Managerial Economics Lecture Notes PDF

BABASAHEB GAWDE INSTITUTE OF MANAGEMENT STUDIES Class: MMS-II Semester: I Name of the Subject: Managerial Economics Name of the Faculty: Prof. Sabir Mujawar Date of Lecture 24 September 2024 O...

BABASAHEB GAWDE INSTITUTE OF MANAGEMENT STUDIES Class: MMS-II Semester: I Name of the Subject: Managerial Economics Name of the Faculty: Prof. Sabir Mujawar Date of Lecture 24 September 2024 Outcome  CO1: Remember and explain the basic concepts of Managerial Economics (L1, L2)  CO2: Explain different concepts like consumer behavior, Utility analysis demand, supply, production, cost, and revenue, etc. (L1, L2)  CO3: Apply the principles of Managerial Economics in business decisions for attaining the objectives of the firms. (L4, L5)  CO4: Analyze and Evaluate the competitiveness in the different markets and decide on pricing and other policies. (L4, L5) Internal Evaluation  Mid Term Examination: 10 MKS  Assignment: 10Mks  Class Participation and Attendance: 10Mks  Presentations: 10MKS  Introducti CHOICES! CHOICES! CHOICES! on What is Economics ? Economics is the study of how people make choices under scarcity. “It is the study of how individuals, businesses, governments, and nations make decisions about how to use their limited resources to meet their unlimited wants.” Study of Economics Economics Macro Microeconomi Economics cs Choices made Choices Made by Large by Individual Group 05 Important Questions of Economics  What to Produce ?  Resources:  Trade-Offs  How to Produce ? Labour  Capital  How much to Produce?  Land  For Whom to Produce ?  Machine Needs Wants  Who gets to make these Decisions ? CHOICES  Scarcity : Unlimited wants & Needs But Limited Resources Managerial Economics ECONOMICS Managerial economics is a branch of economics that applies economic theory Branch and methods to solve practical problems Managerial faced by businesses. Economics It is a hybrid of microeconomics and business administration, and it uses quantitative analysis to help managers make better decisions. Managerial Economics vs. Microeconomics Computer Manufacturer (e.g.: IBM) Similar concepts Microeconomics Managerial Economics In which way were How should the prices the prices set? be set? Problems faced by firms  What should be the price of the product?  What should be the size of the plant to be installed?  How many workers should be employed?  What is the optimal level of inventories of finished products, raw material, spare parts, etc.?  What should be the cost structure? Economics Economics Micro Macro Economics Economics Group or Small Whole Derived Derived from Greek from Greek Word Word “Mikros” “MAKROS” Nature of Managerial Economics Art and Science: Management theory uses critical thinking and economics to solve business problems. Microeconomics Managers handle problems affecting individual businesses, making it part of microeconomics. Uses of Macro Economics Managers evaluate external factors like market changes and government policies to assess their impact on the company. Multidisciplinary Managerial economics combines principles from various fields like accounting, finance, and marketing. Management Oriented Managerial economics helps managers address business challenges and make informed decisions. Practical and realistic It provides practical solutions to everyday business issues. Scope of Managerial Economics Productio Decision- Demand Cost n Making Analysis Analysis Analysis Pricing Risk and Market Resource Strategie Uncertain Structure Allocation s ty Economic Problems Scarcity & Choice Scarcity & Choice Meaning: Scarcity means that there is not enough of something to satisfy everyone who wants it. Choice means that we have to make decisions about how to use the resources that we have. When resources are scarce, we have to make choices about how to use them?. We can't have everything we want, so we have to decide what is most important to us.  Examples Here are some examples of scarcity and choice in everyday life:  You have 24 hours in a day. You have to choose how to spend those hours. Do you want to spend time with your family, work, go to school, or relax?  You have a limited amount of money. You have to choose how to spend it. Do you want to buy food, clothes, or entertainment?  You have a certain amount of talent. You have to choose how to develop your skills. Do you want to focus on your academics, your hobbies, or your career? The concept of scarcity and choice is a fundamental part of economics. It is also a fundamental part of our everyday lives. The way that we make choices about how to use our resources has a big impact on our lives. Example In India, scarcity and choices are evident in various aspects of daily life due to the country's vast population and resource constraints. One striking example is access to healthcare resources, particularly during the COVID-19 pandemic: Scarcity: India's healthcare Choice: Faced with limited healthcare infrastructure faced severe scarcity resources, individuals, healthcare during the COVID-19 pandemic. providers, and policymakers had to Hospitals, medical equipment, make difficult choices: healthcare workers, and critical supplies such as oxygen and ventilators were in short supply compared to the surge in COVID-19 Example  Hospital Beds.  Oxygen Allocation  Vaccine Distribution  Lockdowns and Economic Impact  Healthcare Worker Allocation  Resource Mobilization  Public Compliance Managerial Economics and Decision Making Decision Decision Making Making Internal External Uncertainty Risk ECONOMICS MODELS Affairs Affairs Production Constant Financial Change in PESTEL LOSS Marketing the HR Envirnoment Economic Models An economic model is a simplified way to explain how the economy works. It uses basic ideas, like graphs or maths, to show how different things affect each other It also helps to predict and understand economic behaviour. Concept of Firm A firm is a business or company that makes products or provides services to earn money. It brings together different resources like workers, machines, and materials to create something that people want to buy.  Goal: make a profit (earn more money than it spends).  Examples of Firms: A small shop, a restaurant, or a large company like Apple or Google.  Types of Firms:  Small business (run by one person or a family)Partnership (run by two or more people)Corporation (a big company owned by shareholders) Concept of Market A market is a place where buyers and sellers meet to exchange goods, services, or resources. It doesn’t have to be a physical place—it can also be online. Goal: In a market, buyers want to get products at a low price, and sellers (firms) want to sell at a high price. Examples of Markets: Farmers' markets, online shopping platforms like Amazon, or stock markets where shares of companies are bought and sold. Types of Markets: Perfect Competition: Many sellers offer the same product. Example: farmers selling vegetables. Monopoly: Only one seller provides a product. Example: local electricity company. Oligopoly: A few companies control the market. Example: mobile phone companies.Monopolistic Competition: Many sellers offer slightly different products. Example: clothing brands. How Firms and Markets Work Together: Firms make products or provide services. Markets are where firms sell their products and where people buy them. The interaction between buyers and sellers sets the price of products. Profit Maximization Model The Profit Maximization Model explains how a firm decides the quantity of goods or services to produce and sell in order to earn the highest possible profit. In simple terms, the goal of a firm is to make as much money as possible by balancing its costs and revenues. Important Terms Total Marginal Total Cost Marginal Revenue Profit (π): Revenue (TC): Cost (MC): (TR): (MR): This is the This is the total Profit is what This is the This is the amount a firm total amount spends to remains after additional additional produce its of money a subtracting revenue the cost incurred goods or firm earns services. the total cost firm earns by by producing from selling TC=Fixed Co from the total selling one one more its products. sts (FC) revenue. more unit of unit of a TR=Price (P) +Variable Co Total Reven a product. product. ×Quantity (Q sts (VC) ue (TR) MR=ΔTR/ MC= ΔTC / ) −Total Cost ΔQ ΔQ (TC) Rule for Profit Maximization: A firm maximizes its profit when Marginal Revenue (MR) equals Marginal Cost (MC). MR=MC If MR > MC: The firm should produce more because it earns more revenue from each additional product than it costs to make. If MR < MC: The firm should produce less because the cost of making one more product is higher than the revenue earned from selling it. The Theory of the Firm The Economist Theory of the Firm focuses on how businesses (or firms) behave, make decisions, and interact with markets to maximize profits. Economists study firms to understand their role in the economy, particularly how they produce goods and services, manage resources, and compete with others. There are several key models and theories within this framework, each focusing on different aspects of firm behavior. Key Elements of the Economic Theory of the Firm 1. Profit Maximization Firms want to make as much profit as possible. They do this by making sure the money they earn from selling their product (Revenue) is more than what they spend to make it (Cost). They produce and sell the right amount so that the extra money earned from selling one more item (Marginal Revenue) is equal to the extra cost of making that item (Marginal Cost). Key Elements of the Economic Theory of the Firm 2. Production and Costs Firms use resources like workers and machines to make products. Total Cost is the sum of all expenses needed to produce goods, including wages, rent, materials, etc. Firms try to produce efficiently to minimize costs. 3. Market Structures Firms operate in different types of markets, which affect how they make decisions: Perfect Competition: Many small firms, same products, no one controls the price. Monopoly: One firm controls the entire market and can set prices. Oligopoly: A few firms dominate the market, often affecting each other’s decisions. Monopolistic Competition: Many firms sell similar but slightly different products (e.g., different brands of clothes). 4. Other Theories of the Firm Transaction Cost Theory: Firms exist to reduce the costs of doing business (like finding suppliers or negotiating contracts). Behavioral Theory: Firms may not always aim to get the most profit; they may just aim for “good enough” results. Managerial Theories: Managers in big companies might focus on their own goals, like growing the company or earning bonuses, rather than just maximizing profit for owners Cyert and March's Behavioral Theory Cyert and March's Behavioral Theory of the Firm (1963) explains how real-life firms make decisions, especially under uncertainty and with limited information. This theory challenges the traditional idea that firms always aim to maximize profits and instead suggests that businesses operate based on satisficing—trying to achieve acceptable results, rather than the best possible outcomes. Satisficing Multiple Bounded Organizatio Problemistic Over Goals and Rationality nal Learning Search Maximizing Conflicts Tata Motors Company: One of India's largest automobile manufacturers. Key Product: Tata Nano —low-cost car aimed at the Indian middle class.  Satisficing Over Multiple Goals and Organizational Bounded Rationality Problemistic Search Maximizing Conflicts Learning Tata Motors aimed Different Limited information After initial sales Faced with poor to create a low-cost departments about market disappointment, Tata sales, Tata Motors car for affordability. (marketing, finance) preferences affected Motors learned from made small Focused on had different goals. decisions. experience. adjustments. Marketing wanted to Assumed low price Shifted focus from Improved design and providing "good emphasize low price. would ensure Nano to more marketing of the Finance focused on success but successful segments Nano. enough" keeping production underestimated (e.g., SUVs like Tata Responded to transportation costs low. consumer Nexon). Final price of ₹1 perceptions. Adjusted strategy problems rather than Made reasonable incrementally maximizing profits. lakh was a based on past decisions based on rather than compromise performance. available overhauling the between these information, but entire model. goals. results were not perfect. Marris’ Growth Maximisation Model Marris’ Growth Maximization Model is an important concept in economics and business management that focuses on the growth objectives of firms rather than solely on profit maximization. Developed by economist Robin Marris in the 1960s, this model provides insights into how firms prioritize growth and how this affects their decision- making. Marris’ Growth Maximization Model  Focus on Growth: Firms aim to maximize their growth rate rather than just profits.  Managerial Interests: Managers prioritize growth for their job security and power.  Balance with Profit: Sustainable growth requires balancing growth aspirations with profit generation.  Retention of Earnings: Firms retain earnings to finance growth and meet investor expectations.  Market Influences: Growth strategies are influenced by market conditions and competitive landscape. Hindustan Unilever Hindustan Unilever is a leading consumer goods company in India that focuses on growth through expanding its product lines and market reach. Growth The company aims to increase its market share in various product categories, Objective: such as personal care and food products. Managerial Managers are motivated by the success and expansion of the firm, which can Focus: lead to higher salaries and career advancement. Sustainable Hindustan Unilever balances its growth initiatives with profitability to ensure it Profit: remains attractive to shareholders. Reinvestment: The firm often reinvests a portion of its profits into marketing, research, and development to support its growth strategy. Baumol’s Static and Dynamic Models Baumol’s Models focus on the behavior of firms in terms of revenue maximization. Developed by economist William J. Baumol in the 1950s, these models present two different approaches: the Static Model and the Dynamic Model. Baumol’s Static Model  Objective: Maximize total revenue.  Assumption: Firms maintain profit levels in a competitive market.  Behavior: Set output level where marginal revenue = marginal cost.  Firms maximize revenue by covering costs.  Mathematical Representation:  𝑇𝑅=𝑃×𝑄TR=P×Q Baumol’s Dynamic Model  Objective: Maximize long-term revenue growth.  Assumption: Operate in a dynamic, changing environment.  Behavior: Invest in growth strategies for future revenue.  Focus on growth opportunities over immediate revenue.  Mathematical Representation:  Optimize growth rates with reinvested profits. Williamson’s Managerial Discretionary Theory Williamson’s Managerial Discretionary Theory is an influential concept in management and organizational economics, developed by economist Oliver Williamson. This theory focuses on the discretion that managers have in making decisions within a firm and how this affects the firm's objectives and performance Managerial Discretion Managers have freedom in decision-making due to separation of ownership and control. Objective of Managers Managers may prioritize personal interests over profit maximization. Goals may include job security, salary increases, and status. Influence of External Discretion is influenced by market conditions, competition, and Environment regulations. Managers consider these factors in their decision-making.  Behavioral Considerations Decisions shaped by managers' preferences and risk aversion. Different managers may have varying objectives based on personal backgrounds. Trade-off Between Balance needed between granting discretion and maintaining Discretion and oversight. Control Too much discretion can lead to inefficiencies if personal goals diverge from organizational objectives. Firms may not behave in a profit-maximizing manner. Implications of the Theory Performance measurement may need to account for managerial objectives. Highlights importance of corporate governance to align interests. Production Possibility Curve  It is a graphical representation of various production possibilities of 02 GOODS at a given time, with given resources and technology  In other words, this curve shows that if we want to have more of one good,  we must have less of another good due to limited availability of resources.  To understand this concept further we must first understand the concept of opportunity cost Production Possibility Curve Good X Good Y 100 100 0 90 80 80 20 70 Product X 60 40 60 50 40 60 40 30 20 80 20 0 100 10 0 10 20 30 40 50 60 70 80 90 10 0 0 Product Y Production Possibility Curve Limitations: It assumes that there is full employment of resources. 100 It assumes that there is no inflation. 90 It assumes that there are no changes in the relative 80 prices of goods. 70 Product X It assumes that the technology is fixed. 60 It assumes that the resources are perfectly mobile. 50 Assumptions: It studies only 02 goods 40 All resources are fully employed 30 Technology and techniques remain constant 20 Technology Is used efficiently 10 Resources are fixed 0 10 20 30 40 50 60 70 80 90 10 0 0 Product Y