Course Manual

Economics For Managers

PGDM/PGDRM/PGDIB/PGDFS [2010-12]

I. COURSE FACILITATORS: Facilitator Prof.Meghnaa Sharma Cabin No: 216 ( Second Floor) E-mail ID meghnaa.sharma@iilmgsm.ac.in , Extention No 0120- 3374345 Meeting time 03:00 PM 04:00 PM

II.Course Overview
In today's dynamic economic environment, effective managerial decision making requires timely and efficient use of information.Economics for Managers is the application of economic theory and methodology to managerial decision making problems within various organizational settings such as a firm or a government agency. The emphasis in this course will be on demand analysis and estimation, production and cost analysis under different market conditions, forecasting and decision making under uncertainty. Students taking this course are expected to have had some exposure to economics and be comfortable with basic algebra. Some knowledge of calculus would also be helpful although not necessary. Economics is the study of the allocation of scarce resources. Because all decisions are essentially about the allocation of scarce resources, economics is in fact the study of decision making and problem solving in general. Thus many of the techniques we will study can (and are) applied to other business disciplines. In fact, most business disciplines such as finance were originally sub-fields of economics. For example, CAP-M and Black-Scholes from finance, executive compensation in organizational behavior, and price elasticities used in marketing are all derived from economic theory. Economics for Managers also studies some topics not covered (at least not in detail) by other disciplines. These include what inputs to use, how much to produce, and what price to charge. Because in general these very fundamental decisions are made by higher level executives, economics becomes critically important for CEOs and other senior executives. This is one reason why economics is the most common major among Fortune 500 CEOs. The course, accordingly, is concerned with both theory and practice: the theory serves to sharpen analytical skills, and the practice will give experience in the application of the principles and techniques to real-world business problems.

III.

Course Topics:
Module 1: Introduction Module 2: Optimization techniques and New Management tools Module 3: Consumption and Demand Analysis Module 4: Production Theory Module 5: Cost Theory Module 6: Market Structure and Pricing

IV.

PRE- REQUISITES:

Reading News Paper Regularly ( Economic Times, Business Line) Students are advised to carry a Dictionary of Economics with them.

V.

BOOKS AND REFERENCES:

Main Text Book

1. Peterson, H. Craig & W. Chris Lewis and S. Jain: Managerial Economics, Pearson Education, Indian edition. Additional Readings

1. Salvatore: Microeconomic Theory, Mac Graw Hill, Schaums Outline. 2. Domonik Salvatore (Adapted by Ravikesh Srivastava) : Managerial Economics, Principles and Worldwide Applications, Sixth Edition, Oxford University Press 3. Hirschey: Economics for Managers, Thomson, 1st Indian Ed., 2007 4. Satya Das: Managerial Economics 5. Dean, Joel: Managerial Economics, PHI 6. Keat , Paul G. & Philip K.Y.Young,: Managerial Economics, Pearson Education, 4th Ed., 2003 7. Boyes, William: New Managerial Economics, 1ST Ed., 2005, Biztantra 8. Atmanand: Managerial Economics, First Revised Ed., 2005.
Journals / Magazines: 1. Indian Economic Journal 2. Economic and Political Weekly 3. The Economist Online Resources:

1. 2. 3. 4. 5. 6. 7.

http://indiaimage.nic.in http://goidirectory.nic.in http://mospi.gov.in http://dipp.nic.in http://finmin.nic.in http://www.economicsnetwork.ac.uk http://www.e-econ.co.uk ASSESSMENT CRITERIA:

S.No 1 Parameter Class Test (After 12th session) Group Assignments (end of the term) / Case submissions (ongoing) End Term Weightage 20% GA:15% CS: 5% 60%

VI.

2 3

Course Delivery Plan:

Session Module 1 : Introduction Project Guidelines Readings: 1 CS:1 Topic Pre- Reading (CS: Case Study) Chapters

1 2

Introduction to the subject The basic process of decision making The scope of Managerial Economics Types of variables, equations and functions Supply and demand functions

PL&J, Ch: 1

Module 2 :Optimization Techniques and New Management tools 3 4 Methods of expressing Economic Relationships Total, Average and Marginal Relationships Optimization Analysis Constrained Optimization PL&J, Ch: 2 CS : 2

Module 3: Consumption and Demand Analysis 5 6 Utility as the basis of demand function Demand function The Demand for a Commodity Price Elasticity of Demand Income Elasticity of Demand Cross-Price Elasticity of Demand Using Elasticities in Managerial Decision Making Impact of Tax on Price and Quantity PL&J, Ch: 3-4 CS : 3

CS : 4

Module 4: Production Theory The Organization of Production and the Production Function The Production Function with One Variable Input Production Analysis: meaning, function, the three stages of production, Optimal Use of the Variable Input The Production Function with Two Variable Inputs Optimal Combination of Inputs Returns to Scale Class Test

8 9

PL&J, Ch: 6

10 11 12 13

CS : 5

CS : 6

Module 5: Cost Theory 14 15 16 17 18 The Nature of Costs Short Run Cost Functions Long Run Cost Curves Plant Size and Economies of Scale Beak-even points and shut-down points Guest Lecture Module 6: Market Structure and Pricing 19 20 21 22 23 24 25 26-27 Market Structure and Degree of Competition Perfect Competition Monopoly Monopolistic Competition Oligopoly Pricing of Multiple Product Price Discrimination Guest Lecture Project Presentation PL&J, Ch: 9-10 CS : 9 CS : 10 PL&J, Ch: 7 CS : 7 Readings :2 CS : 8

VII. SESSION DETAILS:

Session 1-2 In this introductory session, we will introduce the students to the subject and make them understand its importance in the current economic environment. This session provides the students with the basic tool kit that aids understanding of the nature and process of decision making by a manager.In the same session we will also discuss the project outline. Readings: * How to Perform a Case Analysis? 1: Managing for Business Effectiveness (by Peter F. Drucker, HBR) Case Study 1- : Conflict in McDonald and Pizza Hut Chapter Peterson, Levis and Jain, Chapter 1 Session 3 - In this session we will make students understand the logic of optimization and its importance in decision making Chapter Peterson, Levis and Jain, Chapter 1 Session 4 In this session, we will introduce the tools designed to increase the effectiveness by providing the analytical framework used by managers. Thus emphasis is placed on optimization techniques. Case Study 2 : Optimal Pollution Control Chapter Peterson, Levis and Jain, Chapter 1 Session 5 . This session will cover economic analysis of consumption and the difference between cardinal, ordinal and marginal utility. Chapter Peterson, Levis and Jain, Chapter 3 Session 6 This session will cover the demand and elasticity of demand. We will start with introduction to the concept of demand which is the force that drives all business. Without a demand for its goods or services, a firm cannot survive. Then we will go a step further and discuss the importance of elasticities as measures of the responsiveness of one item to change in another item. This session will focus on Price Elasticity of demand. In this session the other two types of elasticities of demand will be covered, namely Income elasticity of demand and Cross-Price elasticity of demand.

Case Study 3: Bread Basket of India in a dilemma Chapter Peterson, Levis and Jain, Chapter 4 Session 7 In this session we will make the students understand the use of different elasticities of demand in the real world by taking cases of real business situations and also by giving them some situation and asking for a solution bases on Elasticity concept.and also introduce the concept of tax. Case Study 4 : Gillet Introduces the Sensor and Mach 3 RazorsTwo Truly Global Products Chapter Peterson, Levis and Jain, Chapter 4 Session 8 This session will begin with a discussion of the production function which summarizes the engineering and technological possibilities open to the firm.We will discuss about the most basic decisions of firms: how much to produce and what inputs to use Chapter Peterson, Levis and Jain, Chapter 6 Session 9 In this session we will examine the production function when there is one variable input and three stages of production. This general discussion is extended to the specific case where there is a single variable input or resource and examines how much of the variable input a firm should employ to maximize profit. Chapter Peterson, Levis and Jain, Chapter 6 Session 10 This session will explain the students about the optimal use of variable inputs and production function with two variable inputs. The difference between short run and long run is explained from an economists perspective. Case Study 5 : Substitutability between Gasoline Consumption and Driving Time

Chapter Peterson, Levis and Jain, Chapter 6

Session 11 This session will explain the students how the production function and its building blocks are analysed from a managerial perspective. Also the students will understand how a profit-maximising firm will choose an optimal combination of inputs based on input prices. Chapter Peterson, Levis and Jain, Chapter 6 Session 12 In this session we will discuss the concept of Returns to Scale where all the inputs are variable. The three types of Returns to scale : Constant , Increasing and Decreasing will be explained in detail with the use of different examples from the real world. Case Study 6 : Returns to Scale in U.S. Manufacturing Industry Chapter Peterson, Levis and Jain, Chapter 6 Session 13 Class Test Session 14 - In this session, we will shall discuss some important cost concepts that are relevant for managerial decisions. We analyse the basic difference between these cost concepts and also, examine how accountants and economists differ on treating different cost concepts. We will cover all the short run cost curves in this session. Chapter Peterson, Levis and Jain, Chapter 7 Session 15 - This session will continue the cost concept and will focus on the derivation of long run total, average and marginal cost curves. We then show the relationship between the firms long run average cost curve and the firms short run average cost curves. Case Study 7 : To Reduce Costs, Firms Often Look Far Afield Chapter Peterson, Levis and Jain, Chapter 7 Session 16 In this session we will examine the plant size, economies of scale, diseconomies of scale, economies of scope and learning curves. These concepts and analysis have a lot of applications in real world decision making process. Readings 2 (Article): The World's Largest Heart Factory (Dr. Devi Shetty) FORBES INDIA july 09

Chapter Peterson, Levis and Jain, Chapter 7 Session 17 This session will examine cost-volume-profit analysis (often called breakeven analysis) and operating leverage. These simple analytical techniques are frequently used in managerial decision making and can be quite useful when applien under a proper set of circumstances. Case Study 8 : Breakeven Analysis for Tata Motors Nano Car Chapter Peterson, Levis and Jain, Chapter 7 Session 18 Guest Lecture Session 19 One of the most important decision made by managers is setting the price of the firms product. If the price set is too high, the firm will be unable to compete with other suppliers in the market. On the other hand, if the price is too low, the firm may not be able to earn a normal rate of profit.. Pricing is thus a crucial decision area, which needs much of managerial attention. The process by which price and output are determined in the real world is strongly affected by the structure of the market. We will make the students understand the meaning of market structure which refers to the competitive environment in which the buyers and the sellers of a particular product operate. Then we will distinguish between four types of markets. And finally we will explain the equilibrium conditions for a firm and the industry in a perfectly competitive situation. Case Study 9: Competition in the Stock Market Chapter Peterson, Levis and Jain, Chapter 9 Session 20 In this session we shall analyse the behaviour of a firm under monopoly, examine how the monopolist determines the best level of output and price in the short run and in the long run, and compare monopoly with perfect competition. Case Study 10 : Barriers to Entry and Monopoly by Alcoa Chapter Peterson, Levis and Jain, Chapter 9 Session 21 - In this session we will discuss the meaning and importance of monopolistic competition, show how the equilibrium price and quantity are determined in the short run and in

the long run, explain the concept of product differentiation with special reference to monopolistic competition. Chapter Peterson, Levis and Jain, Chapter 9 Session 22 In this session we will examine oligopoly, briefly study oligopoly models and apply these models of oligopoly behaviour to real world situations. Chapter Peterson, Levis and Jain, Chapter 9 Session 23-24 Most modern firms produce a variety of products rather than a single product. In this session we will expand our simple pricing rule and examine the firms pricing of multiple products. We will also examine the optimal pricing of a product sold by the firm in multiple markets. We will explain the meaning of Price Discrimination and examine the conditions under which it arises. Chapter Peterson, Levis and Jain, Chapter 10 Session 25 Guest Lecture

Session 26 - 27 Group Presentation