Introduction to Microeconomics:What is economics?Economics is a study by which we understand the use of scarce resources for efficientproduction and distribution of goods and services to satisfy the unlimited humanwants.This definition of Economics is the basis for the study of Economics for managers oftoday.We aim to use Economics to be better managers. Does this definition help usmanagers to reach our goal, i.e. ‘Profit Maximization of company’?The ‘of scarce resources for efficient production and distribution of goods andservices’ represents the production side of the society and the ‘unlimited humanwants’ represents the consumer side. Both these meet in the marketplace.Part I: Three components of MICROECONOMICS are the Consumer, Firm and theMarket.Tata Motors Ace touches one-lakh markOur BureauMumbai March 19 Tata Motors rolled out its 1,00,000th Ace, its mini-truck, 20 months after itslaunch, from the companys Pune plant. It was flagged off by Mr Ratan Tata, Chairman, TataMotors.The Ace, suitable for urban and rural use, is powered by a small twin cylinder 16PS IDI 700ccdiesel engine, and has a turning radius of 4.3 metres. Besides being introduced in all majorStates in the country, it has also been launched in Sri Lanka, said a press release.Mr Ravi Kant, Managing Director, Tata Motors, said, "We are happy that we have been able tomeet customers need for a mini-truck for the last-mile connection, while providing comfort,style and easy maintenance. What particularly pleases us is that the Ace has been able togenerate self-employment, with many of its owners being individuals who have entered thetransportation industry for the first time."Tata Motors is setting up a dedicated plant for Ace at Pant Nagar in Uttaranchal, with anannual capacity of 2,50,000 units. The plant will begin production this year.Tata Ace HT (High Torque), a special variant to deal with a wide variety of gradients, especiallyin the North Eastern region has also been recently launched.ApplicationsThe company has developed several applications of the Tata ACE, such as water tanker, deliveryvan — box type (for high-volume low-weight cargo), delivery van — bodyline (for preciouscargo and courier services), garbage tipper, DSiltman (for desilting underground drainage andwells), dumper placer and ACE elevated platform. Tata Motors, the countrys largest automobilecompany, registered revenues of $ 5.5 billion in 2005-06.With over four million Tata vehicles plying in the country, it is the leader in commercial vehiclesand the second largest in passenger vehicles, the company said on Monday.Let us study the article in terms of Microeconomics.Where does the customer feature?Firstly Tata Motors thought carefully what the public wants, what are the features ifadded will boost sales.
Not only in India but also Sri Lanka. Understanding consumer preferences, tradeoffs,predicting demand and its responsiveness to price that Tata Motors will charge.Being alert to demographics of the market.So demand schedule and elasticityOther factors.Demand schedule will start with:The kind of product and the consumersWhat do they want?Upon what does their buying decision depend?How much does price affect them?What besides price affects their buying decision?What about substitutes and complementary goods?Next let us look for the firm, Tata Motors.Tata motors has to be concerned with the cost of manufacturing ACE. What would thecosts be?How would the costs depend on the number of cars produced each year?How would the wages and the price of the raw materials such as steel affect costs?How much would the costs decline when the managers and workers learn the work?And to maximize profits how many cars should Tata Motors produce each year?Production function: inputs and Total product and marginal productCosts: Marginal costs, total costs and average costsFind out what does a firm need to produce goodsWhat is the most efficient mix of inputs?What are the associated costs?So based on costs how much should a firm should produce?What information about the market structure will Tata Motors be interested inTata Motors has to design a pricing strategy and consider how the competitors wouldreact to it.Should it charge minimum for its basic version and then charge for the additionalfeatures and or should it standardize the features and charge a higher price for thewhole new product.Will the other players in the market such as Eicher Motors or Mahindra follow the leadof Tata Motors and reduce the price if Tata Motors sells it at the basic price?Market structures: Perfect Competition, Monopoly, Oligopoly and Monopolisticcompetition.Which markets do I operate in?Who are my competitors?How much do they affect me?How much to produce and sell at what price?So the next question is how do these three factors lead to our goal which ismaximization of profit. Let us bring the three together in such a manner that our goal isreached.
Profit = TR – TCTR = Price X Quantity• Increasing price – which depends on the consumer and the market structure.• Reducing costs – which depend on the scale of production and input costs.• Increasing output - which depends on capacity and demand from the market.What do we learn from the three parties?Consumers: To understand the forces of demand – how much the consumer will buy atwhat price?Competitors: To benchmark the firm vis-à-vis the other producers in the market interms of costs, sales and price.Firm: How much to produce, what capacity to install, the combination of inputs tomaximize profits and what are the costs associated with the production and how tominimize the same?This shows you that the three cannot be studied in isolation but together because theirrelation is dynamic.Part II: Concepts in Microeconomics1. Implicit and explicit costs: If profit is our goal then the gap between TR – TC must be widened, so we need to look at TC. What are the components of TC? Out of the various costs, the firm undertakes some and these need to be accounted for under Economics. Costs may be considered as inputs or resources that are processed to convert into output. These inputs may be purchased from the market or may be owned by the firm, hence no need to purchase from the market. There are many inputs such as raw material, capital, laborers, managers, advertising etc. Now if the warehouse is supplied by the owner, he might not charge rent to the company. But Microeconomics expects you to charge the price that it would get had it rented out and deduct that cost to arrive at the profit. So in Microeconomics profit is reached when you deduct explicit + implicit costs and this profit is termed as Economic profit.2. Tradeoffs: In Microeconomics we are presented with choices and we as consumers or as the firm need to make decisions. When we decide to do something we are also making the decision not to accept the next best option. As a consumer we may need to decide which car to buy a diesel or petrol or should he buy it all and save the money in stocks or fixe deposit. As a worker, I need to decide when to leave studies and take up a job or to work in a large organization or small firm where the learning is more and finally the workers decide how long they should work trading off leisure with work. A firm needs to decide what to produce and how much, produce more by hiring more workers or buying another machine.3. Opportunity cost: We can estimate the cost of our decision by the cost of what we give up. So the definition of opportunity cost: whatever must be given up to obtain some item. So if we take the thought of tradeoffs further, we understand
that if a firm which owns office space and is using it for the firm, works out the opprotunity costs by finding out what it would earn by the next best use.Economics and youB. VenkateshThis person, my friend and I met recently, was very critical about economics. Having completed his post-graduationin that area, he became a software professional because he thought economics was a useless subject that primarilydiscussed issues such as marginal cost curves and business cycles. My friend then explained how economics can beuseful in taking decisions in our everyday life. Suppose your company transfers you to the US for two years tomanage a project. You need to decide whether to carry your furniture. You may choose to ship your personal effectsif you can afford the transportation costs. But that may not be an effective way of deciding this issue.You will unconsciously apply what the economists call the "opportunity cost principle." Suppose you want to moveyour furniture. You find similar quality furniture in the US costs approximately Rs 30,000. If your transportationcost is below this price, you should choose to move your furniture to the US.Notice that you do not consider the cost that you incurred in buying the furniture in India in your decision making.The reason is that the cost has already been incurred. Economists call it as "sunk cost." It means that you cannotsubstantially recover the amount that you have already incurred.Of course, you may be able to sell your furniture and realise some cash. Suppose the furniture can fetch Rs 10,000,then the total cost of furniture will come down to Rs 20,000. In that case, you can decide to transport them if themoving cost is lower than Rs 20,000. Now, have you not used economics in your decision-making?(The author is a Chennai-based financial consultant)A. Like most definitions in economics, there are various competing definitions of the term Microeconomics.Perhaps the simplest answer to the question "What is Microeconomics?" can be found at West Valley College. Theystate that "Microeconomics deals with the decision making and market results of consumers and firms".Wikipedia states that "Microeconomics is the study of the economic behaviour of individual consumers, firms, andindustries and the distribution of total production and income among them. It considers individuals both as suppliersof labour and capital and as the ultimate consumers of the final product."The Economists Dictionary of Economics defines Microeconomics as "The study of economics at the level ofindividual consumers, groups of consumers, or firms...The general concern of microeconomics is the efficient allocation of scarce resources between alternative uses butmore specifically it involves the determination of price through the optimizing behaviour of economic agents, withconsumers maximizing utility and firms maximizing profit."4. Rational People Think at the MarginMany decisions in life involve incremental decisions: Should I remain in school thissemester? Should I take another course this semester? Should I study an additionalhour for tomorrow’s exam?Definition of marginal changes: small incremental adjustments to a plan of action.Example: You are trying to decide how many years you should stay in school.Comparing the lifestyle of an individual with a Ph.D. to that of an individual who hasdropped out of school would be inappropriate. You are likely deciding whether or notto remain in school for an additional year or two. Thus, you need to compare theadditional benefits of another year in school (the marginal benefit) with the additionalcost of staying in school for another year (the marginal cost).Another example: Suppose that flying a 200-seat plane across the country costs theairline Rs.10, 00,000, which means that the average cost of each seat is Rs.5000. Supposethat the plane is minutes from departure and a passenger is willing to pay Rs.3000 for aseat. Should the airline sell the seat for Rs.3000? In this case, the marginal cost of anadditional passenger is very small. It will comprise of the bag of peanuts and a drink.