MANAGERIAL ECONOMICS.MANAGERIAL ECONOMICS.

Microeconomics & Managerial Economics Microeconomics & Managerial Economics address optimization under constraints.address optimization under constraints.

Economics looks at innumerable wants and Economics looks at innumerable wants and limited resources.limited resources.

Needs need be differentiated from wants.Needs need be differentiated from wants. Demands & Supplies are part parcel of Demands & Supplies are part parcel of

fundamental analysis in economics.fundamental analysis in economics. Other things remaining constantOther things remaining constant is important is important

dictum. dictum.

INTRODUCTION.INTRODUCTION.

1.1. Which markets to enter?Which markets to enter?

2.2. How to differentiate products?How to differentiate products?

3.3. Mix of Products --- what to make?Mix of Products --- what to make?

4.4. Pricing the products and services how to do?Pricing the products and services how to do?

5.5. Who are the competitors and how will they Who are the competitors and how will they respond to the strategies?respond to the strategies?

DESIGNING THE INSTITUTION.DESIGNING THE INSTITUTION.

1.Who will take the ultimate decision?1.Who will take the ultimate decision?2. How to reward or pay the contributors to the 2. How to reward or pay the contributors to the

organization?organization?3. Systems that evaluate the performance of the 3. Systems that evaluate the performance of the

individuals as well as of the perform --- how to individuals as well as of the perform --- how to institute them & justify?institute them & justify?

4. Goals ---CARDINAL OBECTIVES: 4. Goals ---CARDINAL OBECTIVES: Profitability, Profitability, Stability & Growth. Stability & Growth.

ECONOMIC ANALYSISECONOMIC ANALYSIS

Survival of the fittest.Survival of the fittest. Bench Marking against Bench Marking against

the best practice.the best practice.

(A Tiger chases you and (A Tiger chases you and your friend in a forest your friend in a forest ----- how will you ----- how will you escape?) escape?)

MAKING CHOICESMAKING CHOICES

1. Decision Making by Marginal Analysis. Marginal 1. Decision Making by Marginal Analysis. Marginal Cost Cost

2. Opportunity Costs --- Value of Best Alternative.2. Opportunity Costs --- Value of Best Alternative.

3. Marginal Utility & Diminishing Marginal Utility. 3. Marginal Utility & Diminishing Marginal Utility.

(Analyze with the backdrop of creativity of the (Analyze with the backdrop of creativity of the individuals involved.)individuals involved.)

Exercise: With a jump clip other than paper hold, what Exercise: With a jump clip other than paper hold, what are the alternative uses? ---- list them quickly in 5 are the alternative uses? ---- list them quickly in 5 minutes.minutes.

INDIVIDUAL OBJECTIVESINDIVIDUAL OBJECTIVES

Why do you obtain goods & services? ----Why do you obtain goods & services? ----

MAXIMIZING PERSONAL HAPPINESSMAXIMIZING PERSONAL HAPPINESS What are UTILITY functions?What are UTILITY functions?

UTILITY FUNCTIONS OFFER UTILITY FUNCTIONS OFFER SATISFACTION. --- Time Form & Place SATISFACTION. --- Time Form & Place UTILITIES. Order of preference.UTILITIES. Order of preference.

EXERCISE: Prioritize in Rs.50,000/= for an EXERCISE: Prioritize in Rs.50,000/= for an executive office. executive office.

CONSTRAINT OF INCOME & CONSTRAINT OF INCOME & RESOURCESRESOURCES

Optimum Combinations of Utility --- Engel’s Optimum Combinations of Utility --- Engel’s theory of expenditure. (When income changes theory of expenditure. (When income changes this combination changes and when the price this combination changes and when the price level changes then too the combination level changes then too the combination changes)changes)

Making the optimum choice.Making the optimum choice. Application to Management of enterprises.Application to Management of enterprises. Graduating from SME to Big enterprises.Graduating from SME to Big enterprises.

MONEY & JOB MONEY & JOB SATISFACTIONSATISFACTION

You are offered a telephone operator job for You are offered a telephone operator job for Rs.45,000/= per month in Arab country & Rs.45,000/= per month in Arab country & Rs.30,000/= per month in India as General Rs.30,000/= per month in India as General manager --- which job do you opt for?manager --- which job do you opt for?

How these behaviors affect your managerial How these behaviors affect your managerial decision making?decision making?

Is honesty a qualification? Is honesty a qualification?

ALTERNATIVE BEHAVIORS.ALTERNATIVE BEHAVIORS.

Is it only Money?Is it only Money? Is it Happiness that contributes to higher Is it Happiness that contributes to higher

productivity?productivity? Is it the Good Citizen certificate that makes Is it the Good Citizen certificate that makes

you work?you work? Is it environment (upbringing) that contributes Is it environment (upbringing) that contributes

to your economic behavior?to your economic behavior? Can you explain Criminal / Juvenile behavior Can you explain Criminal / Juvenile behavior

by economic analysis taught to you? by economic analysis taught to you?

DECISION MAKING UNDER DECISION MAKING UNDER UNCERTAINTY.UNCERTAINTY.

Expected Value.Expected Value. Risk return tangle.Risk return tangle. Risk Aversion.Risk Aversion. Certainty Equivalent of Premium.Certainty Equivalent of Premium.

(Two Managerial jobs are offered to you: The first one (Two Managerial jobs are offered to you: The first one has only performance basis ---- means 0 to 60,000/= has only performance basis ---- means 0 to 60,000/= pm. Average what you can earn is Rs.45,000/=pm. pm. Average what you can earn is Rs.45,000/=pm. There is another job with regular salary scale of There is another job with regular salary scale of Rs.35,000/=pm --- which one do you select?)Rs.35,000/=pm --- which one do you select?)

CERTAIN PRINCIPLES.CERTAIN PRINCIPLES.

What is the role of price? -- Social Coordinators!What is the role of price? -- Social Coordinators! COASE theorem.COASE theorem.(As long as the properties are easily assignable, (As long as the properties are easily assignable,

exchangeable, & enforceable and if the contracting exchangeable, & enforceable and if the contracting costs are low the resources allocation will be costs are low the resources allocation will be efficient regardless of the initial property rights) efficient regardless of the initial property rights) --- Discuss this in the Indian context.--- Discuss this in the Indian context.

PRACTICAL APPLICATION --- PRACTICAL APPLICATION --- SECURITIZATION. SECURITIZATION.

FIRM RESOURCES’ FIRM RESOURCES’ ECONOMICS. ECONOMICS.

Land ---- recent developments.Land ---- recent developments. LABOUR --- hazy difference between LABOUR --- hazy difference between

MANAGEMENT & LABOUR ---- therefore HR as a MANAGEMENT & LABOUR ---- therefore HR as a resource!resource!

ORGANIZATION --- the components--- what are ORGANIZATION --- the components--- what are they in the recent context?they in the recent context?

CAPITAL --- What is the difference between W.C. & CAPITAL --- What is the difference between W.C. & Capital?Capital?

TIME --- its swap with other resources. --- TIME --- its swap with other resources. --- Competitive edge & time! Competitive edge & time!

PRINCIPLES --- CONTINUEDPRINCIPLES --- CONTINUED

Debate as to whether Central Planning or Free Debate as to whether Central Planning or Free Market Economy, which will aid management?Market Economy, which will aid management?

Knowledge, General Knowledge & Specific Knowledge, General Knowledge & Specific Knowledge ---- Cost of specific knowledge.Knowledge ---- Cost of specific knowledge.

Scientific knowledge & knowledge creationScientific knowledge & knowledge creation Specific knowledge & Economic System.Specific knowledge & Economic System. Economic System --- External contracting Economic System --- External contracting

costs Internal costs. costs Internal costs.

WHAT IS A FIRM?WHAT IS A FIRM? It has specific knowledge to create product/service.It has specific knowledge to create product/service. It caters to Demand.It caters to Demand. It has optimization objectives.It has optimization objectives. It can access resources from the market.It can access resources from the market. Resources as well supplies are subject to constraints/competition.Resources as well supplies are subject to constraints/competition. Exclusiveness of knowledge enables exclusiveness of the firm. Exclusiveness of knowledge enables exclusiveness of the firm. Price is the consideration. Market may or may not recognize the Price is the consideration. Market may or may not recognize the

cost of the product/service while determining /paying a price.cost of the product/service while determining /paying a price. It is the firm which has to be conscious of the cost and not the It is the firm which has to be conscious of the cost and not the

consumers.consumers. Therefore pricing is a strategic decision making process rather Therefore pricing is a strategic decision making process rather

than a mere policy.than a mere policy.DISCUSS THE ABOVE DISCUSS THE ABOVE

DEMAND, MARKET & DEMAND, MARKET & COMPETITION.COMPETITION.

Does the entire demand for a product/service Does the entire demand for a product/service constitute Market?constitute Market?

When there is no other supplier for the product When there is no other supplier for the product --- is there no competition?--- is there no competition?

Then What is competition?Then What is competition? Winning the competition --- what strategies? Winning the competition --- what strategies? Creating Demand --- Genuine & Artificial.Creating Demand --- Genuine & Artificial.(Value Based Management, Strategic (Value Based Management, Strategic

Management & War of Attrition.) Management & War of Attrition.)

STRATEGIES!STRATEGIES!

Monopoly.Monopoly. Duopoly.Duopoly. Oligopoly.Oligopoly. What is POLISTIC? What is POLISTIC?

Play “win maximum” game!Play “win maximum” game!

CAN YOU WORK OUT A GAME THEORY CAN YOU WORK OUT A GAME THEORY BASED ON THIS?BASED ON THIS?

VALUE, COST & PRICE.VALUE, COST & PRICE.

Are more valuable ones highly priced?Are more valuable ones highly priced? Are cost and price related?Are cost and price related? As an entrepreneur should price be dictated by the As an entrepreneur should price be dictated by the

firm or the buyer?firm or the buyer? Differentiate value, cost & price ---- are they all only Differentiate value, cost & price ---- are they all only

mere perceptions?mere perceptions? Historical Cost, Marginal Cost, Total Cost, Historical Cost, Marginal Cost, Total Cost,

Opportunity Cost --- When to take what?Opportunity Cost --- When to take what? Minimize short & long term costs & Maximize Minimize short & long term costs & Maximize

profits --- How to do? profits --- How to do?

INVESTMENT INVESTMENT CONSIDERATIONCONSIDERATION

The net realizable value (NRV) of the asset- this is the current The net realizable value (NRV) of the asset- this is the current net disposable value.net disposable value.

The present value of the expected future earnings stream The present value of the expected future earnings stream flowing from the asset (PV)flowing from the asset (PV)

An individual asset may be valued on each of these three An individual asset may be valued on each of these three alternative bases. But there are six ways in which values may alternative bases. But there are six ways in which values may be ranked in order of magnitude. These are:be ranked in order of magnitude. These are:

1. NRV > PV > RC1. NRV > PV > RC 2.2. NRV > RC > PVNRV > RC > PV 3.3. PV > RC > NRVPV > RC > NRV 4.4. PV > NRV > RCPV > NRV > RC 5.5. RC > PV > NRVRC > PV > NRV 6.6. RC > NRV > PVRC > NRV > PV

CAPITAL --- WHAT TYPES?CAPITAL --- WHAT TYPES?

Cost of Capital & Weighted Average Cost Cost of Capital & Weighted Average Cost (WACC).(WACC).

Debt & Leveraging.Debt & Leveraging.1.1. Retained Earnings.Retained Earnings.2.2. Public Contributions (IPO/ PO)Public Contributions (IPO/ PO)3.3. Foreign Capital.Foreign Capital.4.4. Borrowed Capital.Borrowed Capital.Which is the most expensive? Deliberate!Which is the most expensive? Deliberate!

BARGAINING FOR BARGAINING FOR INFORMATION.INFORMATION.

Is Information costly?Is Information costly? Is Information Valuable?Is Information Valuable? Can Information be complete in an Organization?Can Information be complete in an Organization? Could Information give competitive edge?Could Information give competitive edge? Can INFORMATION BRING SATISFACTION?Can INFORMATION BRING SATISFACTION? What are asymmetric information?What are asymmetric information? Problem of Segregation of Useless Information. Problem of Segregation of Useless Information.

Contracts that Bind an OrganizationContracts that Bind an Organization& Incentives!& Incentives!

Employees.Employees. Promoters.Promoters. Investors.Investors. Lenders.Lenders. Suppliers.Suppliers. Buyers.Buyers. Insurers.Insurers. Ultimate consumers.Ultimate consumers.How to compensate each one of them ----How to compensate each one of them ----Fundamental Logic!Fundamental Logic!

INFORMATION EFFICIENCY – INFORMATION EFFICIENCY – AN EXAMPLE!AN EXAMPLE!

Share market ---- how the prices vary?Share market ---- how the prices vary? What is “Insider Information.”?What is “Insider Information.”? Efficient Use of Information ----- What are the Efficient Use of Information ----- What are the

premises? premises? Economics of Information ---- Cost of Economics of Information ---- Cost of

processing Information ---- Missing vital processing Information ---- Missing vital Information --- MIS in firms! Information --- MIS in firms!

CORPORATE CONTROLCORPORATE CONTROL

The stakeholders have stake in the organization.The stakeholders have stake in the organization. Debtors want to control.Debtors want to control. Promoters want to control.Promoters want to control. Managements say they control.Managements say they control. Technology Providers want to control.Technology Providers want to control. Employees want to control (through union)Employees want to control (through union) Suppliers too want control.Suppliers too want control. Regulators & Governments also control.Regulators & Governments also control.Do customers really Control? Who really Controls?Do customers really Control? Who really Controls?

LABOUR ECONOMICS & LABOUR ECONOMICS & MOTIVATION.MOTIVATION.

LABOUR as a commodity.LABOUR as a commodity. Their mobility across the borders.Their mobility across the borders. Collective Bargaining & Organized LABOUR.Collective Bargaining & Organized LABOUR. Conflict of collars’ colors!Conflict of collars’ colors! Disparity in wage levels & Globalization.Disparity in wage levels & Globalization.

(IT & Rocket Science --- case example! Where (IT & Rocket Science --- case example! Where is management education placed?)is management education placed?)

GAME THEORYGAME THEORY

Where strategic or other (may be innate/ deliberate /or Where strategic or other (may be innate/ deliberate /or intended) moves of one or more players (in a market intended) moves of one or more players (in a market

environ or microeconomic context) result in some environ or microeconomic context) result in some kind of tradeoff situations and or equilibrium kind of tradeoff situations and or equilibrium

conditions the possibilities (outcomes) are conditions the possibilities (outcomes) are theoretically predictable through the application of theoretically predictable through the application of

game theory models. They are quantitative techniques game theory models. They are quantitative techniques like linear programming /stepping stones etc. like linear programming /stepping stones etc.

They are of different kinds! They are of different kinds!

TYPES OF GAMES.TYPES OF GAMES.

CLASSIFICATION BY MOVES:CLASSIFICATION BY MOVES:1.1. Simultaneous..Simultaneous..2.2. Sequential..Sequential.. CLASSIFICATION BY OUTCOMES:CLASSIFICATION BY OUTCOMES:1.1. Zero Sum..Zero Sum..2.2. Prisoner’s Dilemma.. Prisoner’s Dilemma.. CLASSIFICATION BY BEHAVIOR:CLASSIFICATION BY BEHAVIOR:1.1. Cooperative..Cooperative..2.2. Non-cooperative..Non-cooperative..

TRANSACTION COSTS – TRANSACTION COSTS – MODERN THEORY FIRMMODERN THEORY FIRM

Potential to be converted in feasibility cost a Potential to be converted in feasibility cost a firm:firm:

1.1. Market potential & Market feasibility.Market potential & Market feasibility.2.2. Technical know-how & production Technical know-how & production

feasibility.feasibility.3.3. Capital & Financial Feasibility.Capital & Financial Feasibility.RELATE THESE ISSUES TO STABILITY, RELATE THESE ISSUES TO STABILITY,

GROWTH & PROFITABILITY i.e. The GROWTH & PROFITABILITY i.e. The cardinal objectives of a firm. cardinal objectives of a firm.

COMPONENTS OF MARKET.COMPONENTS OF MARKET.

DEMAND. (CONSUMER)DEMAND. (CONSUMER) SUPPLY. (PRODUCTION/PRODUCER)SUPPLY. (PRODUCTION/PRODUCER) COST.(WHAT PRODUCER INCURS)COST.(WHAT PRODUCER INCURS) PRICE. (WHAT THE CONSUMER PAYS)PRICE. (WHAT THE CONSUMER PAYS) VALUE. (PERCEIVED)VALUE. (PERCEIVED) UTILITY. (PERCEIVED)UTILITY. (PERCEIVED)

TRANSATION (OTHER MOTIVES AND ECONMIC TRANSATION (OTHER MOTIVES AND ECONMIC BEHAVIORS FORM THE BACKDROP)BEHAVIORS FORM THE BACKDROP)

TRADE ISSUES.TRADE ISSUES.

ASYMMETRIC INFORMATION MAY ASYMMETRIC INFORMATION MAY DAMAGE A MARKET.DAMAGE A MARKET.

DISCUSS THIS ASPECT WITH DISCUSS THIS ASPECT WITH COMPONENTS OF MARKET.COMPONENTS OF MARKET.

ASSIGNMENT.ASSIGNMENT.

Take ten representative companies in different Take ten representative companies in different sectors and study their balance sheet financial sectors and study their balance sheet financial statements and make comparative analysis of statements and make comparative analysis of factor compensations (% analysis) with your factor compensations (% analysis) with your comments!comments!

(More focus on compensation for labor/HR is (More focus on compensation for labor/HR is required.) required.)