsevier

Science/ .nternational "ournal of Production cono$ics - Elsevier Science/ (nnals of Operations Research -Springer/ cological cono$ics -Elsevier Science/ )ocio& cono$ic Planning )ciences -Elsevier Science/ .nternational "ournal of )yste$s )cience -Taylor Francis/ .nternational 1ransactions in Operational Research - Wiley-Blackwell/ "ournal of the Operations Research )ociety of "apan "ournal of 8uantitative cono$ics -Indian Econo etric Society/

(uthorBs h&index: + -)ource: http:CCscholar.google.co.inCcitationsD

hlEenFuserEtGolD@g(((("/

-! scientist has inde" h i# h o# his $ papers have at least h citations each% and the other &$ ' h( papers have at ost h citations each(

)erving as Reviewer for several scholarly <ournals (rea of Research .nterest:

& fficiency and Productivity (nalysis of Organi5ations & Data nvelop$ent (nalysis My research contribution to H.M' against others

Faculty P. Goswami u!"asis #a$ andi% &nand '. P. 'as Biswa . Mis"ra "rid"ar (. 'as" #a"ul )"ar*urta G. (. +a$a* ,. "am!u Prasad Bani*anta Mis"ra Bires" (. a"oo - o. m$ contri!ution

Tier 1 (6) ------------------1 5 /3.33

Tier 2 (17) Tier 3 (7) Tier --------1 1 1 2 3 4 5 20.41 ------2 ----2 ------3 42./6 1 1 1 1 1 3 --------3 25

(12) Total ( 2) 1 1 1 3 3 4 3 2 3 5 16 3/.11

Source: &s %er +2 #an*in3 and &B #an*in3 421115

Microeconomics for Managers

What is Microeconomics?
Microeconomics deals wit" t"e stud$ o. "ow "ouse"olds and

.irms ma*e decisions and "ow t"e$ interact in mar*ets. )"at is7 - we stud$ "ow %eo%le ma*e decisions: how much they

work, what they buy, how much they save, and how they invest their savings; - we also stud$ "ow %eo%le interact wit" one anot"er in t"e mar*et.

Because the functioning of market reflects the behavior of the individuals (consumers and producers) who all comprise the market, we study Microeconomics with the following principles of individual decision making:
Peo%le .ace trade-o..s in t"eir decisions )"e cost o. somet"in3 is w"at $ou 3i8e u% to 3et it7 i.e.7

o%%ortunit$ cost
#ational %eo%le t"in* at t"e mar3in Peo%le res%ond to incenti8es Mar*ets are usuall$ a 3ood wa$ to or3ani9e economic acti8it$ Go8ernments can sometimes im%ro8e mar*et outcomes

Some potential questions to be answered!

Is .ree mar*et 3ood: ;ow %rice ceilin3s/.loors a..ect mar*et outcomes: ;ow ta<es on !u$ers a..ect mar*et outcomes: ,an 3ood news .or .armin3 !e !ad news .or .armers: 'oes dru3 interdiction increase or decrease dru3 related crimes: ="$ do some tennis clu!s "a8e an annual mem!ers"i% c"ar3e in addition to t"eir "ourl$ court .ees: ;ow does t"e c"an3e in %rices a..ect t"e social wel.are/well!ein3 o. %eo%le: ;ow could one assess credit ris*/audit ris* o. com%an$/ %eo%le: ;ow could one assess t"e %er.ormance o. em%lo$ees o. an or3ani9ation:

Getting Started
)tudents often tell us! I. read the text boo?

and . thought . understood it! but when . try to do the proble$s! . donBt ?now where to start.J .ndeed! it is a lot easier to passively KlearnB a concept than to try to apply it. 'ut the $ain reason for learning the tools of econo$ic theory is so that you can apply the$! and the best way we ?now to develop the s?ill of applying ideas is to do lots of proble$s.

!ow managerial economics differs from its public policy cousins, Microeconomics, or e"uivalently, how business differs from economics#
Business: mone$ ma*in3 o%%ortunities )o identi.$ it7 one needs to understand "ow wealth is created and

destroyed.
=ealt" is created w"en assets are mo8ed .rom lower-to "i3"er-8alued

uses.
& %erson>s 8alue .or a 3ood/ser8ice is t"e amount o. mone$ "e/s"e is

willin3 to %a$ .or it.

)"is willin3ness re?uires !ot" desire .or t"e 3ood and t"e a!ilit$ to %a$

.or it.
@alue a %roduct A "ow buyer and seller %ercei8e it: ="ile a buyer>s 8alue .or an item is "ow muc" "e will %a$ .or it7 a seller

won>t acce%t less t"an "er 8alue7 BcostC.

Capitalism creates wealt" !$ lettin3 %eo%le .ollow t"eir sel.-

interest 4;ow:5
& !u$er willin3l$ !u$s i. t"e %rice is !elow "is 8alue7 and a

seller sells i. t"e %rice is a!o8e "er 8alue A !ot" !u$er and seller 3ainD ot"erwise7 t"e$ won>t transact.
Voluntary transactions creates wealth. !n "#a$%le: u%%ose t"at a !u$er 8alues a "ouse at #s.21

la*" and a seller at #s. 15 la*". I. t"e$ can a3ree on a %rice A sa$7 #s. 1/ la*" A t"e seller recei8es #s. 3 la*" more 4producer surplus5 and t"e consumer recei8es it wort" #s. 2 la*" more t"an "e is willin3 to %a$ .or it 4consumer surplus5.

$conomics vs# Business

Economics is use.ul to !usiness as it s"ows us "ow to s%ot mone$-

ma*in3 o%%ortunities 4assets in lower-8alued uses5.

&n econom$ is e..icient i. all assets are em%lo$ed in t"eir "i3"est-

8alued uses.
Economists searc" .or assets in lower-8alued uses and t"en su33est

%u!lic %olicies to mo8e t"em to "i3"er 8alued ones.

& 3ood %olic$ is one t"at increases e..icienc$ !$ .acilitatin3 t"e

mo8ement o. assets to "i3"er-8alued usesD and a !ad %olic$ is one t"at %re8ents assets .rom mo8in3 to "i3"er-8alued uses or7 worse7 mo8e assets to lower-8alued uses.
'eterminin3 w"et"er an economic %olic$ is 3ood or !ad re?uires

anal$9in3 all o. its e..ects A t"e unintended as well as t"e intended e..ects.

;a8in3 identi.ied ine..icient outcomes7 economists will

ar3ue .or c"an3es in %u!lic %olicies. Economists see ine..icienc$ as somet"in3 to !e eliminated t"rou3" !etter %u!lic %olic$.
;owe8er7 !usiness %eo%le see ine..icienc$ as somet"in3 to

!e e<%loited A t"e$ reali9e t"at ine..icienc$ im%lies o%%ortunit$. I. an asset is not em%lo$ed in its "i3"est-8alued use7 someone can ma*e mone$ !$ mo8in3 it. In t"is wa$ !usiness can sometimes miti3ate t"e "arm.ul e..ects o. !ad %olic$.
First lesson o& business ('ow to $a(e $oney): .ind an

asset em%lo$ed in lower-8alued use7 !u$ it7 and t"en sell it someone w"o %uts a "i3"er 8alue on it. Eac" underem%lo$ed asset re%resents a %otential wealt"-creatin3 transaction.

Than( you
for your patience