Managerial economics

MANAGERIAL ECONOMICS.
 Microeconomics & Managerial Economics
address optimization under constraints.
 Economics looks at innumerable wants and
limited resources.
 Needs need be differentiated from wants.
 Demands & Supplies are part parcel of
fundamental analysis in economics.
 Other things remaining constant is important
dictum.

INTRODUCTION.
1. Which markets to enter?
2. How to differentiate products?
3. Mix of Products --- what to make?
4. Pricing the products and services how to do?
5. Who are the competitors and how will they
respond to the strategies?

DESIGNING THE INSTITUTION.
1.Who will take the ultimate decision?
2. How to reward or pay the contributors to the
organization?
3. Systems that evaluate the performance of the
individuals as well as of the perform --- how to
institute them & justify?
4. Goals ---CARDINAL OBECTIVES: Profitability,
Stability & Growth.

ECONOMIC ANALYSIS
 Survival of the fittest.
 Bench Marking against

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

MAKING CHOICES
1. Decision Making by Marginal Analysis. Marginal
Cost
2. Opportunity Costs --- Value of Best Alternative.
3. Marginal Utility & Diminishing Marginal Utility.
(Analyze with the backdrop of creativity of the
individuals involved.)
Exercise: With a jump clip other than paper hold, what
are the alternative uses? ---- list them quickly in 5
minutes.

INDIVIDUAL OBJECTIVES
 Why do you obtain goods & services? ----
MAXIMIZING PERSONAL HAPPINESS
 What are UTILITY functions?

UTILITY FUNCTIONS OFFER
SATISFACTION. --- Time Form & Place
UTILITIES. Order of preference.
EXERCISE: Prioritize in Rs.50,000/= for an
executive office.

CONSTRAINT OF INCOME &
RESOURCES
 Optimum Combinations of Utility --- Engel’s
theory of expenditure. (When income changes
this combination changes and when the price
level changes then too the combination
changes)
 Making the optimum choice.
 Application to Management of enterprises.
 Graduating from SME to Big enterprises.

MONEY & JOB
SATISFACTION
 You are offered a telephone operator job for
Rs.45,000/= per month in Arab country &
Rs.30,000/= per month in India as General
manager --- which job do you opt for?
 How these behaviors affect your managerial
decision making?
 Is honesty a qualification?

ALTERNATIVE BEHAVIORS.
 Is it only Money?
 Is it Happiness that contributes to higher
productivity?
 Is it the Good Citizen certificate that makes
you work?
 Is it environment (upbringing) that contributes
to your economic behavior?
 Can you explain Criminal / Juvenile behavior
by economic analysis taught to you?

DECISION MAKING UNDER
UNCERTAINTY.
 Expected Value.
 Risk return tangle.

 Risk Aversion.

 Certainty Equivalent of Premium.

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

CERTAIN PRINCIPLES.
 What is the role of price? -- Social
Coordinators!
 COASE theorem.

(As long as the properties are easily assignable,
exchangeable, & enforceable and if the
contracting costs are low the resources
allocation will be efficient regardless of the
initial property rights) --- Discuss this in the
Indian context.
PRACTICAL APPLICATION ---
SECURITIZATION.

FIRM RESOURCES’
ECONOMICS.
 Land ---- recent developments.
 LABOUR --- hazy difference between
MANAGEMENT & LABOUR ---- therefore HR as a
resource!
 ORGANIZATION --- the components--- what are
they in the recent context?
 CAPITAL --- What is the difference between W.C. &
Capital?
 TIME --- its swap with other resources. ---
Competitive edge & time!

PRINCIPLES --- CONTINUED
 Debate as to whether Central Planning or Free
Market Economy, which will aid
management?
 Knowledge, General Knowledge & Specific
Knowledge ---- Cost of specific knowledge.
 Scientific knowledge & knowledge creation
 Specific knowledge & Economic System.
 Economic System --- External contracting
costs Internal costs.

WHAT IS A FIRM?
 It has specific knowledge to create product/service.
 It caters to Demand.

 It has optimization objectives.

 It can access resources from the market.

 Resources as well supplies are subject to
constraints/competition.
 Exclusiveness of knowledge enables exclusiveness of the firm.

 Price is the consideration. Market may or may not recognize
the 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
consumers.
 Therefore pricing is a strategic decision making process rather
than a mere policy.
DISCUSS THE ABOVE

DEMAND, MARKET &
COMPETITION.
 Does the entire demand for a product/service
constitute Market?
 When there is no other supplier for the product

--- is there no competition?
 Then What is competition?

 Winning the competition --- what strategies?

 Creating Demand --- Genuine & Artificial.

(Value Based Management, Strategic
Management & War of Attrition.)

STRATEGIES!
 Monopoly.
 Duopoly.

 Oligopoly.

 What is POLISTIC?

Play “win maximum” game!
CAN YOU WORK OUT A GAME THEORY
BASED ON THIS?

VALUE, COST & PRICE.
 Are more valuable ones highly priced?
 Are cost and price related?
 As an entrepreneur should price be dictated by the
firm or the buyer?
 Differentiate value, cost & price ---- are they all only
mere perceptions?
 Historical Cost, Marginal Cost, Total Cost,
Opportunity Cost --- When to take what?
 Minimize short & long term costs & Maximize
profits --- How to do?

INVESTMENT
CONSIDERATION
 The net realizable value (NRV) of the asset- this is the current
net disposable value.
 The present value of the expected future earnings stream
flowing from the asset (PV)
 An individual asset may be valued on each of these three
alternative bases. But there are six ways in which values may
be ranked in order of magnitude. These are:
 1. NRV > PV > RC
 2. NRV > RC > PV
 3. PV > RC > NRV
 4. PV > NRV > RC
 5. RC > PV > NRV
 6. RC > NRV > PV

CAPITAL --- WHAT TYPES?
 Cost of Capital & Weighted Average Cost
(WACC).
 Debt & Leveraging.
1. Retained Earnings.
2. Public Contributions (IPO/ PO)
3. Foreign Capital.
4. Borrowed Capital.
Which is the most expensive? Deliberate!

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

Contracts that Bind an Organization
& Incentives!
 Employees.
 Promoters.

 Investors.

 Lenders.

 Suppliers.

 Buyers.

 Insurers.

 Ultimate consumers.

How to compensate each one of them ----
Fundamental Logic!

INFORMATION EFFICIENCY –
AN EXAMPLE!
 Share market ---- how the prices vary?
 What is “Insider Information.”?
 Efficient Use of Information ----- What are the
premises?
 Economics of Information ---- Cost of
processing Information ---- Missing vital
Information --- MIS in firms!

CORPORATE CONTROL
 The stakeholders have stake in the organization.
 Debtors want to control.

 Promoters want to control.

 Managements say they control.

 Technology Providers want to control.

 Employees want to control (through union)

 Suppliers too want control.

 Regulators & Governments also control.

Do customers really Control? Who really Controls?

LABOUR ECONOMICS &
MOTIVATION.
 LABOUR as a commodity.
 Their mobility across the borders.

 Collective Bargaining & Organized LABOUR.

 Conflict of collars’ colors!

 Disparity in wage levels & Globalization.

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

GAME THEORY
Where strategic or other (may be innate/ deliberate /or
intended) moves of one or more players (in a market
environ or microeconomic context) result in some
kind of tradeoff situations and or equilibrium
conditions the possibilities (outcomes) are
theoretically predictable through the application of
game theory models. They are quantitative techniques
like linear programming /stepping stones etc.
They are of different kinds!

TYPES OF GAMES.
 CLASSIFICATION BY MOVES:
1. Simultaneous..
2. Sequential..
 CLASSIFICATION BY OUTCOMES:
1. Zero Sum..
2. Prisoner’s Dilemma..
 CLASSIFICATION BY BEHAVIOR:
1. Cooperative..
2. Non-cooperative..

TRANSACTION COSTS –
MODERN THEORY FIRM
 Potential to be converted in feasibility cost a
firm:
1. Market potential & Market feasibility.
2. Technical know-how & production
feasibility.
3. Capital & Financial Feasibility.
RELATE THESE ISSUES TO STABILITY,
GROWTH & PROFITABILITY i.e. The
cardinal objectives of a firm.

COMPONENTS OF MARKET.
 DEMAND. (CONSUMER)
 SUPPLY. (PRODUCTION/PRODUCER)

 COST.(WHAT PRODUCER INCURS)

 PRICE. (WHAT THE CONSUMER PAYS)

 VALUE. (PERCEIVED)

 UTILITY. (PERCEIVED)

TRANSATION (OTHER MOTIVES AND ECONMIC
BEHAVIORS FORM THE BACKDROP)

TRADE ISSUES.
ASYMMETRIC INFORMATION MAY
DAMAGE A MARKET.
DISCUSS THIS ASPECT WITH
COMPONENTS OF MARKET.

ASSIGNMENT.
Take ten representative companies in different
sectors and study their balance sheet financial
statements and make comparative analysis of
factor compensations (% analysis) with your
comments!
(More focus on compensation for labor/HR is
required.)

Managerial economics

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Managerial economics