Microeconomics for Managers

Session 1: Basic economic concepts

What is economics?
Principles of economics
Themes of economics
What is a market?
Why study economics?

What is economics?
Scarcity a basic human dilemma

Limited resources vs. unlimited wants

The human condition requires making choices

Definitions of Economics

Mankiws definition
Economics is the study of how society manages its
scarce resources
Hirshleifers definition
Economics concerns decisions choices among actions
Alternative definitions
Economics is how society chooses to allocate its scarce
resources among competing demands to improve
human welfare

What is economics?
microeconomics

Branch of economics that deals with the behavior of

individual economic unitsconsumers, firms,
workers, and investorsas well as the markets that
these units comprise.
macroeconomics

Branch of economics that deals with aggregate

economic variables, such as the level and growth rate
of national output, interest rates, unemployment, and
inflation.

Principles of economics?
1.
2.
3.
4.
5.
6.

People face trade-offs

The cost of something is what you give up to get it
Rational people think at the margin
People respond to incentives
Trade can make everyone better off
Markets are usually a good way to organize economic
activity
7. Governments can sometimes improve market outcomes
8. A countrys standard of living depends on its ability to
produce goods and services
9. Prices rise when the government prints too much money
10. Society faces a short-run trade-off between inflation and
unemployment

Themes of economics
Prices and Markets
Microeconomics describes how prices are determined.
In a centrally planned economy, prices are set by the
government.
In a market economy, prices are determined by the
interactions of consumers, workers, and firms. These
interactions occur in marketscollections of buyers and
sellers that together determine the price of a good.

Themes of economics
Accounting cost vs. opportunity cost
Rationality and rational behavior of individuals
Interdependence and gains from trade - basis of exchange,
division of labor & specialization
Role of the price system - Perfect market versus Imperfect
market
Asymmetry of information
Non-unique prices
Transactions costs

Role of profits
Role of a government
Use of methodology: marginal analysis, use of models &
positive rather than normative analysis

Themes of economics
Theories and Models
Economics as a Science
ObservationTheoryDataTesting
A model is a mathematical representation, based on
economic theory, of a firm, a market, or some other
entity.

Positive versus Normative Analysis

positive

analysis describes relationships of cause and

effect.
normative analysis examines questions of what ought
to be.

What is a market?
Market A market is an institutional arrangement
under which buyers and sellers can voluntarily
exchange some quantity of a good or service at a
mutually agreeable price.
It can, but need not be a specific place or location
where buyers and sellers actually come face to face for
the purpose of transacting their business e.g. market
for professors has no physical location
Law

of one price

Arbitrage

Practice of buying at a low price at

one location and selling at a higher price in
another.

What is a market?
Market DefinitionThe Extent of a Market
extent

of a market Boundaries of a market, both

geographical and in terms of range of products
produced and sold within it.

Market definition is important for two reasons:

A company must understand who its actual and

potential competitors are for the various products

that it sells or might sell in the future.

Market definition can be important for public policy

decisions.

Why managers to study economics?

Corporate Decision Making: Before launching AMAZE in Indian Market

The design and efficient production of AMAZE involved not only

some impressive engineering, but also understanding of the
following;
First, Honda had to think carefully about how the public
would react to the design and performance of its new
products.
Second, Who are the existing players in the segment?
Next, Honda had to be concerned with the cost of
manufacturing these cars choice of production locations
Finally, Honda had to think about its relationship to the
government and the effects of regulatory policies as
Automobile Emission Standards

Questions?