MANAGERIAL ECONOMICS

Session 1
Tanushree Haldar
Questions……..
• Why is Amazon giving free delivery service to prime customers? If delivery
cost is not very high for Amazon, why is it not providing free delivery
service to all customers?
• How Netflix managed to acquire 8 mn new subscribers between April 2024
and June 2024, while its competitors are struggling to increase the
consumer base?
• Should Netflix start focusing on Ad revenue, just like its competitors?
• Why is Meta not following Zomato's strategy of imposing platform fees for
its Instagram customers?
• What price would Eli Lilly charge for its weight loss drug, Tirzepatide, if it
gets approval in countries like China and India?

2
WHAT IS MANAGERIAL ECONOMICS
• Economics the study of choices

• Management efficient decision making

• Managerial economics Efficient choices/decision making which involves a

framework of cost-benefit analysis.

3
WHY MANAGERIAL ECONOMICS?

Managerial
Decision Making
Managerial
Economics
Understanding
other disciplines
of Management

4
Managerial Economics and Other Business
Disciplines
Operations

Strategy
Marketing

Managerial Finance
HR Economics
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ME applied to Marketing
• Determination of the demand and understanding consumer
behaviour
• Determination of price of the product and price elasticities
• Determining the feasibility of supplying the product to the market
• Recognize the competition in the market
• Designing product promotion and differentiation of products to
facilitate the customers to select product from the same firm

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ME applied to Operations
• Procurement of resources at best possible prices
• Selection of production methods
• Determination of deployment of technology which forms a part of the
factors of production
• Demand forecasting
• Cost minimization
• Inventory planning and control
• Efficient supply chain management
• Revenue management

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ME applied to HR
• Identifying quality of the candidate

• Fixing the wage for employees as per education and skill set

• Designing incentive mechanism for employees

• Designing hiring policies to minimize cost of recruitment

8
ME applied to Finance
• Deploying funds to fulfil stakeholder’s preference

• Raising capital by minimizing the cost of capital

• Where to invest, when to invest, how to invest

• Relevant cost and Incremental cost analysis

• Break-even analysis
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ME applied to Strategy
• Types of competition

• Strategic Interactions

• Performance analysis

• Transaction cost theory

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Three basic questions From a Company’s
of Economics Standpoint
What goods and services should
The product decision
be produced?

How should these goods and The hiring, staffing, procurement,

services be and
produced? capital budgeting decisions

For whom should these goods and

services The market segmentation decision
be produced?

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ABOUT THE COURSE
• 20 Sessions: Lecture, Case discussion and problem solving

• Refer to PPT and textbook to learn concepts

• Focus on discussions to learn application

• Students have to come prepared for each class: Cases (if any) and last
session’s discussion

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Project
• Choose a company.

• Identify the major product sold by that particular company.

• Analyze the company’s key strategic decisions using the theory you
learn in class.

• E.g. Fevicol by Pidilite Industries Limited

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Report may cover following points (feel free to add
or drop pointer depending on the product you
have selected)
• Understand the economic conditions in company is competing
• Supply and Demand conditions
• Market structures
• Should our firm be in the business or close down? Should it go for an
expansion?
• What pricing strategy the company is following? Do you think this is the
best pricing strategy for the firm? If yes, why. If not, suggest alternative
strategy and argue why that is better?
• What other strategies the company is following to capture customers and
gain advantage over competitors? Analyze these strategies in depth.
• Is there any information asymmetry present at company’s end or
consumer’s end? How to deal with the problem?
ASSESSMENT
Sr. No. Component Individual / Group Weightage

2 Quizzes (3) Individual 40

3 Group Project Group (with individual 20

penalty)
4 Group Presentations Group (with individual 10
penalty)
5 End-Term Individual 30

15
Quiz Dates (Best of two)
Quiz Dates

Quiz 1 After session 6

Quiz 2 After session 10

Quiz 3 After session 16

iPhone 15 Pro
• 6.2 inch
display
• USB-C port
• Line of dark-
red color will
be added
MARKET
• A market is any arrangement that enables buyers and sellers to interact

• Market requires:

• Buyer: Demand
• Seller: Supply
• Product

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Getting Demand from the Market
• Auction

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What is Demand?
• The value we assign to a product gives our maximum willingness to
pay for the product.

• We want to buy the product as long as the price that we need to pay
is less than the maximum amount we are willing to pay.

• When we can afford to fulfill such wants and have definite plans of
fulfilling such wants, i.e., we have money and intention to fulfill such
wants, it forms a demand.

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Demand Definition
If you demand something, then you
1. Want it,
2. Can afford it, and
3. Have made a definite plan to buy it.

Wants are the unlimited desires or wishes people have for goods and services.
Demand reflects a decision about which wants to satisfy.

The quantity demanded of a good or service is the amount that consumers plan
to buy during a particular time period, and at a particular price.
Demand Function
• 𝑄𝑑 = 𝑓 𝑃, 𝑃𝑐 , 𝑃𝑠 , 𝐼, 𝐼𝑓𝑢𝑡 , 𝑃𝑓𝑢𝑡 , 𝑃𝑜𝑝, 𝑇, 𝑇𝑃, 𝐴, … . .

• Demand function provides a relation between quantity demand and

all factors that could impact demand, e.g. Price of the product, price
of complementary good (product or service that should be used along
with our product), price of substitutes (price of products that can
substitute our product), Income, future Income, Future price,
population, taxes (T), taste and preference of consumers (TP),
advertisement expenditure (A), and so on.
Demand curve

A relation between Price and Quantity

demanded, keeping all other factors
impacting demand fixed at some level
(constant).
 Plotting a Linear Demand Curve

Let inverse relation between Price (𝑃) and quantity

demanded (𝑄𝑑 ) is given as follows: P
𝑄𝑑 = 𝑎 − 𝑏𝑃 a/b
In terms of P (inverse demand function):
𝑎 1
𝑃 = − 𝑄𝑑
𝑏 𝑏

We plot the demand curve in figure 1

Y-intercept (Along Price axis) = 𝑎/𝑏
X-intercept (along Quantity axis) = 𝑎
a Q
1 Figure 1
|Slope| =
𝑏
The Law of Demand
The law of demand states:
Other things remaining the same, the higher the price of a good, the smaller
is the quantity demanded; and the lower the price of a good, the larger is the
quantity demanded.

The law of demand results from

▪ Substitution effect
▪ Income effect
The Law of Demand
Substitution Effect
When the relative price (opportunity cost) of a good or service rises, people seek
substitutes for it, so the quantity demanded of the good or service decreases.
For example, if the price of Coke increases, people (not all, but some) will switch to
competitor Pepsi.

Income Effect
When the price of a good or service rises relative to income, people cannot afford all
the things they previously bought, so the quantity demanded of the good or service
decreases.
For example, if the price of Coke increases, people will not be able to afford as much
Coke as they were buying initially.

Exception: Inferior Goods- Demand decreases with an increase in Income. For

example, people buy very cheap quality products because they cannot afford to buy
a better quality product. If there income increases, they will buy better quality.
Movement along Demand Curve
•A rise in the price, other things remaining the same, brings a decrease in the
quantity demanded and a movement up along the demand curve.

•A fall in the price, other things remaining the same, brings an increase in the
quantity demanded and a movement down along the demand curve.
Movement along Demand Curve
Let’s continue with our initial linear inverse demand
curve: P
𝑎 1
𝑃 = − 𝑄𝑑
𝑏 𝑏 a/b
We plot the demand curve in Figure 2.
A

If Price of a good (product or service) increases, the

point will move up the demand curve (along orange
line). Quantity demand will fall (represented by point B
A). If Price of a good decreases, the point will move
down the demand curve (along orange line). Quantity
demanded will increase (represented by point B).
a Q
Change in price will result in movement along the Figure 2
demand curve.
Factors effecting Demand
Six main factors that change demand are

▪ The prices of related goods (complements and

substitutes)

▪ Expected future prices

▪ Income
▪ Expected future income and credit
▪ Population
▪ Taste & Preferences
Demand
Prices of Related Goods

A substitute is a good that can be used in place of another good.

A complement is a good that is used in conjunction with another good.

When the price of substitute for an energy bar rises or when the price of a
complement of an energy bar falls, the demand for energy bars increases.
Demand
Expected Future Prices
•If the expected future price of a good rises, current demand for
the good increases and the demand curve shifts rightward.

Income
•When income increases, consumers buy more of most goods
and the demand curve shifts rightward.

•A normal good is one for which demand increases as income

increases.

•An inferior good is a good for which demand decreases as

income increases.
Demand

Population
•The larger the population, the greater is the demand for all goods.

Preferences
•People with the same income have different demands if they have different
preferences.
A Change in Demand (Shift in demand curve)
•When there is some influence on buying plans other than the price of the
good changes, there is a change in demand for that good.

•The quantity of the good that people plan to buy changes at each and every
price, so there is a new demand curve.

•When demand increases, the demand curve shifts rightward.

•When demand decreases, the demand curve shifts leftward.

 A Shift of the Demand Curve
Let’s continue with our initial linear inverse demand curve:
𝑎 1
𝑃 = − 𝑄𝑑 P
𝑏 𝑏
We plot the demand curve in Figure 2. a/b
Increase in
If the price remains the same but one of the other factors B
Demand
influencing demand changes, demand also changes and
the demand curve shifts.
A
Factors resulting in an increase in demand will shift the Decrease in
demand curve upwards and vice versa. Demand

a Q
Notice that the P and Q intercepts are changing. However, Figure 2
the slope is the same. The slope will only change if b (the
price sensitivity of demand) will change.