Managerial/Entrepreneurial Economics Lecture Notes PDF

Managerial/ entrepreneurial Economics Meenakshi Rajeev 1 What an Entp need to do in general? The nature of sound manager/entrepreneurial decisions varies depending on the underlying goals of the manager/entrepreneur. In particular, an effective manager/entreprene...

Managerial/ entrepreneurial Economics Meenakshi Rajeev 1 What an Entp need to do in general? The nature of sound manager/entrepreneurial decisions varies depending on the underlying goals of the manager/entrepreneur. In particular, an effective manager/entrepreneur must (1) identify goals and constraints, (2) recognize the nature and importance of profits, (3) understand incentives, (4) understand markets, (5) recognize the time value of money, (6) use marginal analysis, and (7) make data-driven decisions. 2 1. Identify Goals and Constraints The first step in making sound decisions is to have well- defined goals because achieving different goals entails making different decisions. If your goal is to maximize your grade in this course rather than maximize your overall grade point average, your study habits will differ accordingly. Similarly, if the goal of a food bank is to distribute food to needy people in rural areas, its decisions and optimal distribution network will differ from those it would use to distribute food to needy inner-city residents, produce food items for profit. 3 1. Understanding Constraints Notice that, in both instances, the decision maker faces constraints that affect the ability to achieve a goal. The 24-hour day affects your ability to earn an A in this course; A budget affects the ability of the food bank to distribute food to the needy. Constraints are an artifact of scarcity. 4 1. Division/Streamlining of Goals Different units within a firm may be given different goals; Those in a firm’s marketing department might be instructed to use their resources to maximize sales or market share, While those in the firm’s financial group might focus on earnings growth or risk- reduction strategies. 5 2. Recognising the nature and importance of profits The overall goal of most firms is to maximize profits or the firm’s value Economic versus Accounting Profits When most people hear the word profit, they think of accounting profits. Accounting profits are the total amount of money taken in from sales (total revenue, or price times quantity sold) minus the cost of producing goods or services. 6 2. The concept of Economic Profit A more general way to define profits is in terms of what economists refer to as economic profits. Economic profits are the difference between the total revenue and the total cost plus opportunity cost of producing the firm’s goods or services. The opportunity cost of using a resource includes both the explicit (or accounting) cost of the resource and the implicit cost of giving up the best alternative use of the resource. M S Swaminathan : MSP (rental on land). 7 3. Role of incentives Within a firm, incentives affect how resources are used and how hard workers work. To succeed as a manager/entrepreneur, you must have a clear grasp of the role of incentives within an organization such as a firm and how to construct incentives to induce maximal effort from those you manage. The first step in constructing incentives within a firm is to distinguish between the business place, as it is and the way you wish it were. Many professionals and owners of small establishments have difficulties comprehending this 8 How to Incentivise A friend of ours—Mr. O—opened a restaurant and hired a manager/entrepreneur to run the business so he could spend time doing the things he enjoys. Recently, we asked him how his business was doing, and he reported that he had been losing money ever since the restaurant opened. When asked whether he thought the manager/entrepreneur was doing a good job, he said, “For the Rs 7.5 lakh salary I pay the manager/entrepreneur each year, the manager/entrepreneur should be doing a good job.” 9 How to Incentivise Mr. O believes the manager/entrepreneur “should be doing a good job.” This is the way he wishes But individuals often are motivated by self-interest. The key is to design a mechanism such that if the manager/entrepreneur does what is in his own interest, he will indirectly do what is best for Mr. O. How can we incentivize him? Let’s discuss….. 10  Like giving a base salary and then incentives based on sales. 11 Incentive Concept of Efficiency wage hypothesis 12 Understanding markets Consumer–Producer Rivalry Consumer–producer rivalry occurs because of the competing interests of consumers and producers. Consumers attempt to negotiate or locate low prices, while producers attempt to negotiate high prices Let’s discuss: What are the other rivalries do we have? 13 Government and the Market When agents on either side of the market find themselves disadvantaged in the market process, they may attempt to induce the government to intervene on their behalf. Let’s discuss: Under what kind of situation, Govt can come in? 14  In Economics present value of money or income is very crucial. What is present value? It is value from today’s perspective It depends usually on the rate of interest. 15 Data driven decisions Make Data-Driven Decisions Good manager/entrepreneurs don’t simply guess how their decisions will affect their organizations, they make data-driven decisions. Use of regression and forecasting What is regression analysis? Least square estimates? 16  Thanks 17