power points managerial economics
TRANSCRIPT
![Page 1: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/1.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 1/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Chapter 1
Foundations of Managerial
Economics
![Page 2: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/2.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 2/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
What is Economics?
•What to produce
•How to produce
•How to distribute
![Page 3: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/3.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 3/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Definition, scope and functions
Microeconomics Macroeconomics Decision Sciences
Managerial Economics
![Page 4: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/4.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 4/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
The BIG Picture
Product
Market
FirmsHouseholds
Factor
Market
Income spent
Goods demand
Inputs supplied
Income earned
Inputs demand
Factor costs
Goods supplied
R
e
v
e
n
u
e
Revenue earned
![Page 5: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/5.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 5/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Objective of the Firm• Profit maximization
- economic profit:
total revenue minus total economic
costs
- economic costs are “relevant” costs
![Page 6: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/6.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 6/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Invisible Hand
Furthering selfish interest
Furthers growth of the Nation
![Page 7: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/7.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 7/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Problems in Managerial
EconomicsClassified into two broad categories:
• Those requiring „optimal‟ solutions
- Total, Average and Marginal
magnitudes
• Those requiring equilibrium solutions
- Supply – Demand Analysis
![Page 8: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/8.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 8/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Graphical Solution to Supply- demand
Analysis
P
Q
D
DS
S
![Page 9: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/9.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 9/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Algebraic Solution
P = 300 – Qd P = 60 + 2Qs
a = 300; b = 1; c = 60; d = 2
300 – Q = 60 + 2Q
Q* = 80 P* = 220
![Page 10: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/10.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 10/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Total, Average, and Marginal
magnitudesQ P TR MR Q P TR MR
(=AR)
0 10 0 - 6 4 24 -11 9 9 9 7 3 21 -3
2 8 16 7 8 2 16 - 5
3 7 21 5 9 1 9 -7
4 6 24 3
5 5 25 1
![Page 11: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/11.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 11/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Relation between Total, Average
and Marginal Magnitudes• When Total is rising, Marginal is positive
• When Total is falling, Marginal is negative
• When Total is maximum, Marginal is zero
• When Average falls/rises, Marginal
falls/rises at a faster rate
![Page 12: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/12.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 12/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Concept of Margin
• Rate of Change
• Derivative- Calculus
![Page 13: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/13.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 13/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Chapter 2
Household as a Consumer
![Page 14: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/14.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 14/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
The decision making process of
the consumer
Preference set Constraints
Optimal decision
![Page 15: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/15.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 15/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Assumptions
• Completeness
• Transitivity
• Non satiation
![Page 16: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/16.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 16/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Utility and Optimization
• Utility:
- reflects a rank ordering of preferences.
- is a magnitude indicating the direction of
preferences
• Optimization:
- Cardinal Approach and OrdinalApproach
![Page 17: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/17.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 17/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Optimization
The Cardinal Approach• Utility is cardinally measurable and the
objective is to maximize utility
• The Law of Diminishing Marginal Utility
• Optimization Rule 1:
When only one good is consumed and is
available for free, consume till
MUx = 0
![Page 18: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/18.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 18/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Optimization
• Optimization Rule 2:
When only one good is consumed and is
available for a price:Consume till MUx = Pricex
• Optimization Rule 3:When more than onegood is consumed and the goods‟ prices are
different:
Consume till MUx /Px = MUy /Py = MUz /Pz
![Page 19: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/19.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 19/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Optimization- The Ordinal approach
• Rank ordering of preferences
• Combinations of goods
Two inputs required to arrive at optimal
combination:
1. Preference set2. Opportunity set
![Page 20: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/20.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 20/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Preference Set- Indifference
Curves• Indifference Curve:
Combination of goods that yield the same level
of satisfaction.• Properties of Indifference curves:
- Slope downward
- Convex to the origin- Non intersecting
![Page 21: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/21.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 21/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Shapes of Indifference curves
MRS decreasing MRS Constant=1 One fixed proportion
Normal substitutes perfect substitutes Complements
![Page 22: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/22.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 22/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Opportunity Set
• Defined by Budget Constraint.
6x + 3y = 60
Given Px = 6 and Py = 3
Graphically,
-Px /Py is the Slope
10
Y
20
X
![Page 23: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/23.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 23/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Consumer’s Equilibrium- The
Optimal Combination
e
x
y
At „e‟ slope of the budget line is equal to the slope
of the Indifference curve.
![Page 24: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/24.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 24/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Consumer’s Equilibrium
• Slope of the budget line: - Px /Py
• Slope of Indifference curve: MUx/MUy
• Equilibrium : MUx/MUy = Px /Py
or MUx/Px = MUy/Py
![Page 25: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/25.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 25/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Chapter 3
Comparative Statics and Demand
![Page 26: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/26.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 26/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Meaning of “comparative statics”
• The analysis which enables us to arrive at new
optimal decisions when underlying assumptions
change
![Page 27: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/27.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 27/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Changes in equilibrium when prices
change• Relative price changes get reflected in changes in
slope of the budget line.
• New point of tangency between the indifference
curve and the new budget line
![Page 28: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/28.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 28/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Changes in equilibrium
• Joining all these points of tangency gives the
Price Consumption Curve. (PCC)
X
Y
PCC
Price of X is falling.
![Page 29: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/29.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 29/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Derivation of the demand curve
• Data contained in the PCC:
- Optimal level of consumption of X
- Optimal level of consumption of Y- Prices of X and Y
• Demand curve for X requires –
- Price of X.- Quantity consumed of X.
![Page 30: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/30.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 30/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Demand Curve
• Every point on the PCC gives the price of X and
quantity demanded/consumed of X
Thus,
Qx
Px
![Page 31: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/31.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 31/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Shifts in and movements along a
Demand Curve
• Effect on demand of changes in its own price
results in movement along the demand curve.
• Effect on demand of changes in other factors
results in shifts in demand curve
![Page 32: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/32.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 32/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Changes in equilibrium when
income changes• Income changes show up as parallel shifts of the
budget line
• New points of tangency between indifference
curves and the new budget lines
![Page 33: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/33.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 33/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Changes in equilibrium
• Joining all these points of tangency gives
the Income Consumption Curve (ICC)
X
Y
ICC
![Page 34: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/34.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 34/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Slope of the ICC
• If the goods are „Superior‟, the ICC is
upward sloping
• If one of the goods is „Inferior‟, the ICC
is downward sloping
![Page 35: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/35.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 35/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Slope of the PCC
• If the goods are normal, PCC is upward
sloping
• If PCC is downward sloping, then one of them
is a Giffen Good
![Page 36: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/36.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 36/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Giffen good
Income effect
• Price effect +
Substitution effect• Substitution effect is inversely related to price.
• Income effect can be inversely related to
changes in income – Inferior Good• Income effect can be positively related to
income-Superior good
![Page 37: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/37.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 37/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Giffen Good
• If income effect is inverse and large enough to
offset the substitution effect, then it is a GiffenGood
• The Demand curve for Giffen Good will have apositive slope
![Page 38: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/38.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 38/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Elasticity
• Price Elasticity: Proportionate change in
quantity demanded due to a
proportionate change in price- ∆Qx/ ∆Px * Px/Qx
- negative for normal goods
- negative sign is ignored while making
comparisons among normal goods
![Page 39: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/39.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 39/178
![Page 40: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/40.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 40/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Elasticity
• Income Elasticity
∆Qx/∆I * I/Qx
• Could be negative or positive:
Negative for Inferior goods
Positive for Superior goods
![Page 41: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/41.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 41/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Elasticity
• Cross Price Elasticity:
∆Qx/∆Py * Py/Qx
• Could be negative or positive
- Negative for complements
- Positive for substitutes
![Page 42: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/42.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 42/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Chapter 4
Demand Estimation and
Forecasting
![Page 43: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/43.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 43/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Demand Estimation Techniques
Qualitative Quantitative
- consumer Surveys - Statistical estimation
- Market Experiments Techniques- Consumer Clinics - Regression
![Page 44: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/44.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 44/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Steps in Demand Estimation
Exercise• Identification of variables
• Collection of Data
• Mathematical specification of the relationship• Estimation of the parameters
• Using these estimates to arrive at estimates of
variables
![Page 45: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/45.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 45/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
A Simple Linear Regression Model
• Y = a + BX + u
Where Y is the dependent variable
X is the independent variable„a‟ is the intercept ; „b‟ is the slope ; „u‟ is the
error term.
![Page 46: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/46.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 46/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Method of Estimation
• Method of Ordinary Least Square( OLS)
- minimizes the sum of the squared deviations of
each of the points from the mean.
![Page 47: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/47.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 47/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Coefficient of Determination
• Regression Sum of Squares (RSS) /
Total Sum of Squares (TSS) is R2
– Coefficient of Determination
• If R2 = 1, the best fit.
• If R2 = 0.4, 40% of the total deviationsis explained by the regression
![Page 48: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/48.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 48/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Graphical Representation
R2 = 1 R2 = 0
![Page 49: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/49.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 49/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Problems in using Regression
• Multicollinearity – where there is dependency
amongst independent variables
• Identification problem• Auto correlation
![Page 50: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/50.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 50/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Forecasting Techniques
• Opinion polls and market research
• Expert opinion
• Surveys• Economic indicators
• Projection Techniques
• Econometric Models
![Page 51: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/51.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 51/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Time Series Projection using
Least Square method
• How the dependent variable moveswith time
Yt = f (Tt , St , Ct , Rt ) whereYt is the actual value of the data in time series
Tt is the trend component at time „t‟
St is the seasonal component at time „t‟
Ct is the cyclical component at time „t‟
Rt is the random component at time „t‟
![Page 52: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/52.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 52/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Chapter 5
Firm as a Producer
![Page 53: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/53.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 53/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Creation of a firm
• To minimize Transaction costs
• One entity takes the responsibility to bring all
the factors together required for production
![Page 54: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/54.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 54/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Motive behind existence of a Firm
• Profits
- economic Profits
- total revenue minus total „economic‟ costs
• Economic costs are „relevant‟ costs usingthe principle of opportunity costs
![Page 55: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/55.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 55/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Marginal Analysis
• Used to arrive at the profit-maximizing output
level
• Uses the concepts of Marginal revenue andMarginal Cost
• Marginal revenue is the change in total
revenue due to an additional unit of output
• Marginal cost is the change in total cost due to
an additional unit of output
![Page 56: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/56.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 56/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Profit-maximizing Rules
• Rule- The level of output at which MR = MC
• Should this level of output be produced at all?
- Shut Down Rule:If at the optimal level of output, Average
Revenue is less than Average (economic) Cost,
then, SHUT DOWN.
![Page 57: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/57.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 57/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Do Firms really maximize Profits?
• Satisficing Theory
• Other Objectives:
- provide good products/services tocustomers
- a good work place for employees
- responsibility to society
![Page 58: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/58.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 58/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Control Mechanisms
• Principal – Agency Cost
Therefore CONTROL MECHANISMS
Internal External
-board of Directors - Takeovers
- ESOPs
![Page 59: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/59.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 59/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Non- Profit Firms
• No right to accumulate Profits
• Operate with funds from external sources
• Exempt from Corporate Tax
![Page 60: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/60.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 60/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Public Sector Firms
• Operate in areas where Private sector will not
operate
• Involved in the provision of Public goods
![Page 61: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/61.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 61/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Chapter 6
Analysis of Production
![Page 62: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/62.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 62/178
![Page 63: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/63.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 63/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Production Function with twovariable inputs
• Q = f (K , L) where K is capital and L is labour
![Page 64: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/64.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 64/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Isoquants
• Graphical representation of production
function• A curve drawn through the technically feasible
combinations of inputs to produce a target
level of output
![Page 65: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/65.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 65/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Map of Isoquants
Output 160
Output 200Output 260
K
L
![Page 66: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/66.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 66/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Properties of Isoquants
• They are downward sloping
• They are convex to the origin
• They do not intersect
![Page 67: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/67.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 67/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Production function with onevariable input
• Total Product: Q = 30L+20L2-L3
• Average Product : Q /L
• Marginal Product : MP = dQ/dL = 30+40L-L2
![Page 68: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/68.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 68/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Production Elasticity
• ∆Q / ∆X * X / Q = MPx * 1 / APx
![Page 69: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/69.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 69/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Three Stages of Production
• Stage 1: AP is increasing, MP is increasing and
Production Elasticity is > 1.
• Stage 2: AP and MP are decreasing andProduction Elasticity is 0 < Prod.Elas < 1
• Stage 3: MP and AP continue to decrease and
Production Elasticity < 0.
![Page 70: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/70.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 70/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Returns to Scale
• Increasing Returns to Scale When output
increases by a proportion greater than the
proportionate increase in all inputs.
• Decreasing returns to scale
• Constant returns to scale
![Page 71: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/71.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 71/178
Managerial Economics ©Oxford University Press, 2006
All rights reserved
Cobb – Douglas ProductionFunction
• Q = A Lα Kβ
Where, α + β indicates Returns to Scale
If > 1, it exhibits Increasing Returns to Scale
If < 1, it exhibits Decreasing Returns to Scale
If = 1, it exhibits Constant Returns to Scale
![Page 72: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/72.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 72/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Optimal Input Levels
• With one variable input:
Marginal Revenue Product (MRP) = Marginal
Variable Cost.MRP = MP * MR
• With many variable inputs:
MPL
/ PL
= MPK
/ PK
= ……….
![Page 73: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/73.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 73/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Chapter 7
Analysis and Estimation of
Costs
![Page 74: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/74.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 74/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Concepts of costs
• Economic costs – Relevant costs definedin terms opportunity costs
• Sunk costs – Expenditures that are
irrelevant for decision making during theconcerned period
• Normal Profit – this is as much acomponent of costs as wages, interest, etc.It is a payment for „entrepreneurship‟
![Page 75: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/75.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 75/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Long-run total Cost (LRTC)
• Steps to derive:
- select level of output
- find the point of tangency between therelevant isoquant and the isocost line
- repeat the first two steps for differentlevels of output
- the line joining all these points of tangencyis the LRTC
![Page 76: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/76.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 76/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Short run Total Cost (SRTC)
• The relevant cost is the Short-Run Variable
cost
• Fixed costs are irrelevant in the short run
• The slope of the SRTC varies with the
returns from the variable input
![Page 77: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/77.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 77/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Average and Marginal Cost Curves
• The LRAC is derived from LRTC ; is U-
shaped reflecting Returns to Scale
• SRAC is derived from SRTC; is U-shapedreflecting variable returns from the variable
input in the short run
• Marginal Cost is derived from LRTC or
SRTC; is U- shaped
![Page 78: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/78.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 78/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Relationship between Marginaland Average Cost
• When MC is below the AC, the AC falls
• When MC is above the AC, the AC rises
• When AC is at the minimum, MC is rising• MC cuts AC at the minimum of the AC
![Page 79: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/79.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 79/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Relationship between LRAC andSRAC
• Points on the LRAC gives the lowest cost of
producing a target level of output
• The lowest point on the SRAC gives the level of output at which the AC is lowest in the short
run
![Page 80: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/80.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 80/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Cost Functions
• Polynomial Function:
- Cubic Fn: TC = a + bQ - cQ2 +dQ3
- Quadratic Fn: TC = a + bQ + cQ2
- Linear Fn: TC = a + bQ
• Logarithmic Function:
- ln TC = a + b ln Q
![Page 81: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/81.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 81/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Breakeven Analysis
• Qb = TFC / ( P – AVC)
P – AVC is “ Contribution”
• Quantity at which a target profit can beearned:
Q = TFC + Profit Target / Contribution
![Page 82: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/82.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 82/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Chapter 8
The Competitive and Monopoly
Models
![Page 83: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/83.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 83/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Optimizing rules in CompetitiveModel
• Marginal Output Rule:
MR = MC
• Shut-down Rule:If P (price) is less than Min AC , then SHUT
DOWN
M i l t t R l d S l C
![Page 84: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/84.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 84/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Marginal output Rule and Supply CurveGraphical Representation
MC
AEC (Avg Eco. Cost
AR=MR=P
Q
Rs/unit
B
Every point above „B‟ on the MC curve is a pointon the Short run supply curve
![Page 85: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/85.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 85/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Long Run (LR) Supply curve
• The relevant curves are the Long run MC curve
and the Long run Avg Cost curve.
• Derived from these two curves just as the Short
run supply curve.
![Page 86: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/86.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 86/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Elasticity of supply
• Ess = % change in quantity supplied / %
change in price
• Flatter the supply curve , larger the elasticity
![Page 87: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/87.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 87/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Characteristics of a Perfectly
competitive Market
• Large number of sellers. Each seller is
therefore a price taker
•Large number of buyers
• Homogeneous product- hence uniform price
• Perfect information
• Free entry and exit- so no supernormal profits
![Page 88: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/88.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 88/178
N i l i f P f
![Page 89: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/89.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 89/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Normative analysis of PerfectCompetition
• Total Surplus is maximum
SS
DD
A
B
![Page 90: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/90.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 90/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Monopoly
• A single firm faces the entire demand - Price
Maker
• No role for strategy
• No substitutes
• No entry
P i i d O d i i f
![Page 91: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/91.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 91/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Pricing and Output decisions of aMonopolist
• Downward sloping demand curve or AR
curve
• Hence a falling MR curve• MC=MR at E
ARMR
MC
Q
E
![Page 92: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/92.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 92/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Monopoly Vs Competitive Solution
• Output lower and price higher in a monopoly than
in competition.
• This is because :
MR = P in Competition and MR < P in Monopoly
In competition, MC =MR =P.
In monopoly, MC=MR and MR < P
![Page 93: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/93.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 93/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Regulation of Monopoly
• Regulation of prices
• Antitrust Policies – to prevent the
monopolist from exercising Monopoly
Power.
• In India , we had the MRTP Act of 1969
• We now have the competition Act 2002
• Patent Policy
R ti l b hi d P i
![Page 94: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/94.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 94/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Rationale behind PriceDiscrimination
• To transfer as much as possible of the
consumers surplus over to the seller
![Page 95: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/95.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 95/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Price Discrimination
• Practice of charging different prices in
different markets for the same product
• The seller should be a price maker
• Price elasticity of demand has to be different
for different market segments
• The different market segments should be
insulated
![Page 96: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/96.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 96/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Chapter 9
Monopolistic Competition and
Oligopoly
F t f li ti
![Page 97: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/97.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 97/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Features of monopolisticCompetition
• Large number of sellers but each seller is a
Price Maker
• Large number of imperfect substitutes due to
product differentiation
• Large number of uninfluencing buyers – both
informed and uninformed
• Free entry
Eq ilibri m Short r n and Long
![Page 98: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/98.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 98/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Equilibrium- Short run and Longrun
• In the Short run at MR =MC , the seller
makes Super normal Profits
• In the Long run, „ Free entry‟ squeezesout the Profit
• So at the Long run equilibrium, MR =
MC= AC
![Page 99: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/99.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 99/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Features of Oligopoly
• Few sellers
• Interdependence
• Intense rivalry• „Strategy‟ plays a dominant role.
• Barriers to entry; Natural and Strategic
![Page 100: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/100.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 100/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Equilibrium in Oligopoly
• Cournot Equilibrium
• Bertrand Equilibrium
• Stackelberg Equilibrium• The kinked demand model
• Cartel
• Collusion
• Price Leadership
![Page 101: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/101.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 101/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Game Theory and Oligopoly
• A Pay off Matrix: WIPRO
without remote with
remotewithout areas areas
H remote areas 40,70
35,55
C
L With remote
areas 30,60 45,45
![Page 102: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/102.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 102/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
A Game Tree
Hero
Atlas
Atlas
low
high
Rs 4000,4000
Rs 6000,1000
Rs 1000,6000
Rs 3000,3000
highlow
lowhigh
![Page 103: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/103.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 103/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Strategies
• Maximin Strategy
• Dominant Strategy
• Dominated Strategy• Pure and mixed Strategy
![Page 104: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/104.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 104/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Different Games
• Entry Game• Games of imperfect and incomplete
information – Prisoners‟ Dilemma
Games• Sequential Games
• Repeated Games
• Finitely repeated Games
![Page 105: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/105.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 105/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Chapter 10
Alternative Pricing Practices
![Page 106: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/106.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 106/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Pricing of Multiple Products
• Products with interdependent
demands but independent production
Optimizing rule:
MCx = MRx
MRx
= dTRx /dQ
x+ dTR
y /dQ
x
![Page 107: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/107.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 107/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Pricing of Multiple Products
• Products related in production but
independent in demand:
Optimizing rule:
1. MC of Production = MR1 + MR2+….
Eg. Petroleum Products
2. MC = MRt (Total MR)
Eg. Hide and Meat- A Product Package
![Page 108: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/108.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 108/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Other Pricing Principles
• Fully distributed Cost – based pricing
• Incremental Cost Pricing
• Ramsey Pricing
![Page 109: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/109.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 109/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Other Pricing Principles (contd…)
• Transfer Pricing:
- a firm with multiple divisions where eachis
treated as an autonomous profit centre.- where Market exists, the rule is:
• Transfer the product at Market Price
- where external market exists, transfer at
P=MC- where external market is imperfect,behave
like a discriminating monopolist
![Page 110: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/110.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 110/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Other Pricing Principles (contd..)
• Two Part Tariff:
- a lump sum fixed Charge and a Variable component
• Peak Load Pricing:
- where the product is not storable.
- Where demand varies with time.
- Differing price elasticities
- The same facility is being used to meet all the different
demands
![Page 111: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/111.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 111/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Chapter 11
Market for Factor Inputs
![Page 112: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/112.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 112/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Competitive Factor Markets
• Demand for a single variable factor:
MRPl = MFCl
( MPl * MR = MRPl )• Demand for several variable factors:
MC = w/MPl = r/MPk
Or MC/MR = w/MRPl
= r/MRPk
![Page 113: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/113.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 113/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Economic rent
• In the context of factor markets, the excess of
payment over the minimum required to buy
the use of the factor is economic rent.
• Economic Rent earned varies with supply
elasticity
![Page 114: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/114.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 114/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Monopsony in the factor market
• A single buyer of a factor
• Minimum Wage Law to protect labour from
exploitation by monopsonist
![Page 115: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/115.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 115/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Factor market with Monopoly Power
• A single seller of a factor
• A classic example is the Labour Union
![Page 116: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/116.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 116/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Bilateral Monopoly
• A monopolist seller meets a monopsonist buyer
• Each would bargain and the price gets fixed
Ch t 12
![Page 117: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/117.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 117/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Chapter 12
Long Term Investment and
Risk Analysis
![Page 118: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/118.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 118/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Evaluation of Capital Expenditure
• Large investments in assets which, once
undertaken, are irreversible
• Revenue occurs in the future
![Page 119: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/119.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 119/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
The Capital Budgeting Process
• Generation of capital investment projects
• Estimation of the cash flows
• Evaluation of the projects
• Ex-post evaluation of projects
Methods of evaluating investment
![Page 120: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/120.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 120/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Methods of evaluating investmentprojects
• Payback period
• Average return on investment or Accounting
rate of return
• Net Present Value
• Internal rate of Return
![Page 121: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/121.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 121/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Discounting
• The process of bringing the future stream of
revenues to the present
• Choice of the discount rate is important
• The discount rate should reflect the
opportunity cost of capital to the firm
E i C B fi A l i
![Page 122: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/122.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 122/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Economic Cost – Benefit Analysis
• Used to evaluate projects where „ profits „ are
not very relevant
• Used in situations:
- with externality
- where distributional impact is important
- of merit goods
Ri k
![Page 123: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/123.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 123/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Risk
• A decision making situation in which the
possible outcomes can vary and the probability
of occurrence of each outcome is known
I ti f Ri k
![Page 124: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/124.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 124/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Incorporation of Risk
• Subjective approach
• Utility function approach
• Decision tree approach• Risk adjusted discount rate approach
M i Ri k d U t i t
![Page 125: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/125.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 125/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Managing Risk and Uncertainty
• Seek more information
• Diversification
• Hedging• Insurance
• Controlling the operating environment
• Restricting use of firm-specific assets
Th C f D l t bl R
![Page 126: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/126.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 126/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
The Case of Depletable Resources
• Cost of Production
• Cost of Depletion
I t t R t
![Page 127: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/127.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 127/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Interest Rates
• Interest rate is the price of funds
- Prime lending rate
- Commercial paper rate- Discount rate or Bank rate
- T- Bill rate
![Page 128: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/128.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 128/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Chapter 13
Economics of Information
I f t I f ti
![Page 129: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/129.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 129/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Imperfect Information
• Incomplete Information
- where both sides to a transaction do not
possess complete information
• Asymmetric Information
- where one of the parties to a transaction has
more information than the other
As mmetric Information ( td )
![Page 130: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/130.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 130/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Asymmetric Information (contd…)
• Two sources:
- the characteristic (e.g. – quality of a
used car)- a hidden action (e.g. – actions of an
employee such as „shirking‟ work)
Signalling
![Page 131: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/131.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 131/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Signalling
• Ways of conveying and getting information on
hidden characteristics (e.g. airlines offering
various „Packages‟)
Adverse Selection
![Page 132: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/132.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 132/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Adverse Selection
• an outcome of asymmetric information
wherein you select precisely the ones you
should not (e.g. – the unhealthy and weak
taking up health insurance)
• this is due to asymmetric information on
some hidden characteristics
Responses to Adverse Selection
![Page 133: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/133.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 133/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Responses to Adverse Selection
• Market response:
- “the insurance industry makes medical
examination compulsory, higherpremiums”
Government Response:
- “making information mandatory”
Hidden Action
![Page 134: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/134.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 134/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Hidden Action
Characterized by:
- one side of the transaction not being able to
observe the action taken by the other.
- The unobservable action affects the other side.
- no agreement on whether the action should be
taken or not.
* The result of hidden Action is Moral Hazard
![Page 135: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/135.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 135/178
Moral Hazards in Product Markets
![Page 136: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/136.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 136/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Moral Hazards in Product Markets
• Brand Name Reputation as Hostages
• Guarantees and Warrantees
![Page 137: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/137.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 137/178
Externalities
![Page 138: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/138.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 138/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Externalities
• The effect of an economic activity that is not
incorporated into or reflected in the market
price is called an Externality
• Externality if negative, imposes a „cost‟
unaccounted for
• Externality if positive, gives rise to a „benefit‟
not accounted for
Externalities (contd )
![Page 139: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/139.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 139/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Externalities (contd..)
• Pollution is a negative externality;
development of an area due to industrial
units being set up is a positive externality
• The result is that costs and benefits are
either overestimated or underestimated
Internalizing Externalities
![Page 140: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/140.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 140/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Internalizing Externalities
• Government‟s response:
- Taxes
- Regulation
- Effluent Fee
- Transferable Emission Permits
- Recycling
Internalizing Externalities
![Page 141: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/141.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 141/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Internalizing Externalities
• Market‟s Response
- Mergers
- Social Conventions
- Property Rights
Public Goods
![Page 142: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/142.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 142/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Public Goods
• Public goods are Non Rival
• Public Goods are Non Excludable
• The result: no reason for the consumerto reveal his/her valuation of the good or
service
• HENCE MARKETS FAIL
Provision of Public Goods
![Page 143: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/143.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 143/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Provision of Public Goods
• Government alone being responsible.
• Public Private Partnerships (P3s)
Public Private Partnerships (PPP)
![Page 144: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/144.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 144/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Public Private Partnerships (PPP)
• PPPs are contractual arrangements between agovernment and a private party for the provisionof Assets and the delivery of services that havebeen traditionally provided by the public sector
• The central point is the sharing of decisionmaking authority
• The not-so central point is the sharing of rewards and risks
![Page 145: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/145.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 145/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Chapter 15
Macroeconomic Aggregates
Macro Aggregates
![Page 146: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/146.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 146/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Macro Aggregates
• Aggregate output levels
• Aggregate Price levels
• Aggregate Investment levels
• Aggregate Consumption levels
• Balance of Payments
Fundamental Identity
![Page 147: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/147.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 147/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Fundamental Identity
Agg output ≡ Factor Income ≡Expenditure
Measures of Aggregate Output
![Page 148: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/148.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 148/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Measures of Aggregate Output
At Market Price At Factor Cost
* Gross Domestic Product
* Gross National Product
* Net Domestic Product
* Net National Product
* PPP Gross Domestic ProductNational Income ≡ NNP at Factor Cost
Price Indices
![Page 149: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/149.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 149/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Price Indices
• CPI (Also called Cost of living Index)
• WPI (Wholesale Price Index)
• GDP Deflator
Price Indices
![Page 150: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/150.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 150/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Price Indices
• CPI : Weighted Average Retail Price of aspecific basket of goods.
• WPI : Based on wholesale prices of a
specific basket of goods ( different from CPI’sbasket both in composition and in weights).
• GDP Deflator: Ration of Nominal GDP to
Real GDP.
Aggregate Consumption
![Page 151: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/151.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 151/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Aggregate Consumption
• Keynesian Consumption function
- Concept of Marginal Propensity to
consume
• Irving Fisher‟s Hypothesis
• Life-Cycle Hypothesis
• Duesenberry‟s Hypothesis
• Random walk Hypothesis
Investment
![Page 152: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/152.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 152/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Investment
• Investment as a function of changes in
income(Y)
- The Accelerator• A relationship between Investment and
the stock market is Tobin‟s Q
• Investment as a function of Real InterestRate
Inflation and Unemployment
![Page 153: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/153.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 153/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Inflation and Unemployment
Cost-Push
• InflationDemand- Pull
Remedy in the Short Run: SqueezingAggregate Demand
Phillip’s Curve
![Page 154: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/154.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 154/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Phillip s Curve
• Inflation (Wage rate) and Unemployment are
inversely related
• NAIRU: Non Accelerating Inflation Rate of
Unemployment
w
Unemp rate
W is wage rate
Balance of Payment
![Page 155: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/155.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 155/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Balance of Payment
• Captures all transactions between any
economy and the rest of the world.
• Current Account
• Capital Account
Balance of Payment
![Page 156: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/156.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 156/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Balance of Payment
• Items keenly watched:
- ratio of current account Deficit/surplus
to GDP- ratio of Capital Account surplus/deficit
to GDP
- extent of intervention through reserves.
![Page 157: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/157.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 157/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Chapter 16
Fiscal, Monetary and Exchange
Rate Policies
Business Cycles
![Page 158: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/158.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 158/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Business Cycles
• Fluctuations in economic activity.
- low level of economic activity: Recession
- Peaking levels of economic activity: Boom
• Economic activity is measured by rate of
change in GDP
• Policy interventions are called for to reduce
the severity of fluctuations and to stabilize theeconomy
Stabilization Policies
![Page 159: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/159.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 159/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Stab at o o c es
• Reliance on Demand management Policies in
the Short Run.
Fiscal Policies Monetary Policies
Fiscal Policy
![Page 160: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/160.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 160/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
y
• Instruments: Taxes and Government Spending
• These two instruments don‟t work through the
market.
• Both these are reflected in the Budget.
Monetary Policy
![Page 161: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/161.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 161/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
y y
• The central bank of a country is the sole authority.
• Interest Rate is the instrument which is
manipulated by changes in Money supply.
• Interest rate is the price of funds.
Money Supply
![Page 162: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/162.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 162/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
y pp y
• Is primarily determined by the central bank.
• The banking sector plays a key role through the
„fractional reserve system‟ and the „multiple
expansion of deposits‟.
Money Multiplier
![Page 163: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/163.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 163/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
y p
• Given by :
Cu /D + 1
-----------------------------
Cu/D + RR/D + ER/D
Where Cu is the currency, RR is Required reserves
and ER is Excess Reserves.
Exchange Rate Policies
![Page 164: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/164.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 164/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
g
• Fixed Exchange rate Policy
• Market determined Exchange rate Policy
• Between these two, there is a system of “Managed
Floats”
Stability of Exchange Rates
![Page 165: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/165.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 165/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
y g
• Depends on elasticities of imports and exports.
• An elastic import basket and an elastic export
basket results in stable rates.
• An inelastic import basket and a relatively highly
elastic export basket also results in stable rates.
• An inelastic import basket and a not so elastic
export basket results in instability in exchangerates.
Devaluation
![Page 166: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/166.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 166/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
• A reduction in the value of a currency.
• Devaluation is done when:
- a country cannot maintain the Fixed Exchange
rate due to scarcity of Reserves.
- a country chooses to consciously improve trade.
![Page 167: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/167.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 167/178
Relationship between Monetary policies
and Exchange rate Policies
![Page 168: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/168.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 168/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
and Exchange rate Policies
• Fixed Exchange Rate Policy:
monetary Policy‟s role is exclusively to maintain
the fixed rate for which it requires reserves of
foreign and domestic currencies.
Flexible Exchange rate policy gives freedom to use
monetary policies for other purposes.
Chapter 17
![Page 169: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/169.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 169/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
The New Economy
Definition
![Page 170: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/170.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 170/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
• Outcome of the Information Revolution.
• It has 3 distinguishing characteristics:
- it is leaning on intangibles
- it is global
- it is intensely interlinked
The New Economy is thus a „Network‟ Economy.
Information Goods
![Page 171: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/171.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 171/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
• These are digitized information.
Eg. Encyclopedias, Directories
• Characteristics:
- High fixed costs but very low variable costs of
reproduction.
- The above results in non excludability and
market failure.- Pricing is Value based (since MC is near zero)
Network and Network Industries
![Page 172: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/172.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 172/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
• Industries which provide Information goods are
called Network industries.
• A network is a set of connections between nodes.
• Networks could be real or virtual.
• Larger the network size, more viable the
production and usage.
Networks
![Page 173: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/173.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 173/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
• Network Externality: The value to each user
being in the network rises at a rate much higher
than the rate of increase in the size of the network.
Old Economy Industries (OEI) Vs
Network Industries
![Page 174: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/174.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 174/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Network Industries
• In old eco.Industries (OEI), economies of scaleoccur on the supply side, whereas in the Network industries, they occur on the Demand side.
• In OEIs, demand is downward sloping and this„shifts‟ when factors change. For network industries, demand increase as accumulateddemand increases- a positive feedback chain.
• In OEI, scarcity gives rise to value. In Network industries, abundance gives rise to value.
Rise and Fall of Dot-Coms
![Page 175: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/175.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 175/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
• Dot-Coms emerged to deal with products
and services that used the Internet.
• Focused on „mind share‟(market share) torealize Network externalities.
Ignored the result of the outcome of theabove- a “winner takes all” situation.
Fundamental Laws and Concepts of
Old Economy
![Page 176: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/176.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 176/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
Old Economy
• Profit Maximization
• Economies of scale results in one or few
winners.
• Demand estimation and elasticities are
important.
• Cost estimation is essential.
Ignoring the above led to the demise of Dot-
Coms
Internet Pricing Models
![Page 177: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/177.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 177/178
Managerial Economics ©Oxford University Press, 2006 All rights reserved
• Flat – rate Pricing
• Usage sensitive Pricing
• Transaction- based Pricing
• Priority Pricing
• Precedence model
• Smart Market Mechanism Model
Role of Government
![Page 178: Power Points Managerial Economics](https://reader031.vdocuments.site/reader031/viewer/2022021218/577d25451a28ab4e1e9e6911/html5/thumbnails/178.jpg)
8/3/2019 Power Points Managerial Economics
http://slidepdf.com/reader/full/power-points-managerial-economics 178/178
•Public policy to facilitate adoption and adaptation.
•Policy to actively promote innovation.
•Policy to provide education.
•Policy to promote digitization.