Managerial Economics

Lecture Notes: 1

What is Economics?
• Study of the allocation of scarce resources among alternative uses.

• Trade-offs: What, how and for whom to produce?

• Who makes these trade-offs: Consumers, Firms, Governments (Economic Agents)

What is Microeconomics?
• “The study of economic choices individuals and firms make and how these choices
create markets.”

• “Branch of economics that deals with the behavior of individual economic units—consumers,
firms, workers, and investors—as well as the markets that these units comprise.”

What is Macroeconomics?
• “Branch of economics that deals with aggregate economic variables, such as the level
and growth rate of national output, interest rates, unemployment, and inflation.”

• Trade-offs here as well: Export or not to export? Cut inflation or focus on growth?

• Link between micro and macro.

Why study Managerial Economics?

• Formal introduction to rationality!

• Importance for other disciplines.

• Importance for different job roles.

Economic Models
Models are simplifications of reality. They provide a framework for analyzing more com-
plex problems. We are reducing complex problems to a few essential variables for ease of
analysis.

• Generally easier to build when compared to the actual reality.

• But serve the basic purpose.

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• Depiction of economic models: graphs and math!

Two assumptions or principles of economic models:

• Optimization Principle: People try to choose the best pattern of consumption
that they can afford i.e. make themselves as well-off as possible.

• Equilibrium Principle: Prices adjust until the amount demanded by people is

equal to the amount that is supplied.

• Also, Ceteris Paribus! : all other things being equal i.e., effect of one economic vari-
able on another, provided all other variables remain the same.

Simple Demand and Supply Model:

• Example of Apple Prices in a Fruit Mandi.

– Many sellers and Many buyers

– Quality of Apples: homogeneous

• Demand Curve: describes how consumers behave!

– How do you think the demand of apples relates to their price? Will more apples
be demanded at a higher price or at a lower price, in general?

– In general, more of a good is demanded at a lower price and less at a higher

price (for normal goods).

– Formal Approach: Through reservation price (or maximum willingness to

pay) of a consumer.

– Try drawing the demand curve!

How does the slope look like? (Hint: See point no. 2)
• Supply Curve: describes how firms behave!

– How do you think the supply of apples relates to their price? Will more ap-
ples be supplied (or be available for sale) at a higher price or a lower price, in
general?

– Generally, supply will respond positively to price (given ss has time to adjust).
A higher quantity of a good will be supplied at a higher price.

– Try drawing the supply curve!: relates quantity supplied to price. How does
the slope look like?

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Market Equilibrium
The equilibrium price is the price at which quantity demanded is equal to quantity sup-
plied: market clears.

Why P* and Q* are equilibrium price and quantity? How equilibrium is achieved?

What happens if P<P* ?

What happens if P>P* ?

Only at P=P*, quantity demanded = quantity supplied

Business Case: Uber!

• The Effects of Uber’s Surge Pricing: A Case Study

– Rationale behind ‘surge pricing’ ? What role does it serve? The (in)visible
hand ?
– Potential benefits? Potential drawbacks?
– What happens when there’s no surge pricing (the natural experiment setting)?