Topic 1 - Microeconomics - Course Outline & Introduction.ppt
- 1. Microeconomics 2022 Facilitator: Dr. Sunil Ashra, Office: Room No. C16, Faculty Block, x – 5178, sunil@mdi.ac.in 1
- 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
- 9. Organisational Decision Problems Economic theory Microeconomics Macroeconomics* Decision Sciences Mathematical Economics Econometrics * MANAGERIAL ECONOMICS Application of economic theory and decision science tools to solve managerial decision problems OPTIMAL SOLUTION TO ORGANISATIONAL DECISION PROBLEMS * Will be done later
- 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.
- 19. Economic Actors Households Firms Financial Intermediaries Government Rest of the World
- 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 20
- 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
- 31. Trade-offs: The Production Possibility Frontier What to do? Even a castaway faces trade-offs.
- 32. The Economy’s Production Possibilities Frontier/Curve (PPF/PPC) Coconut Fish 30 20 Investment Consumption
- 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
- 40. Totally planned economy Totally free-market economy N. Korea Cuba Poland France UK USA Early 1980s Classifying economic systems China Hong Kong India
- 41. Totally planned economy Totally free-market economy N. Korea Cuba Poland France UK USA Early 1980s Early 2020s China HK, Tax Heavens India Classifying economic systems N. Korea China (Hong Kong) Singapore UK Cuba China Poland India France USA Singapore Sweden, Norway, Denmark, Finland, Iceland, Costa Rica, Austria, Germany, Belgium
- 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.
- 43. Positive Versus Normative Economic Analysis The Glass is half full half empty
- 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.
- 49. Course Outline
- 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
- 63. Markets Monopoly Oligopoly Monopolistic Competition Perfect Competition Consumer •Demand (I, P) •Demand Elasticity •Preference •Max U s. t. Budget Constraints Producer/ Firm •Production ((K. L. E) •Cost Minimization •Profit Max Market Failure Public Goods Externality Regulation, Tax, Subsidy
- 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.