Lecture 0:

Unlocking the Secrets of Managerial

Economics

Dr Soumyatanu Mukherjee

Ph.D. (University of Nottingham, UK), FHEA.

Associate Professor of Economics, XLRI Delhi-NCR.
Winner: EXIM (Export-Import) Bank of India's International Economic Research
Annual (IERA) Award 2018.
External Research Fellow of CREDIT & GEP.
Web: https://sites.google.com/site/smukhnottingham/.
Belong to Alan Deardorff's "Family Tree of Trade Economists" <http://www-
personal.umich.edu/~alandear/tree/Z1081.HTM>.
A recent search generated the following headlines:

“BMW, Daimler and VW charged with collusion over emissions”

“McDonald's adoption of price tactics like "value meals" and special deals maximizes revenue generation from customers”

“Is ‘Everyday Low Prices’ killing Big Bazaar?”

“How Discogs Marketplace Differs From eBay in business strategy of selling CDs?”

“Uber and OLA Are in ‘an Arms Race in Marketing Spend Right Now’”

Sadly, billions of dollars are lost each year because many existing managers fail to use basic tools from managerial
economics to

- shape pricing and output decisions,

- optimize the production process and input mix, choose product quality,

- or optimally design internal and external incentives.

Happily, if you learn a few basic principles from managerial economics, you will be poised to drive the inept managers out
of their jobs!
 Today
• Introduction
• Course specifics
• Economics (or, Eco-No-Mix?)
• Scarcity, Opportunity Costs, Incentives – Basic Introduction
How this course will be delivered

20 sessions x 90 min per session = 30 hours

• Go through the indicated reading/cases before coming to class

• Classroom learning will go beyond the textbook so read widely

Exams, group presentations, class

participation
• Assignments with feedback (5%)
• 1 mid-term exam (30%)
• 1 end-term exam (40%)
• Group Presentations (20%)
• Maintaining decorum in class & meaningful
participations (5%)
 Course contact
• Facilitator:
– Dr. Soumyatanu Mukherjee
– Office: FC-01
– Email: soumya.mukherjee@xlri.ac.in
– Web: https://sites.google.com/site/smukhnottingham/
– Available to meet on class days
– Assignments are good opportunities to clear doubts

• Teaching Assistant:
– Mr. Hardik Sen
– Email: hardiksen@xlri.ac.in
 Course contract
• You are expected to
– Respect your co-learners (maintain discipline & decorum, NO mobiles/ NO laptops
(unless I instruct you)/ NO iPads/ NO food/ NO napping/ NO chatting/ NO fighting)
• Class participation marks = starts with 3 for all, provided you also maintain decorum in class

• negative marks for misconduct

• positive marks for answering (not for asking) questions

– Be punctual and regular (recorded attendance is absolutely non-negotiable,

attendance will be taken in the first 5 min of the class, try not to miss lectures)

– No requests for rescheduling classes please!

• In return, you expect?

 Session-plan of this course:

• Course outline
• The whole of
science is nothing
more than the
refinement of
everyday thinking.
 Big Questions
• When you hear the term “Economics”, what
words come into mind?

• What do we mean by Scarcity? Then how we

should understand problems of making
judicious choices amongst scarce resources?

• What do we mean by “Managerial Economics”?

• How do incentives affect our choices?

 What is Economics
• Scarcity
-- The limited nature of society’s resources given society’s unlimited wants

• In a typically developed country, labour is relatively more scarce than technology and equipment, while in a
developing country it is the opposite.

• Think of electricity or drinking water. In most parts of India, their availability is limited, especially during
summer months.

• Fundamentally, for the government or policy makers, there are two alternative options to ‘solve’ this problem:
– increase supply by sufficiently investing in power and water projects

– decrease demand by propagating a slogan that we should reduce consumption ‘in the national interest’.
 Economics – All About Making “Choices”
Which one is the right approach?
• Unfortunately, the second approach is being propagated in most of the
cases. Is this really what we want, especially over a longer time-horizon?
NO.

• The correct perspective of economics is to recognise— and salute— the

unlimitedness of wants and yet try not to suppress or reduce them, unless
they lead to other problems like seriously impairing the environment.

• The aim should be to fulfil the wants as best as possible—by investing in

appropriate technology and by making sensible choices among alternatives.
This is the spirit of economics.
 Opportunity Cost
Opportunity cost: The highest-valued alternative that must be sacrificed to get
something else.

The best possible decision is the one that minimizes the opportunity cost.

A car manufacturer must decide between producing SUVs or electric vehicles

(EVs).
• If the manufacturer decides to produce EVs, what’s the opportunity cost?

Tesla's focus on electric cars as opposed to traditional gasoline-powered cars.

• How do you justify Tesla’s decision in light of the relative opportunity costs of entering
electric car market vis-à-vis the market for gasoline-powered cars? 12
Recognize the Nature and Importance of Profits
Accounting profit
• Total amount of money from sales (total revenue) minus the
dollar cost of producing goods or services.
Economic profit
• The difference between total revenue and total cost, wherein
total cost = explicit cost + opportunity cost.
• Role of Opportunity cost
• You should consider not only the explicit cost of a resource but
also the implicit cost of giving up its best alternative.
• Consider this example.