Microeconomics for Managers Session 1: Basic economic concepts

What is economics?

Principles of economics

Themes of economics

What is a market?

Why study economics?

Scarcity – a basic human dilemma Limited resources vs. unlimited wants The human condition requires making choices

Definitions of Economics

Mankiw’s definition Economics is the study of how society manages its scarce resources

Hirshleifer’s 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?

What is economics?

● microeconomics Branch of economics that deals with the behavior of individual economic units—consumers, firms, workers, and investors—as 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.  People face trade-offs 2.  The cost of something is what you give up to get it 3.  Rational people think at the margin 4.  People respond to incentives 5.  Trade can make everyone better off 6.  Markets are usually a good way to organize economic

activity 7.  Governments can sometimes improve market outcomes 8.  A country’s 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

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 markets—collections 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

Observation→Theory→Data→Testing

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.

Themes of economics

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.

Market Definition—The 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.

What is a market?

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?