Managerial economics


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Managerial economics

  1. 1. MANAGERIAL ECONOMICS. Microeconomics & Managerial Economics address optimization under constraints. Economics looks at innumerable wants and limited resources. Needs need be differentiated from wants. Demands & Supplies are part parcel of fundamental analysis in economics. Other things remaining constant is important dictum.
  2. 2. INTRODUCTION.1. Which markets to enter?2. How to differentiate products?3. Mix of Products --- what to make?4. Pricing the products and services how to do?5. Who are the competitors and how will they respond to the strategies?
  3. 3. DESIGNING THE INSTITUTION.1.Who will take the ultimate decision?2. How to reward or pay the contributors to the organization?3. Systems that evaluate the performance of the individuals as well as of the perform --- how to institute them & justify?4. Goals ---CARDINAL OBECTIVES: Profitability, Stability & Growth.
  4. 4. ECONOMIC ANALYSIS Survival of the fittest. Bench Marking against the best practice.(A Tiger chases you and your friend in a forest ----- how will you escape?)
  5. 5. MAKING CHOICES1. Decision Making by Marginal Analysis. Marginal Cost2. Opportunity Costs --- Value of Best Alternative.3. Marginal Utility & Diminishing Marginal Utility.(Analyze with the backdrop of creativity of the individuals involved.)Exercise: With a jump clip other than paper hold, what are the alternative uses? ---- list them quickly in 5 minutes.
  6. 6. INDIVIDUAL OBJECTIVES Why do you obtain goods & services? ----MAXIMIZING PERSONAL HAPPINESS What are UTILITY functions?UTILITY FUNCTIONS OFFER SATISFACTION. --- Time Form & Place UTILITIES. Order of preference.EXERCISE: Prioritize in Rs.50,000/= for an executive office.
  7. 7. CONSTRAINT OF INCOME & RESOURCES Optimum Combinations of Utility --- Engel’s theory of expenditure. (When income changes this combination changes and when the price level changes then too the combination changes) Making the optimum choice. Application to Management of enterprises. Graduating from SME to Big enterprises.
  8. 8. MONEY & JOB SATISFACTION You are offered a telephone operator job for Rs.45,000/= per month in Arab country & Rs.30,000/= per month in India as General manager --- which job do you opt for? How these behaviors affect your managerial decision making? Is honesty a qualification?
  9. 9. ALTERNATIVE BEHAVIORS. Is it only Money? Is it Happiness that contributes to higher productivity? Is it the Good Citizen certificate that makes you work? Is it environment (upbringing) that contributes to your economic behavior? Can you explain Criminal / Juvenile behavior by economic analysis taught to you?
  10. 10. DECISION MAKING UNDER UNCERTAINTY. Expected Value. Risk return tangle. Risk Aversion. Certainty Equivalent of Premium.(Two Managerial jobs are offered to you: The first one has only performance basis ---- means 0 to 60,000/= pm. Average what you can earn is Rs.45,000/=pm. There is another job with regular salary scale of Rs.35,000/=pm --- which one do you select?)
  11. 11. CERTAIN PRINCIPLES. What is the role of price? -- Social Coordinators! COASE theorem.(As long as the properties are easily assignable, exchangeable, & enforceable and if the contracting costs are low the resources allocation will be efficient regardless of the initial property rights) --- Discuss this in the Indian context.PRACTICAL APPLICATION --- SECURITIZATION.
  12. 12. FIRM RESOURCES’ ECONOMICS. Land ---- recent developments. LABOUR --- hazy difference between MANAGEMENT & LABOUR ---- therefore HR as a resource! ORGANIZATION --- the components--- what are they in the recent context? CAPITAL --- What is the difference between W.C. & Capital? TIME --- its swap with other resources. --- Competitive edge & time!
  13. 13. PRINCIPLES --- CONTINUED Debate as to whether Central Planning or Free Market Economy, which will aid management? Knowledge, General Knowledge & Specific Knowledge ---- Cost of specific knowledge. Scientific knowledge & knowledge creation Specific knowledge & Economic System. Economic System --- External contracting costs Internal costs.
  14. 14. WHAT IS A FIRM? It has specific knowledge to create product/service. It caters to Demand. It has optimization objectives. It can access resources from the market. Resources as well supplies are subject to constraints/competition. Exclusiveness of knowledge enables exclusiveness of the firm. Price is the consideration. Market may or may not recognize the cost of the product/service while determining /paying a price. It is the firm which has to be conscious of the cost and not the consumers. Therefore pricing is a strategic decision making process rather than a mere policy.DISCUSS THE ABOVE
  15. 15. DEMAND, MARKET & COMPETITION. Does the entire demand for a product/service constitute Market? When there is no other supplier for the product --- is there no competition? Then What is competition? Winning the competition --- what strategies? Creating Demand --- Genuine & Artificial.(Value Based Management, Strategic Management & War of Attrition.)
  16. 16. STRATEGIES! Monopoly. Duopoly. Oligopoly. What is POLISTIC?Play “win maximum” game!CAN YOU WORK OUT A GAME THEORY BASED ON THIS?
  17. 17. VALUE, COST & PRICE. Are more valuable ones highly priced? Are cost and price related? As an entrepreneur should price be dictated by the firm or the buyer? Differentiate value, cost & price ---- are they all only mere perceptions? Historical Cost, Marginal Cost, Total Cost, Opportunity Cost --- When to take what? Minimize short & long term costs & Maximize profits --- How to do?
  18. 18. INVESTMENT CONSIDERATION The net realizable value (NRV) of the asset- this is the current net disposable value. The present value of the expected future earnings stream flowing from the asset (PV) An individual asset may be valued on each of these three alternative bases. But there are six ways in which values may be ranked in order of magnitude. These are: 1. NRV > PV > RC 2. NRV > RC > PV 3. PV > RC > NRV 4. PV > NRV > RC 5. RC > PV > NRV 6. RC > NRV > PV
  19. 19. CAPITAL --- WHAT TYPES? Cost of Capital & Weighted Average Cost (WACC). Debt & Leveraging.1. Retained Earnings.2. Public Contributions (IPO/ PO)3. Foreign Capital.4. Borrowed Capital.Which is the most expensive? Deliberate!
  20. 20. BARGAINING FOR INFORMATION. Is Information costly? Is Information Valuable? Can Information be complete in an Organization? Could Information give competitive edge? Can INFORMATION BRING SATISFACTION? What are asymmetric information? Problem of Segregation of Useless Information.
  21. 21. Contracts that Bind an Organization & Incentives! Employees. Promoters. Investors. Lenders. Suppliers. Buyers. Insurers. Ultimate consumers.How to compensate each one of them ----Fundamental Logic!
  22. 22. INFORMATION EFFICIENCY – AN EXAMPLE! Share market ---- how the prices vary? What is “Insider Information.”? Efficient Use of Information ----- What are the premises? Economics of Information ---- Cost of processing Information ---- Missing vital Information --- MIS in firms!
  23. 23. CORPORATE CONTROL The stakeholders have stake in the organization. Debtors want to control. Promoters want to control. Managements say they control. Technology Providers want to control. Employees want to control (through union) Suppliers too want control. Regulators & Governments also control.Do customers really Control? Who really Controls?
  24. 24. LABOUR ECONOMICS & MOTIVATION. LABOUR as a commodity. Their mobility across the borders. Collective Bargaining & Organized LABOUR. Conflict of collars’ colors! Disparity in wage levels & Globalization.(IT & Rocket Science --- case example! Where is management education placed?)
  25. 25. GAME THEORYWhere strategic or other (may be innate/ deliberate /or intended) moves of one or more players (in a market environ or microeconomic context) result in some kind of tradeoff situations and or equilibrium conditions the possibilities (outcomes) are theoretically predictable through the application of game theory models. They are quantitative techniques like linear programming /stepping stones etc. They are of different kinds!
  26. 26. TYPES OF GAMES. CLASSIFICATION BY MOVES:1. Simultaneous..2. Sequential.. CLASSIFICATION BY OUTCOMES:1. Zero Sum..2. Prisoner’s Dilemma.. CLASSIFICATION BY BEHAVIOR:1. Cooperative..2. Non-cooperative..
  27. 27. TRANSACTION COSTS – MODERN THEORY FIRM Potential to be converted in feasibility cost a firm:1. Market potential & Market feasibility.2. Technical know-how & production feasibility.3. Capital & Financial Feasibility.RELATE THESE ISSUES TO STABILITY, GROWTH & PROFITABILITY i.e. The cardinal objectives of a firm.
  30. 30. ASSIGNMENT.Take ten representative companies in different sectors and study their balance sheet financial statements and make comparative analysis of factor compensations (% analysis) with your comments!(More focus on compensation for labor/HR is required.)