01 Eco 1 -Microeconomics - Introduction

8/3/2019 01 Eco 1 -Microeconomics - Introduction

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MANAGERIAL ECONOMICS

Part 1 - Microeconomics

DR. SANGEETA D.MISRA

IIM LUCKNOW



WHAT IS ECONOMICS

WHAT IS MICROECONOMICS

WHAT IS MACROECONOMICS

ECONOMICS Scarcity of resources

Need to make a choice among alternative uses

Social Organisations Market economy

Command economy



Q

P

Personal ConsExpenditure

Rs

Goodsand Services

Households

(Individuals)

Rs Expense

Roles:A. Resource

ownersB. Consumers

Business

FirmsRole:Producershire resource

Resource offered

S

D

Resource hired

P r i c e

Resource

Resource Market

(Mouse Click to advance)(Mouse Click to advance)

N

P

Circular Flow

(Mouse Click to adv

S

D

Goods andservices

(

RevenueRs

Q

P

Goods Market





BASIC ECONOMIC PROBLEMS OF EVERYSOCIETY

What to produce

How to produce

F

or whom to produce

Problem of efficiency

Problem of full resource utilisation

Is the purchasing power of money constant?

Problem of growth



BASIC ECONOMIC PROBLEMSPRODUCTION POSSIBILITY FRONTIER ( PPF )

a

b

d

c

Unattainable combination

PPF illustrates 4 basic problems : what to produce, problem of efficiency,

problem of full utilisation of resources, problem of growth

PPF illustrates : scarcity, choice and opportunity cost

Military goods

Civilian

goods



WH AT IS MICROECONOMICS?

Deals with the study of the behaviour of

households, firms and the markets in which theyoperate.

WH AT IS MACROECONOMICS?

Deals with national level economic problems likeinflation, unemployment, growth, businesscycles etc.



Applied Microeconomics Defined

The application of economic theory and

the tools of decision science to examine

how an organization can achieve its aimsor objectives most efficiently.



APPLIED MICROECONOMICS

Management decision problems

Economic Theory Decision Science

Microeconomics Mathematical Eco

Econometrics

Application of eco. theory & decision sc tools

to solve managerial decision problems

Optimal solution to managerial

decision problems



CASE STUDY ± TVS SUZUKI Started operations in 1987-88 as a JV between the TVS group and

Suzuki, Japan, which has a 25.98% stake. It was the first to launch

Indo-Japanese motorcycles in India.

Its performance deteriorated in the following 3 years.

It incurred huge losses because of intense competition in themarket place. Also the appreciation in the value of yen brought the

company into the red, because of its heavy import content.

Determined to fight competition and improve performance, thecompany took a series of steps ±

1) the company acquired a moped manufacturing unit situated nearby.

2) It started indigenisation of motorcycle operations.

3) A 6 month, week-by-week, cost reduction drive focussed on rawmaterial cost, manpower cost, and non-value added expenditure.This led to a drop of 30 percent in operating costs.

4) A massive exercise in value engineering undertaken in tandem withSuzuki. This resulted in a saving of Rs 10 million per month.





SOME BUSINESS HEADLINES

Time to sue OPEC, TOI, 24/06/08.

Food chains resort to differential pricing, TOI, 23/06/08.

Double whammy inflation hitting FMCG sector with low sales and highinput costs : ASSOCHAM, May, 2008.

Unilever Q1 net profit up 34%, May, 2008.

Parle products launch new µParle 20-20¶ biscuits, May, 2008.

Hyundai India sets new record in exports, June, 2008.

Yahoo says deal talks with Microsoft fail, June, 2008.

Tyre prices rise on high input costs, June, 2008.

Reduction in Operating Cost of Indian Railways: Operating ratio was83.7% for 2005-06. Has improved to 76.3% in 2007-08, Rail Budget,2008.



MICROECONOMICS

What is a firm?

What is meant by production?

Why do firms exist?



The Firm

Combines and organizes resources for thepurpose of producing goods and/or services for sale.

Internalizes transactions, reducingtransactions costs.

Primary goal is to maximize the wealth or value of the firm.



What are the goals of a firm?

1. Profit maximisation

2. Non profit maximising goals-Sales maxi. with a min. profit target

-Growth maximisation subject to a

min. profit requirement.-Satisficing behaviour

-Evolutionary theory



JUSTIFICATION OF PROFIT MAXIMISINGGOAL

Survival of the fittest

Empirical evidence supports it

Alternative goals are all short run proxy

policies for the maximisation of presentvalue of present and future profits.



Definitions of Profit

Business Profit: Total revenue minus the

explicit or accounting costs of production.

Economic Profit: Total revenue minus theexplicit and implicit costs of production.

Opportunity Cost: Implicit value of a

resource in its best alternative use.



Function of Profit

Profit is a signal that guides the allocation of

society¶s resources.

High profits in an industry are a signal that

buyers want more of what the industry produces.

Low (or negative) profits in an industry are asignal that buyers want less of what the industry

produces.



ROLE OF MANAGER AND MANAGERIAL ECONOMICS

Set production levels, obtain inputs, choose a price

Predict demand, locate plants, choose product lines, setinventory levels, allocate funds to advertising and R&D.

Financial decisions

Accounting decisions

Marketing decisions



Questions

How do markets work?

How do customers value products?

What are the relevant production and costmeasures for decision making?

How does competition affect business decisions

in different market structures?

What prices should be set?



Real Versus Nominal Prices

Nominal price is the absolute or current

rupee price of a good or service when it is

sold. Real price is the price relative to an

aggregate measure of prices or constant

rupee price.




The Consumer Price Index (CPI) is an

aggregate measure.

± Real prices are emphasized to permit the

analysis of relative prices.




Calculating Real Prices

year current

year current

year basePriceNominalx

CPI

CPI PriceReal !

(in terms of baseyear prices)



An Example:

Calculating the Real Price of Milk

1970 .40 38.8 .40 = 38.8/38.8 x .40

1980 .65 82.4 .31 = 38.8/82.4 x .65

1999 1.05 167.0 .24 = 38.8/167.0 x 1.05

Nominal Price Real Price of Milk Year of Milk CPI in 1970 dollars



Calculating Real Prices:

An Example - Eggs & College

Consumer Price Index

(1983 = 100) 38.8 53.8 82.4 107.6 130.7 163.0Nominal Prices

Grade A Large Eggs $0.61 $0.77 $0.84 $0.80 $0.98 $1.04

College Education $2,530 $3,403 $4,912 $8,156 $12,800 $19,213

Real Prices ($1970)Grade A Large Eggs $0.61 $0.56 $0.40 $0.29 $0.30 $0.25

College Education $2,530 $2,454 $2,313 $2,941 $3,800 $4,573

1970 1975 1980 1985 1990 1998



Calculating Real Prices:

An Example - Eggs & College

$4,573$19,213x163.0

38.8 !!

Real Price of a

College Education1998 (in terms of 1970

prices )

0.25x1.04

163

38.8Eggsof RealPrice 1970

!!

1998 (in terms of 1970prices )

Documents

01 Eco 1 -Microeconomics - Introduction