2. Definition of Economics
ECONOMICS IS THE ART OF MAKING THE
MOST OF LIFE……..George Bernard Shaw
“……….THE STUDY OF MANKIND IN THE
EVERYDAY BUSINESS OF LIFE”…..A
Marshall
“THE SCIENCE WHICH STUDIES HUMAN
BEHAVIOR AS A RELATIONSHIP
BETWEEN ENDS AND SCARCE MEANS
WHICH HAVE ALTERNATIVE USES”.. L
Robbins
3. What is Economics?
Economics is the study of how people
choose to use their scarce resources
in an attempt to satisfy unlimited
wants
A resource is scarce if the amount
people desire exceeds the amount
that is available
Without scarcity there would be no
economic problem
4. Scarcity arises out of 2 - basic fundamental
facts of life
a) Wants unlimited
b) Economic Resources limited
3 - questions
1) What to produce
2) How to produce
3) For whom to produce
Economics – analyses & provides
answers to basic fundamental
question of scarcity
5. What do you get out of the course?
Better Decision-making skills
Understanding of the role of business
and government
Understanding of economic analysis
and its uses in Management of a
business
6. What is the ‘Economic Problem’?
The ECONOMIC PROBLEM is the
problem of allocating resources
efficiently
to achieve objectives
while satisfying constraints, such as
scarcity
requirement
feasibility
7. Basic Assumptions in Economics
Ceteris Paribus
A Latin Phrase which means “with other things
being the same”
Used in isolating description of a particular event
from other potential variables
Ex: price-demand relationship
Rationality
People act rationality (??!!)
Consumers and producers measure and compare
the costs and benefits of a decision before going
ahead
8. Basic Assumptions in Economics
People Respond to Economic Incentives
EV Vs Diesel/Petrol/CNG cars
Optimal Decision is Made at the Margin
Most decision in life involve doing a little more or
little less
Economists use the word marginal to mean an
extra or additional benefit or cost of a decision
Economists reason that the optimal is to continue
any activity up to the point where marginal benefit
is equal to marginal cost; MR=MC
10. Economic Analysis are important to a
variety of public and private sector
activities.
For e.g.
1. Pricing strategy of a product
2. causes of unemployment, inflation,
3. Analysing costs and benefits of a project, or a
scheme,
4. tax rate from revenue and equity point of view
5. user fees (price) for public parks, water, toll road,
6. designing scholarship program,
11. Resources – Factors of Production
Land
used in the production of goods and services
Labor
The physical and mental effort of humans
Capital
Skills, and Buildings & equipment
Entrepreneurial Ability
Managerial, organizational, and risk-taking skills
12. Resources - Payments
Land or Natural Resources
Rent (for land)
Labor or Human Resources
Wages (for labor)
Capital (Physical and Human)
Interest (for capital)
Entrepreneurial Ability
Profit (for entrepreneurial ability)
13. Market
A market is a set of arrangements
through which buyers and sellers carry
out exchange at mutually agreeable
terms
Product Market
A market in which goods and services are
exchanged
Resource/Input Market
A market in which resources/input are
exchanged
14. Market – FTC cases in
the US
Who won? Any guesses
Coca Cola Case
Is it a market?
M&A Case – Merger of Staples & Office
Depot
What is a market here?
15. When an activity is chosen, the opportunity cost
is the benefit expected from the best alternative
forgone
Example: If you choose to attend B-School
this year, your opportunity cost is the salary
you would have received from the best
available full-time job.
16. The real cost of something is what you
must give up to get it.
The real cost of an item is its opportunity cost:
what you must give up in order to get it.
Opportunity cost is crucial to understanding
individual choice:
Ex.: The cost of attending the economics class is
what you must give up to be in the classroom during
the lecture.
Sleep? Watching TV? Rock climbing? Work?
All costs are ultimately opportunity costs.
17. Opportunity Cost
In fact, everybody thinks about opportunity
cost.
The bumper stickers that say:
“I would rather be ….{fishing, golfing,
swimming, etc…}” are referring to the
“opportunity cost.”
It is all about what you have to forgo to
obtain your choice.
I WOULD RATHER BE SURFING THE INTERNET.
20. Circular-Flow of Economic Activities
A household is a person/group of people.
A firm is an organization that produces goods and services for
sale in the market.
Firms sell goods and services that they produce to households
in markets for goods and services.
Firms buy the resources they need to produce—factors of
production—in factor markets from the households
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21. Economic Interactions at large
One Person’s spending = Other person’s
Income
When Overall Spending (Demand) gets
out of line with the Economy’s Productive
Capacity (i.e. Supply) Government
policies can change spending behaviour
22. Factor
Payments
Consumption of
domestically
produced goods
and services (Cd)
BANKS, etc GOV. ABROAD
Investment (I)
Government
expenditure (G)
Export
expenditure (X)
Net
saving (S)
Net
taxes (T)
Import
expenditure (M)
The circular flow of income
WITHDRAWALS
INJECTIONS
23. Economic Tools
Formalizing economic behaviour into
some model
2 types –
Operational or Internal Use to an
organisation (Microeconomics)
Environmental or External to an
organization (Macroeconomics)
24. Economic Models
A model is a simplified
representation of a
real situation that is
used to better
understand real-life
situations.
A model is usually a
graph or a set of
mathematical equations
Clearly, the Wright
brothers believed in
their model.
25. Ceteris Paribus
(“other things constant”)
When focusing on key economic variables,
other variables are held constant
This is important for model building
As economic models become more
complex, fewer and fewer variables will
be held constant
26. Distinction between
Microeconomics & Macroeconomics
Microeconomics is the study of the
economic behavior of individual decision
makers, e.g. Firm, Household etc. & how
they interact with one another in markets.
Macroeconomics is the study of the
behavior of entire economies. Its goal is
to explain the economic changes that
affect many households, firms, and
markets at once.
27. Rational Self-Interest
Individuals rationally
select alternatives they
perceive to be in their
best interests
Behavioral Economics
A behavioral assumption describes the expected
behavior of economic actors
Most behavioral assumptions are applied to the
most sophisticated decision makers: households
and firms
28. Marginal Effects
A term meaning
“incremental” or
“decremental,” used
to describe a
change in an
economic variable
Marginal benefits
and marginal costs
29. Barter to Money
Barter is the direct
exchange of one good for
another without the use
of money
Modern economies moved
beyond barter by using
money to facilitate
exchange
30. Division of Labor: Adam Smith (1776)
The organization of
production of goods into
separate tasks in which
workers specialize
The specialization of
labor takes advantage of
the individual
preferences and natural
abilities of workers
33. Efficiency & Production Possibilities
Frontier
Efficiency exists when there is no
way resources can be reallocated
to increase the production of one
good without decreasing the
production of another good.
34. Efficiency & Production Possibilities
Frontier
Capital Goods
Consumer
Goods
Unattainable
Inefficient
35. An Increase in Resources (growth)
Capital Goods
Consumer
Goods
An increase in resources
will cause the production
possibilities frontier to shift
36. A Technological Change
Capital Goods
Consumer
Goods
Technological improvement in
the production of one good will
cause the production possibilities
frontier to rotate
37. 3- Important Economic
Questions
1.What goods will be produced
• what markets to serve
• how differentiated should the products be
• what price to charge
• How goods will be produced
• d
2.What mix of inputs to use in the
process of production
3.Who gets the goods that are
produced – distribution Q
38. Economic Systems
An economic system is
a set of mechanisms
and institutions that
resolve the what, how
and for whom
questions
39. Types of Economic Systems
Pure capitalism (or Free Market
Economy)
A system with private ownership of resources
and the use of prices to coordinate economic
activity in free, competitive markets
Planned (or Command) Economy
• A system with centralized economic planning
and public ownership of resources
Mixed economy
42. Microeconomics
Microeconomics analysis aim at clarifying
interrelationships between
- prices,
- costs,
- production and
- markets, in an integrated manner,
- generally considered separate from
each other in a firm.
44. A positive economic statement can be proved
or disproved by reference to facts
"An increase in price leads reduction in quantity
demanded”
A normative economic statement represents
an opinion, which cannot be proved or
disproved
"The government should be the employer of last
resort"
Positive Vs Normative Economic
Analysis
45. Using Models
Positive economics is the branch of
economic analysis that describes the way the
economy actually works.
Normative economics makes prescriptions
about the way the economy should work.
A forecast is a simple prediction of the future.
45
46. When and Why Economists Disagree
There are two main reasons economists
disagree:
They may disagree about which simplifications
to make in a model.
They may disagree about values and
assumptions there-off.
46
47. help the Businesses in determination of
1. best (or optimal) prices,
2. minimum costs and
3. optimal level of production
- introduces the optimal behaviour of the firm
in different type of market setup.
- the issue of regulation, especially in the
context of public utilities like electricity,
telecommunications, transport etc.
48. PADAGOGY: STRUCTURE, &
REQUIREMENT
- a discussion based course concerning the
theory & analysis of microeconomics
- empirical applications using econometrics,
- applied problems and case studies.
- Certain aspects of each prescribed chapter
will be considered in class discussions,
- the chapter content should be regarded as
requisite background preparation besides
the Handout
- Full preparation is needed before each class.
50. Introduction to microeconomics; its
relationship with other management
disciplines
- Theory of the firm, objectives of the firm
- Methods of expressing economic relationships-
equations, tables and graphs; total, marginal and
average relationships,
- Opportunity Cost, Economic Cost & Profit
- Elementary demand and supply theory.
Part 1: Nature & Scope
- Optimization analysis- profit maximization; use of differential calculus in
optimisation; multivariate optimisation and constrained optimisation;
- New management tools - benchmarking, TQM, re-engineering, learning
organisation etc.
51. 2.1 Demand Curve & Functions: Individual &
market demand, specification, factors affecting
demand.
2.2 Elasticity of Demand - Different concepts &
their measurement; Relationship between price
elasticity, TR & MR; using elasticities in managerial
decision-making.
2.3 Utility Theory and Indifference Curve: MRS,
PCC, Income CC, Substitution and Income Effects,
Engel curves,
2.4 Consumer & Producer Surplus: Incidence of
tax, dead weight loss
Part 2: Demand Analysis
2.5 Demand Estimation & Demand Forecasting
52. Part 3: Theory of Production, Cost
Concepts, Cost Functions and Estimation
Production Theory (Supply-side)
- Production function – SR & LR,
- Law of returns to scale and factor;
- Production function and isoquants, optimal
combination of inputs for minimising cost;
- Long run production function and returns to
scale;
- Estimation of production functions.
53. Part 3: Theory of Production, Cost
Concepts, Cost Functions and Estimation
(contd..)
Cost Theory (Supply-side)
- Types of costs, short-run cost, long run costs
functions
-Marginal cost, average cost, fixed cost,
variable cost
- Estimation of cost functions.
54. - Pricing under Perfect Competition:
Assumptions, short-run equilibrium of the firm
and market; long-run equilibrium,
determination of price, profit maximization
- Pricing under Monopoly: Pure and
discriminating monopoly; Monopsony;
Networks & Platforms
- Pricing under Oligopoly: Duopoly,
- Game theory and strategic behaviour
- Pricing under Monopolistic Competition
Part 4: Market Structure
55. Part 5: Market Failures
Networks – Platforms
Externalities – Pollution
Public Goods – Clean Air
Common Goods – Roads
Inequality & Poverty – Justice
Asymmetric Information – Moral Hazard
& Adverse Selection
Market Failure
Here the allocation of goods and services by
a free market is not efficient
Market failures can be viewed as scenarios
where individuals' pursuit of pure self-interest
leads to results that are not efficient – that
can be improved upon from the societal
point-of-view
Market failures are often associated with
information asymmetries non-competitive
markets, externalities or public goods
56. - Pricing practices & Role of Government :
• Peak load pricing, & Overbooking
• Pricing of joint products
• Transfer Pricing
• Tying & Bundling
• Two part tariff
Regulatory issues.
• Natural Monopoly,
• Average Cost pricing (Cost-plus pricing),
• Marginal Cost pricing,
Part 6: Pricing Practices
57. Course Grade
Surprise (!!) Quizzes
20%
Class performance 5%
Project Assignment & Case 25%
Mid Term & End-Term Exam
50%
58. Case Study Assignments
Everyone will be supposed to present and
write an assignment based on the Assignment
given.
DEADLINES
Deadlines should be strictly followed for all the
assignments.
59. Requirements and
Preparation for Course
Some calculus
Text and class discussion will
present alternative treatments
of most course material.
Exams will use some calculus.
60. Resources should be used as efficiently
as possible to achieve society’s goals.
An economy is efficient if it takes all
opportunities to make some people better off
without making other people worse off.
Should economic policy makers always strive to
achieve economic efficiency?
Equity means that everyone gets his or her fair
share. Since people can disagree about what’s
“fair,” equity isn’t as well-defined a concept as
efficiency.
61. Efficiency vs. Equity
Ex.: Handicapped-designated parking spaces in a
busy parking lot
Sometimes there may be a conflict between:
EQUITY, making life “fairer” for handicapped
people, and
Efficiency, making sure that all opportunities to
make people better off have been fully exploited by
never letting parking spaces go unused.
How far should policy makers go in promoting equity
over efficiency?
62. When markets don’t achieve efficiency,
government intervention can improve society’s
welfare.
Why do markets fail?
Individual actions have side effects not taken into
account by the market (externalities).
One party prevents mutually beneficial trades from
occurring in the attempt to capture a greater share of
resources for itself.
Some goods cannot be efficiently managed by
markets.
Ex.: Defence, Public Goods
64. - Rubinfield and Pindayak, Microeconomics
- Krugman and Wells, 2021 Microeconomics,
Worth Publishers
- Salvatore, 2022, Managerial Economics in a
Global Economy
- Tim Harford (2016) Undercover Economist
- Partha Dasgupta (2006) A very short
introduction to Economics, Oxford
- HBR Cases
- Current Cases from Newspapers
References
65. Readings and Video Links
- The HIDDEN COSTS of Every Decision You Make!
https://www.youtube.com/watch?v=b4BzYHFnOZw&list=PLgCAz23OwpcoK
sOeXzDANKK8EP5UiPUAh&index=39
- Intro to Economics: Crash Course Econ #1
https://www.youtube.com/watch?v=3ez10ADR_gM
- Buffett & Munger: Look at Opportunity Costs, Not Cost of Capital. Ep. 287
https://www.youtube.com/watch?v=TTkLTwlyREg
- Charlie Munger: Mental Models for the Rest of Your Life (PT 2)
https://www.youtube.com/watch?v=cgfuEEnsuAc&t=26s
- The paradox of value - Akshita Agarwal
https://www.youtube.com/watch?v=e7S8jWh6AEs
66. - OPPORTUNITY COST is whatever you give up to do something.
- SCARCITY is the tension between infinite wants and finite resources.
- INCENTIVES is a set of external (rather than intrinsic) motivators that
explain people's choices.
- MACROECONOMICS is the study of production, employment, prices, and
policies on a nationwide scale.
- MICROECONOMICS is the study of how consumers, workers, and firms
interact to generate outcomes in specific markets.
