Managerial

ECONOMICS

DR. ARUNA KUMAR DASH

A S S O C I AT E P R O F E S S O R ,
I C FA I B U S I N E S S S C H O O L , H Y D E R A B A D
Why do people want to participate in “Kaun Banega
Crorepati”?

 For more visibility.

To satisfy their unlimited wants with given resources
The Economic problem: Scarce resources, unlimited wants. Remember resources are
inputs/factor of production. By using factor of production or inputs producer produces some
goods and services. For example car is the output and inputs are raw material, steel, plastic,
rubber, labour, electricity etc Goods and services are scares as resources are scares
Goods means tangibles. The pen you are holding, the chair you are seating and books you are
holding etc are treated as goods. You can touch it, feel it and realize it. On the contrary services
are intangibles such as doctor’s services, haircuts, cab services, services provided by housewife's,
banking services, tourism etc.
What do you mean by Economics?

Economics is a Social science which studies how an individual, firm, government makes choices/decisions
to satisfy their unlimited wants with given resources. In other words, economics studies how an individual
or society make choices to satisfy their unlimited wants with given resources. Note: Resources have
alternative uses

What do you mean by social science and how it is different from pure science?. Pure science such as H20. I
mean two atom of Hydrogen and 1 atom of Oxygen makes water. It is tested and proven many years before.
If you will experiment the component of water you will also get the same result. Likewise Newton 3 rd law.
But economics keep on changing according to environment. It is dynamic in nature.

Economics studies how we allocate our resources more efficiently. We can achieve it by reducing wastage.
Remember by using scarce resources an individual/firm/government produces some goods and services. As
resources are scarce , goods and services are scarce.
Who make choices?
 An individual

Firm
Government
As an Individual, As a firm

As an individual
Families must decide whether to spend their money on buying a new car or a
vacation trip.
You are making choice whether to have panipuri/ chats. Whether to have roti or
naan in breakfast, whether to work hard or follow short cut method.

As a firm decision/choice is on output and price , which raw material to use
Producer decision making
Industry
As a Government choices based on
Nations must decide whether to devote more funds to national defence or to protecting the
environment.
Remember decisions are based on the choice.

ARE YOU FACING THE PROBLEM OF LIMITED

RESOURCES AND UNLIMITED WANTS?

The Economic problem: Scarce resources, unlimited

wants
When scarcity Arises?

Scarcity means that human wants for goods, services and resources exceed what is
available. Put it simply when demand for the goods exceeds the supply/ availability of
goods.
For example: Lets assume that all of you(100 friends) are tried due to continuous
classes. All of you decided to watch new movie named “radhe”. You planned to watch
it on Sunday. You travelled to the movie theatre but unfortunately 60 tickets are
available. What you will do. You will change your plan to watch another movie. So
when there is scarcity there is choice. Economics is all about making choices.
Scarce resources have alternative uses
Choices

You have to make choices when You have scarce resources which has alternative uses and
unlimited wants.

Note: When there is scarcity there is choice. If there is no scarcity, there is no choice and
there is no economics. Hence, Economics is all about making choices.
As there is scarcity there is choice. Take a farmer. Farmer has only 1 acre of land. The land
have also alternative uses. The farmer can’t produce potato, onion, brinjal , rice etc with 1
acre of land. The farmer will choose which he wants to produce with limited
resources(land). The farmer will decide what to produce, how much to produce and for
target customer due to limited resources.
 Why there is a need that everybody should learn economics
Do you agree?

•Why MBA students should learn economics-

to enhance Critical thinking,
To enhance decision making,
for better idea about the market,
to do better cost and benefits analysis,
why demand/supply increases/decreases,
why country risk arises,
If RBI will increase/decrease interest rate how it will affect the economy,
why budget deficit arises and how it can be controlled,
why inflation arises and how it can be reduced to increase the competitive price etc. Decision
making
•There was one survey in US in 2005 and found 90% of the people who are in higher level positions are either economist or Engineering background.
•Why GDP falls and its impacts

•Are Doctors follow economics?- Through scarce resources that is time.

•Why CEO/CFO etc- If GDP will fall by 1% how it will affect the company’ s profitability etc

Economics helps develop the policies by which the government can improve the performance of
the economy.
Why do we study Economics at MBA level?

Economists at business schools research and teach about how markets work
(and when they don't work);
how scarce resources get produced, consumed and allocated; and how various
participants in the economy make optimal decisions. 
Why GDP falls and its consequences
MICROECONOMICS AND MACROECONOMICS

Microeconomics focuses on the actions of individual agents within the economy.

Individual agents might be household/consumer, producers/firm

Macroeconomics studies at the economy as a whole.

Note: Microeconomics is subset and macro economics is super set. Macro

economics is in broder sence.
Microeconomics
It studies the behaviour of Individual economic agents
Consumer
Producer
Macro Economics Studies
Gross Domestic Product-
Employment
Government policies( Stimulus package of the govt. of India)
Consumption level in an economy
Inflation
Monetary policy
Income and expenditure of a country
Micro VS. Macro economics
Micro Economics
Macro Economics
1. Micro Economics is the study of particular
1. It studies the economy as a whole.
individual household, firm/industry, individual
2. It is the theory of income,
prices, wage, income .
empyoyment, price and output.
2. In Micro Economics , we study various
3. It studies the behaviour of not a
constituents or parts of the economy and not
particular unit but all the units taken
as a whole.
together.
3. Micro Economics deals with the consumer
4. Macro Economics deals with not the
behaviour, theory of demand and supply,
individual output but national
theory of firm, pricing to market and theory
output/GDP, not individual income
of distribution
but the aggregate income , not the
4. In Micro Economics we study the behaviour of
individual price but the general price
particular consumer or producer and how
levels/Inflation.
he/she attains equilibrium.
Managerial Economics

Managerial Economics refers to the application of economic theory and decision science(tools)
used by a manager for taking the decisions more efficiently. Economic theory relates to micro
and macro economics theory such as demand theory, supply theory, production theory, cost
theory, pricing theory etc.
Analytical tools such as statistical technique, Econometrics technique, Linear programming, etc.
Econometrics is the application of mathematics and statistics.
Business Decisions

Deciding the price of a product and the quantity of the commodity to be

produced
Choosing the production technique to be employed in the production of a given
product
Deciding on the advertising media and the intensity of the advertising campaign
Making employment and training decisions
Making decisions regarding further business investment and the mode of
financing the investment
 What are the decisions a manager takes
Investment decision and risk involved
Decision related to price of the product
Decision related to designing of a product
Decision related to cost involved
Decision related to sales
Decision based on production technique
Manager should compare among the alternatives and take decisions
As a manager, you should always analysis the cost and benefit analysis
Manager should follow business ethics
Manager should take decisions rationally
Decisions related to time management
 Steps involved in Business decision making process
1) Identify the Problem
2) Gather relevant information
3) Finding the alternatives
4) Weigh the evidence
5) Choose among alternatives
6) Take action
7)  Review your decision
 General Vs. Partial equilibrium
General Equilibrium
1. The fundamental feature of any economy is inter
dependence Partial equilibrium
2. GE tells that prices and quantity of all the markets are 1. Each market /industry is analyzed
determined simultaneously separately and the interaction among the
3. Any change in one market will affect the other market market/industry is not considered.
through spill over effect. For example if there is change 2. It analysis of a particular sector
in demand and price of automobile it will also 3. Partial equilibrium approach deals that
immediate effects the demand and price of inputs of there is no interdependence among the
automobiles such as steel , glass and rubber as well as market. Each market is independent
income and wages of worker
4. GE analysis the changes cause in the whole economy
5. GE analysis shows the interrelationship among all parts
of the economy
Positive vs. Normative Economics
Positive Economics
1. Positive economics is based on fact . For
eg. The unemployment rate of India is
currently 9 %.
2. The statement if government will provide
healthcare facility that will increase public
expenditure
3. Here no value judgement
Normative Economics
1. Normative economics is subjective
and opinion based. Eg. The
unemployment rate of India is high.
The government must take action to
reduce unimplement. It is a
normative statement and it includes
value judgement
 Advantages of case study method

Case study expose the participants to real life situation

The most important  advantage of using case study is that it simplifies the complex concepts
 It truly help the students to lots of value addition through continuous discussion
It improve the analytical thinking, critical thinking, communication skills 

It  It enhances team work

Case study allow the student to think multiple dimensions.
Case study leaves the issue open ended
Production Possibilities Frontier (PPC)/Curve

The Production Possibilities Frontier(PPF) identifies possible combination of two types of goods
that can be produced when all available resources are employed efficiently.
PPC is a graphical representation of the production schedule.
Assumptions of PPF
Out put is limited to only two broad classes of products. Here consumer and capital goods are
taken into consideration
The focus is on production during a given period-in this case , a year
The economy’s resources are fixed in both quantity and quality during that period.
Available technology does not change during the year
PPC Schedule
Possible Combinations Consumer goods Capital goods Resources
given/Avilable
A 0 100 100
B 1 80 100
C 2 50 100
D 3 10 100
E 4 0 100
PPC Curve

100 A

Capital Goods 80 B

50 C

10 I D

0 E
1 2 3 4
Consumer goods
The PPF describes efficient combinations of output, given the economy’s resources and
technology.

The PPF slopes downward, so more of one good means less of the other goods, thus
demonstrating opportunity cost.
The exhibit shows a production possibilities curve for consumer goods for X-axis and capital
goods on the Y-axis. Point A identifies the amount of capital goods produced per year if all the
economy’s resources are used efficiently to produce capital goods. Point E identifies the amount
of consumer goods produced per year if all the economy’s resources are used efficiently to
produce consumer goods. Points along the curve between A and E identify possible combinations
of the two goods that can be produced when all the economy’s resources are used efficiently.

Points A, B,C,D and E are the efficient allocation of resources. At point A economy is producing
100 capital goods and no consumer goods. Entire resources are diverted for capital goods. At
point E , economy is producing 4 consumer goods and zero capital goods . Point A and E are
extreme scenario as economy is producing only one goods.
As economy is moving from point A to point B , in order to produce 1 unit of consumer goods
economy is sacrificing 20 units of capital goods. Here, economy is sacrificing more of capital
goods in order to produce 1 additional units of consumer goods. Here, the opportunity cost is (100-
80)/1-0=20/1=20.

As the economy is moving from B to C , then economy is sacrificing (80-50)=30 units of capital
goods in order to produce additional 1 unit of consumer goods. Here, the opportunity cost of
producing 1 unit of consumer goods is (80-50)/2-1=30/1=30
PPF is concave because of law of increasing opportunity cost. In our example, opportunity cost
increases from 20 to 30 as we move from A to B to C. Law of increasing opportunity cost to
produce more of one good, a successfully large amount of the other goods must be sacrificed.
Why do we say any point inside the PPC is attainable but not efficient?
Points inside the PPF, such as I, identify combinations that do not employ resources efficiently.
Point I is inefficient combination. In point I, economy is producing 10units capital goods and 2
units of consumer goods.
If you will compare point I with point C and D, point C and D produces more output than point I.

Lets compare point I with Point C. 2 units of consumer goods are produced in point I and
C(same amount in both the points). However, in point C produces more capital goods (50 units)
compared to point I (10units). Point C produces more capital goods than point I though consumer
goods are same. Hence, we can say that point C is more efficient than point I.

If we will compare point I with point D, the economy is producing same amount of capital
goods(10 units) but consumer goods production are more in point D(3 units) as compared to
point I(2 units). Hence D is more efficient than point I.
People and firms are inside their PPC when they do not efficiently produce.
Note: any points inside the PPF is attainable with given resources and technology and any points
inside the PPF is not efficient. Likewise any points outside the boundary is unattainable with
given resources and technology.

PPF not only shows the efficient output produced in an economy but also it separates the
unattainable combination which is outside the frontier (point G) and inefficient combination
which is inside the frontier (point I).
What PPF doesn’t tell us
PPF does not tell us which combination to choose. The PPF tell us only about the cost, not the
benefits, of the two goods.
 Can shape of the PPF be a straight line?
Possible Combinations Consumer goods Capital goods Resources
given/Avilable
A 0 100 100
B 1 80 100
C 2 60 100
D 3 40 100
E 4 20 100

If resources were perfectly adaptable to alternative uses, the PPF would be a straight line, reflecting a
constant Opportunity cost along the PPF.
Can PPC will shift in short run?
In the short run, PPC is fixed. But in the long run, resources are not fixed, so increases in natural

resources or changes in productivity due to population growth, changes in technology, and increase in

worker education will shift the PPC outward. Improved technology makes us better off and shift the

PPC outward. Suppose that a new fertilizer is invented that increases maximum capital and consumer

goods production . These increases will cause the PPC from PPC A to PPC B.

PPC will shift only in long run not in short run. In long run, PPC will shift due to following
reasons
Increase in available resources
Decrease in available resources
Change in resources, technology that benefits consumer goods only
Change in resources, technology that benefits producers goods only
 (a) Increase in available resources b) Decrease in available resources

Capital goods
Capital goods

Consumer goods
Consumer goods
( C) Change in resources, technology, ( d) Change in resources, technology,
that benefits capital goods that benefits consumer goods

Consumer goods
Capital goods

Capital goods
Consumer goods
Changes in resources availability
If people decided to work longer hours, the PPF will shift outward as shown in panel (a). An
increase in the size or health of the labour force, an increase in the skills of the labour force, or an
increase in the availability of other resources, such as new oil discoveries shift the PPF outward.
In the contrast, decreases in resources shift the PPF inward as depicted in panel (b). For example,
in 1990 Iraq invaded Kuwait , setting oil fields ablaze and destroying much of Kuwait’s physical
capital.
Technological Change
A technological discovery that employs resources more efficiently could shift the economy’s PPF
outward. Some discoveries enhance the production of both consumer goods and capital goods, as
shown in panel(a). For example, internet has increased firms ability to produce both consumer
and capital goods.
A technological advance in the production of capital goods, such as better software for designing
heavy machinery.

A technological discovery that benefits consumer goods only, such as more disease resistant
crops, is reflected by a rotation outward of the PPF along the consumer good axis, as shown in
panel D.
 Opportunity Cost
What do we mean when we talk about the cost of something?. Isn’t what we must give up –
must forgo-to get that thing?. The opportunity cost of the chosen item or activity is the value of
the best alternative that is foregone.
You can think of opportunity cost as the opportunity lost.
Sometimes opportunity cost can be measured in terms of money, although , as we shall see,
money is usually part of opportunity cost.
Opportunity cost is subjective. Only the individual making the choice can identify the most
attractive alternative.
Calculating opportunity cost requires time and information.
Opportunity costs varies with circumstances
Opportunity cost depends on your alternatives. This is why you are more likely to study on
Tuesday night then a Saturday night. On a Tuesday night the opportunity cost of studying is
lower because your alternatives are less attractive than on a Saturday night.
THANK YOU