Eco200 1-3

Evaluation Criteria Themes in Economics Microeconomics and Managerial Decisions Demand and Supply Equilibrium
Managerial Economics (ECO200)
Rahul Singh AMSOM, rahul.singh@ahduni.edu.in
18 August 2021
Evaluation Criteria
Classroom Participation- 20%

Polls
Discussions: chats as well as personal interactions.
Review Quiz
Online Quiz -30%
Group project - 30% (Check LMS for Guidelines)
End Term Exam - 20%
Scarcity
Economic Agents: Consumers, Producers/Firms,

Governments, etc. → Makes Economic Decisions
Scarcity

Resources/Goods/Services are Scarce → There is less of it
available than people would want!
Scarcity

Can you think of a good that is not scarce? Enough is
available to satisfy everybody’s want for it!
Scarcity

IMPORTANT → Scarcity does not imply rareness! → A
good can be plentiful (available in large quantities) and yet be
scarce! Examples!!
Scarcity

IMPORTANT → Scarcity does not imply rareness! → A
good can be plentiful (available in large quantities) and yet be
scarce! Examples!!
Scarcity
Scarcity has to do with a mismatch between people’s wants

and its availability!
Are cars scarce? Are they rare?
Scarcity

Inevitable consequence of Scarcity → Rationing
Scarcity

Rationing → We need a way to decide who gets to have the
scarce resources!
Scarcity

Rationing → We need a way to decide who gets to have the
scarce resources!
Scarcity and Tradeoff
Much of Economics is about studying how economies manage

scarce resources.

scarce resources.
Consumers decide how much to buy, and what to buy with
limited income!

scarce resources.
limited income!
Workers decide how much to work, consume and save.

scarce resources.
limited income!
Firms decide what to produce, how much to produce, how
many workers to hire.

scarce resources.
limited income!
Firms decide what to produce, how much to produce, how
many workers to hire.
Government decides how to allocate resources between
national defence, consumer goods, health, infrastructure etc.
By choosing more of an alternative we have to reduce other
alternatives → We tradeoff one alternative for another!
Tradeoffs
What is the tradeoff facing the government during the Covid

pandemic? Discuss!
Tradeoffs
What is the tradeoff facing the government during the Covid

pandemic? Discuss!
Let us all recollect a recent example of tradeoff that we
experience!
Trade-Offs
Constrained Optimization → Choose the “BEST”

alternative given “LIMITED” resources.
Trade-Offs
Constrained Optimization → Choose the “BEST”

alternative given “LIMITED” resources.
Let’s hear your optimization stories!
People Respond to Incentives
Incentive: The prospect of a reward or punishment that

induces an economic agent to act.

Examples of incentives!

AU’s attendance policy!

How did the mortality rate on British Ships to Australia finally
reduce? (POLL)

How did the mortality rate on British Ships to Australia finally
reduce? (POLL)
Performance Bonus!
Examples of incentives! Recall an instance where you

observed incentives at work!

Incentives are very powerful and can help attain intended
goals if designed properly!

Incentives are very powerful and can help attain intended
goals if designed properly!
Give an example where incentives led to unintended
consequences!
In colonial India in Delhi, the British Governor wanted to

reduce the number of cobras as there were too many of them.
He announced a bounty for anyone who brought a corpse of
cobra. Think about incentives this policy creates and what
would happen to the population of cobras. (POLL)
In the 1980s smog in Mexico City was terrible. The

Government, in an attempt to reduce pollution, introduced a
law called: “You Don’t Drive Today”. On each day cars with
numbers ending with specific digits were not allowed. For
example, on Saturday cars with numbers ending with 3 and 8
were not allowed. What happened to smog in Mexico City?
Think about the below interventions by the government!

Government introduces laws that make seat belts and safety
air bags mandatory for every car?
The Government waives off all loans by farmers!
The Government announces that school Teacher’s salary will
be based on the scores of the students!
Opportunity Costs
Is facebook free? Discuss!

Opportunity Costs

There is no such thing as a free lunch! Nothing is truly free.
Opportunity Costs

What is the next best alternative if the action is not taken? If
you were not on facebook, what would you have done?
Opportunity Costs

What is the next best alternative if the action is not taken? If
you were not on facebook, what would you have done?
Scarcity → Tradeoffs → For every action, we have to give up
(forego) the opportunity to do another alternative.
Opportunity Costs
Opportunity Cost of an action: Cost associated with foregone

opportunities.
Two Components of Opportunity Costs
Opportunity Costs

opportunities.
Direct cost attached to the chosen action.
Opportunity Costs

opportunities.
Net value associated with the next best alternative that was
foregone.
Opportunity Costs

opportunities.
Net value associated with the next best alternative that was
foregone.
Opportunity Cost = Direct Costs + Net value of Alternative

Net value of Alternative = (Benefit) − (Costs)
Let’s solve some problems!
Problem: You won a free ticket (no resale value) to watch the
latest movie starring Deepika. In the nearby theatre, the latest
movie starring Shahrukh is screening and this is your next best
alternative. You are willing to pay a maximum of INR 420 for
Shahrukh’s movie. The price of the movie ticket for Deepika
Padukone’s movie is 290 and for Shahrukh’s movie is 270. Assume
there are no other costs to seeing either of the movies. What is the
opportunity cost of watching Deepika Padukone’s movie for you?
(POLL)
Let’s solve some problems!
Problem: You won a free ticket (no resale value) to watch the
latest movie starring Deepika. In the nearby theatre, the latest
movie starring Shahrukh is screening and this is your next best
alternative. You are willing to pay a maximum of INR 420 for
Shahrukh’s movie. The price of the movie ticket for Deepika
Padukone’s movie is 290 and for Shahrukh’s movie is 270. Assume
there are no other costs to seeing either of the movies. What is the
opportunity cost of watching Deepika Padukone’s movie for you?
How will your answer change if the ticket for Deepika’s
movie was purchased and not free? (POLL)
Discuss
Opportunity cost in action!

Causation vs Correlation
You have been hired as a consultant by a large consumer

goods company in the United States to advise on their ad
campaigns to increase sales. You analyze a lot of data related
to historical ad campaigns and arrive at a very interesting
hypothesis: Ad campaigns with a lot of red colors increase
sales relatively more compared to other colors. Sales go up
25% when lot of red colours are used but only increase by 5%
when lot of blue is used. You go to the CEO expecting to
impress her and land another contract for consulting. She fires
you! Why? Discuss!
Increasingly data is available for almost all variables we can

think of!

think of!
However, managers have to exercise caution!

think of!
However, managers have to exercise caution!
Confusing correlation with causation can be costly!
Correlations are very useful, but have to be analyzed further
to establish causality!
Activity: Write down an example from your experience!

Why Managerial Economics?
Microeconomic Principles → Managerial Decisions.


Example: Tata launches electric car Nexon → Discuss

Managerial Decision: Design and Production

Design vs Performance → Consumer Preferences

Managerial Decision: When to launch?

Managerial Decision: When to launch?
Managers need to assess consumers’ response to the product
→ Consumer Demand
Why Microeconomics?
Example: Tata launches electric car Nexon

Managerial Decision: What price to charge customers?
Why Microeconomics?

How responsive is demand to change in prices → Elasticity of
Demand
Why Microeconomics?

Demand
How many competitors are there in the market? → Market
Structure
Managerial Decision: How many cars to produce?
Why Microeconomics?

Demand
How many competitors are there in the market? → Market
Structure
Managerial Decision: How many cars to produce?
Managers need to assess the cost of production → Economic
Costs of Production
Why Microeconomics?

Devise a Pricing Strategy.
Why Microeconomics?

Devise a Pricing Strategy.
How will competitors like Mahindra react? → Strategic
Decisions for Pricing and Production
Individual’s Demand Curve
Demand Curve → Quantity demanded of a good at various

levels of prices by a consumer.

levels of prices by a consumer.
Consumer’s Willingness to Pay!

Aggregating from Individuals’ Demand Curves

Aggregate Demand Curve

levels of prices in the market.

Defining Market is important!

Demand Curve and Law of Demand
Law of Demand → CETERIS PARIBUS, Quantity demanded

of a good decreases with increase in prices.

But Demand for Sanitizers went up even as their prices were
rising! Discuss!

But Demand for Sanitizers went up even as their prices were
rising! Discuss!
Ceteris Paribus → All ELSE EQUAL
Shifts in Demand Curve

Shifts in the Demand Curve
Factors inducing shifts in demand. Discuss!

Shifts in the Demand Curve
Factors inducing shifts in demand. Discuss!

Consumer Tastes/Preferences
Income
Population
Substitutes and Complements
Expectations
Movement along the Demand Curve
Movement along the demand curve → Changes in Prices

(DISCUSS!)

(DISCUSS!)
Shift in supply while demand curve is unchanged!

(DISCUSS!)
Shift in supply while demand curve is unchanged!
Changes to prices due to interventions!
Individual Producer’s Supply Curve
Supply Curve → Quantity supplied of a good at various

levels of prices by an individual Producer.

levels of prices by an individual Producer.
Willingness to Accept

Aggregating from Individual Producers’ Supply Curves

Aggregate Supply Curve


Defining Market is key!

Shifts in Supply Curve

Shifts in the Supply Curve
Factors inducing shifts in supply curve. Discuss!

Shifts in the Supply Curve
Factors inducing shifts in supply curve. Discuss!

Technology
Input Cost → Raw material Cost, Interest Rate on Capital,
Wages
Expectations
Number of Sellers
Poll 4
Movement along the Supply Curve
Movement along the Supply curve → Changes in Prices

(DISCUSS!)

(DISCUSS!)
Shift in Demand while Supply curve is unchanged!

(DISCUSS!)
Shift in Demand while Supply curve is unchanged!
Changes in consumer tastes overnight!
Equilibrium
The Price at which quantity demanded equals quantity

supplied in a competitive market.
Equilibrium
The Price at which quantity demanded equals quantity

supplied in a competitive market.
Market Clears!
Equilibrium
QUIZ
Price Quantity Demanded Quantity Supplied

C1 C2 C3 P1 P2 P3
1 240 190 270 20 30 50
2 200 160 240 60 90 150
3 160 130 210 100 150 250
4 120 100 180 140 210 350
5 80 70 150 180 270 450
QUIZ

C1 C2 C3 P1 P2 P3
1 240 190 270 20 30 50
2 200 160 240 60 90 150
3 160 130 210 100 150 250
4 120 100 180 140 210 350
5 80 70 150 180 270 450
Draw the market demand and supply curves.
QUIZ

C1 C2 C3 P1 P2 P3
1 240 190 270 20 30 50
2 200 160 240 60 90 150
3 160 130 210 100 150 250
4 120 100 180 140 210 350
5 80 70 150 180 270 450
What is the equilibrium price? (POLL1)
Quiz
Market Demand Equation!

Quiz
Qd = 800 − 100P
Market Supply Equation!

Quiz
Qd = 800 − 100P
Qs = 200P − 100
Quiz
Qd = 800 − 100P
Qs = 200P − 100

Quiz
Qd = 800 − 100P
Qs = 200P − 100

What is the equilibrium price? (POLL2)
QUIZ
Prereadings! (POLL3)
Equilibrium
Prices determine who consumes! → Consumers who have a

willingness to pay equal to or greater than the market
price.
Equilibrium

price.
Prices determine who produces! → Producers with costs
equal to or lower than the equilibrium price.
Equilibrium

price.
Prices determine who produces! → Producers with costs
equal to or lower than the equilibrium price.
Neither Consumers nor Producers have an incentive to
deviate from equilibrium! → Let’s prove this graphically!
Excess Supply
Excess Demand
Change in Equilibrium
How does the equilibrium price change in response to changes

in the economic environment.
How does the equilibrium price change in response to changes

in the economic environment.
Economic Environment
Demand side factors!
Supply side factors!
Solving for Equilibrium Graphically
In response to a change in economic environment

Carefully study the effect on Demand and Supply → Whether
they shift!

they shift!
Identify the direction of the shift.

they shift!
Draw the new demand and supply curves.

they shift!
Draw the new demand and supply curves.
The new point of intersection of supply and demand is the new
equilibrium price.
Solving for Equilibrium Algebraically
Given the demand and supply functions we can solve for

equilibrium price.
Given the demand and supply functions we can solve for

equilibrium price.
Market Demand curve!
Qd = 800 − 100P
Market Supply curve!
Qs = 200P − 100
In equilibrium,
Qs = Qd
In equilibrium,
Qs = Qd
⇒ 800 − 100P = 200P − 100
In equilibrium,
Qs = Qd
⇒ 800 − 100P = 200P − 100
⇒ 900 = 300P
⇒ P = 900/300 = 3
Solving for Changes in Equilibrium Algebraically
Due to increase in income, the new demand curve is given by:
Qd = 1100 − 100P
Qd = 1100 − 100P
Solve for the new equilibrium!

Qd = 1100 − 100P
Qs = Qd
Qd = 1100 − 100P
Qs = Qd
⇒ 1100 − 100P = 200P − 100
Qd = 1100 − 100P
Qs = Qd
⇒ 1100 − 100P = 200P − 100
⇒ 1200 = 300P
⇒ P = 1200/300 = 4
Market Demand curve!
Qd = 500 − 100P
Market Supply curve!
Qs = 200P − 100
Solve Graphically.

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Evaluation Criteria Themes in Economics Microeconomics and Managerial Decisions Demand and Supply Equilibrium

Managerial Economics (ECO200)

Rahul Singh AMSOM, rahul.singh@ahduni.edu.in

Classroom Participation- 20%

Economic Agents: Consumers, Producers/Firms,

Economic Agents: Consumers, Producers/Firms,

Economic Agents: Consumers, Producers/Firms,

Economic Agents: Consumers, Producers/Firms,

Economic Agents: Consumers, Producers/Firms,

Scarcity has to do with a mismatch between people’s wants

Scarcity has to do with a mismatch between people’s wants

Scarcity has to do with a mismatch between people’s wants

Scarcity has to do with a mismatch between people’s wants

Scarcity and Tradeoff

Much of Economics is about studying how economies manage

Scarcity and Tradeoff

Much of Economics is about studying how economies manage

Scarcity and Tradeoff

Much of Economics is about studying how economies manage

Scarcity and Tradeoff

Much of Economics is about studying how economies manage

Scarcity and Tradeoff

Much of Economics is about studying how economies manage

What is the tradeoff facing the government during the Covid

What is the tradeoff facing the government during the Covid

Constrained Optimization → Choose the “BEST”

Constrained Optimization → Choose the “BEST”

People Respond to Incentives

Incentive: The prospect of a reward or punishment that

People Respond to Incentives

Incentive: The prospect of a reward or punishment that

People Respond to Incentives

Incentive: The prospect of a reward or punishment that

People Respond to Incentives

Incentive: The prospect of a reward or punishment that

People Respond to Incentives

Incentive: The prospect of a reward or punishment that

People Respond to Incentives

Examples of incentives! Recall an instance where you

People Respond to Incentives

Examples of incentives! Recall an instance where you

People Respond to Incentives

Examples of incentives! Recall an instance where you

People Respond to Incentives

In colonial India in Delhi, the British Governor wanted to

People Respond to Incentives

In the 1980s smog in Mexico City was terrible. The

People Respond to Incentives

Think about the below interventions by the government!

Is facebook free? Discuss!

Is facebook free? Discuss!

Is facebook free? Discuss!

Is facebook free? Discuss!

Opportunity Cost of an action: Cost associated with foregone

Opportunity Cost of an action: Cost associated with foregone

Opportunity Cost of an action: Cost associated with foregone

Opportunity Cost of an action: Cost associated with foregone

Opportunity Cost = Direct Costs + Net value of Alternative

Let’s solve some problems!

Let’s solve some problems!

Opportunity cost in action!

You have been hired as a consultant by a large consumer