Managerial Economics Chapter 1 Summary

Microeconomics: deals with the behavior of individual economic units—consumers, firms, workers, and Macroeconomics: deals with aggregate economic variables, such as the level and growth rate of national
investors—as well as the markets that these units comprise. output, interest rates, unemployment, and inflation.
Trade offs
Consumers Workers Firms

Consumers have limited incomes, which can be spent on a wide
variety of goods and services, or saved for the future.
Prices and Markets
Centrally planned economy
Workers also face constraints and make trade-offs. Firms face limits in terms of the kinds of products that they can
• People must decide whether and when to enter the workforce. produce, and the resources available to produce them.
• Workers face trade-offs in their choice of employment.
• Workers must sometimes decide how many hours per week they
wish to work, thereby trading off labor for leisure.
Market economy

In a centrally planned economy, prices are set by the government. Prices are determined by the interactions of consumers, workers, and firms. These interactions
occur in markets—collections of buyers and sellers that together determine the price of a good.
Two types of analysis

Positive analysis Normative analysis

Cause and effect What should be done

• Example: Budget 2021 increased duties on some parts of mobile devices. What will happen to Example: Tata Motors is looking for a future in Green Cars. How much money should be investment in this
cellphone manufacturers, prices of cellphones, buyers of cellphones? project? What should be the best mix of small cars and big cars that are produced to recover costs fastest?

Markets
Market: Collection of buyers and sellers that, through their actual or potential interactions, determine the
price of a product or set of products. Example: Market for personal computers
market definition Determination of the buyers, sellers, and range of products that should be included in
a particular market. Example: Dell, HP, Lenovo, etc are sellers and IT Companies can be institutional buyers
Arbitrage: Practice of buying at a low price at one location and selling at a higher price in another.
Example: Dell assembling computers in China and selling at higher prices in India
Market price: Price prevailing in a competitive market.
Perfectly competitive market: has many buyers and sellers, so that no single buyer or seller has a
significant impact on price
Extent of a market Boundaries of a market, both geographical and in terms of range of products
produced and sold within it. Example, Market for personal computers in India

Prices

Nominal Price
Absolute price of a good, unadjusted for inflation.
Also known as the current retail price or current
wholesale price Example: Microeconomics
textbook price is INR 829.
Real Price
Price of a good relative to an aggregate measure
of prices; price adjusted for inflation.
Example: What was the price of Microeconomic
book if INR value was constant
Consumer Price Index
Records how the cost of of a large basket of goods
purchased by a typical consumer changes over
time. Used to convert nominal prices to real prices
for goods purchased by consumers
Producer Price Index
How have wholesale prices changed over time.
Used to convert nominal prices to real prices of
goods/services normally purchased by businesses.
 Managerial Economics Chapter 1 Summary

Calculating Real Prices with an example

Table below shows the average retail price of butter and Consumer Price Index (CPI) from 1980 to 2010, scaled so that CPI=100 in 1980
Butter/kg 1980 1990 2000 2010
CPI 100 158.6 208.9 218.1
Retail Price 188 199 252 288

Question 1: Calculate the real price of butter in 1980 dollars. Has the real price increased/decreased/stayed the same from 1980 to 2000?
Answer 1: Formula to calculate Real Price:

So we rebuild the table as: Butter/kg 1980 1990 2000 2010

CPI 100 158.6 208.9 218.1
Retail Price 188.0 199.0 252.0 288.0
Formula RP=(100/100)*188 RP=(100/158.6)*199 RP=(100/208.9)*252 RP=(100/218.1)*288
Real Price 188.0 125.5 120.6 132.0
So, we can say that real prices have decreased from 1980 to 2000.

Question 2: Convert CPI to 100 for the year 1990 and determine the real prices of butter in 1990 INR terms
Answer 3: New CPI for 1990=100
To convert the remaining CPIs, we use this formula: Butter/kg 1980 1990 (=100) 2000 2010
(CPI of each year)*100/ CPI of base year Old CPI 100 158.6 208.9 218.1
Which means: (CPI of each year)*100/ CPI of 1990
CPI Conversion Formula 100*100/158.6 158.6*100/158.6 208.9*100/158.6 218.1*100/158.6
New CPI 63.1 100 131.7 137.5
Retail Price 188.0 199.0 252.0 288.0
Formula RP=(63.1/100)*188 RP=(100/100)*199 RP=(131.7/208.9)*252 RP=(137.5/218.1)*288
Real Price 118.6 199.0 158.9 181.6