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MICROECONOMICS
FOR MANAGERS
Ajay Sharma
Rules
• Slides will not be shared (so be attentive in class)
• No use of phones, laptops or other gadgets during the
class
•No sleeping
• No make-up quiz (exam – we’ll see!)
• Do not come to the class without reading (preparation)
• Not to speak without reading
• Not to speak without raising hand and permission
• Before asking the question
• Think whether it will benefit the class or not
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Text Book
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Evaluation
Component Weight
Mid-Term Exam 35%
End-Term Exam 35%
Surprise Quizzes 20%
Class Participation 10%
Syllabus: Superset of
Course Outline and Classroom Discussions
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Grading
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Welcome to IIM INDORE
PGP-1
MICROECONOMICS
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What is economics?
• "Economics is the study of people in the ordinary
business of life.“ -- Alfred Marshall, Principles of
economics; an introductory volume (London: Macmillan,
1890)
• “Economics is the science which studies human
behavior as a relationship between given ends
and scarce means which have alternative uses.”--
Lionel Robbins, An Essay on the Nature and
Significance of Economic Science (London: MacMillan,
1932)
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What is economics?
• Economics is not just about end results but the
mechanism behind those results.
• The theory of economics does not furnish a body
of settled conclusions immediately applicable to
policy. It is a method rather than a doctrine, an
apparatus of the mind, a technique of thinking
which helps its possessor to draw correct
conclusions.
-- John Maynard Keynes
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Guideposts to Economic Thinking
1. Trade-off - the use of scarce resources is costly
2. Optimize- individuals try to get the most from their
limited resources
3. Incentives matter - choice is influenced in a
predictable way by changes in incentives
4. Marginal Analysis - Individuals make decisions at
the margin
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Guideposts to Economic Thinking
5. Costly Information - information can help us
make better choices but there is a cost attached
6. Secondary Effects - economic actions often
generate direct as well as indirect effects
7. Rationality (bounded) -decision making by
individual agents is affected by the information
available to them
8. Ceteris paribus- Partial analysis (assuming some
factors constant)
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What is Microeconomics?
Study of the economic behaviour of individual consumers,
firms, and industries and the distribution of total production
and income among them.
Microeconomics seeks to analyse the market or other type of
mechanism that establishes relative prices among goods and
services and allocates society’s resources among their many
alternative uses.
The prefix micro is derived from the Greek word mikros,
which means “small.” Microeconomics therefore studies the
economic behavior of individual economic decision makers,
such as a consumer, a worker, a firm, or a manager.
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What would you learn in this course?
•Managerial decision-making
•Tools for economic analysis and thinking
•Develop critical thinking and analytical skills
•Concepts of this course to be applied in
• Industrial Regulation, Strategic Competition
• International Business, Consumer Behavior
• Accounting and Finance, Public Policy
• Market Research, Planning and implementation
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What else can you do with economics?
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What else can you do with economics?
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Part 1- Consumer Behavior
Session Topic/s
No.
2 How consumers match scarce
resources with unlimited wants
3-4 Demand-Supply and Equilibrium
5. Elasticity: Measuring the changes in
demand and supply
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Part 2 – Theory of Production
Session Topic/s
6. Basic concepts related to
production choices
7. Identifying costs and
implications
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Part 3- Market Structures
Session Topic/s
8. Competitive Supply
9-10. Taxes, Subsidies, and Changes in
Equilibrium
11. Monopoly and Market Power
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Part 3- Market Structures
Session Topic/s
12 -13. Pricing with Market Power
14-15. The more prevalent market
structures
16-17. Competitive Strategy
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Part 4- Market Failures
Session Topic/s
18. Economics of Information
19. Externalities
20. Public Goods
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How do we explore microeconomics?
•Objective function
• Endogenous vs. exogenous variables
•Constrained Optimization
• Maxima-Minima (optimal choice)
• Constraints: Budget/Income/ market
conditions/regulations
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How do we explore microeconomics?
•Equilibrium Analysis
• Optimal outcomes (stable or rational choice)
•Comparative Statics
• Inter-relationship among constraints, choices and
alternatives
•Nature of analysis
• Positive vs. normative
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Microeconomic models
Choice vs. Alternatives
Models are like maps – using visual methods,
they simply the process and facilitate understanding
of complex concepts. Microeconomic models
need to:
Should resemble Reality
Should be understandable
Should be of an appropriate
Scale
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The Objective Function
Defined: The Objective Function specifies what
the agent cares about.
• Does manager care more about raising profits
or increasing sales?
•Does individual gets more satisfaction from
clothing than food?
•Or he/she values food and clothing equally?
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Exogenous & endogenous variables
Variables that have values as given in the
analysis are exogenous variables. Variables
that have values determined as a result of the
model’s workings are endogenous variables.
“How much food and clothing should the consumer
purchase in order to maximize satisfaction on a budget
of $100?”
vs.
“What is the minimum level of expenditure that the
consumer must receive in order to reach a subsistence
level of satisfaction?”
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The Constraints
Constraints are whatever limits are
placed on the resources available
to the agent.
Time
Budget
Other Resources
Technical Capabilities
The Marketplace
Rules, Regulations, and Laws
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The Constrained Optimization
Consumer purchases
Food (F), Clothing (C), Income (I)
Price of food (pf),
price of clothing (pc)
Satisfaction from purchases of food and clothing:
S = (FC)1/2
Max S(F,C) - subject to: pfF + pc C < I
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The Constrained Optimization
Example – Consumer Purchases
F
PFF + PCC = I
C
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The Constraint Optimization
Example – Consumer Purchases
F
PFF + PCC = I
(FC)1/2 = S0
C
0 29
Equilibrium
Example – Sale of Coffee Beans
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Equilibrium
Example – Sale of Coffee Beans
Demand (P,I)
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Equilibrium
Example – Sale of Coffee Beans
P* •
Demand (P,I)
Q*
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Comparative Statics Analysis
A Comparative Statics
Analysis compares the
equilibrium state of a system
before a change in the
exogenous variables to the
equilibrium state after the
change.
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Comparative Statics Analysis
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Nature of analysis in economics
•Positive Analysis
• An analysis that attempts to explain how an
economic system works or to predict how it
will change over time
•Normative Analysis
• An analysis of what should be done or what
can be the ideal situation.
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Positive vs. normative: examples
•Should we impose a progressive income tax or a
sales tax to increase income equality?
•Will a progressive income tax reduce aggregate
hours worked?
•How would change in wages of workers will
affect the production of a firm?
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The Toughest Ticket in Sports
• The Masters, held every year in Augusta, Georgia, is
arguably the most prestigious professional golf
tournament in the world.
• But Masters tickets (actually known as “Masters
badges”) are like season tickets to a football team, if
you have obtained them in the past, you can
continue to obtain them.
• And they are so prized that the individuals who
have obtained them in the past continue to obtain
them.
• As a result, tickets to the Masters have not been
sold to the general public since 1972.
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The Toughest Ticket in Sports
• If you want a Masters badge, you must obtain it
from a ticket broker such as Stubhub (online
reseller) or on an Internet auction site such as eBay.
• Even though the face price of a Masters badge is in
the hundreds of dollars, people who obtain Masters
badges on the Internet or from a broker typically
pay a price in the thousands.
• In 2009, something happened that had not
happened in several years: The price of Masters
badges went down. Why? How?
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The Toughest Ticket in Sports
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Notes of Caution
• Spurious Correlation vs. Causation
• Study hours and Grades
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Choice of advertising under fixed
budget
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Thank You
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What is economics?
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