PUNJAB COLLEGE OF TECHNICAL EDUCATION BADDOWAL COURSE MODULE Instructor: Ragini Khanna e mail ID- [email protected]Mb- 9988531999 Course: Managerial Economics (MB 105) Class: MBA I Semester: I “Managerial economics applies economic theory and methods to business and administrative decision making.” Managerial Economics is concerned with the application of economic principles and methodologies to business decision problems. In this course students will increase their understanding of economics and learn a variety of techniques that will allow them to solve business problems relating to costs, prices, revenues, profits, and competitive strategies. Students will also get a macro view about National Income, GDP, GNP, Consumption Function, Inflation, Monetary and fiscal policies. The over-riding goal of the course is to make students better decision-makers in a business or institutional context but the principles and techniques are also applicable to personal financial and economic decisions. A subsidiary purpose of the course is to sharpen analytical skills so that students will be
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PUNJAB COLLEGE OF TECHNICAL EDUCATION BADDOWAL
COURSE MODULE
Instructor: Ragini Khanna e mail ID- [email protected] Mb- 9988531999
Course: Managerial Economics (MB 105)
Class: MBA I Semester: I
“Managerial economics applies economic theory and methods to business and administrative decision making.”
Managerial Economics is concerned with the application of economic principles and
methodologies to business decision problems. In this course students will increase their
understanding of economics and learn a variety of techniques that will allow them to solve
business problems relating to costs, prices, revenues, profits, and competitive strategies. Students
will also get a macro view about National Income, GDP, GNP, Consumption Function, Inflation,
Monetary and fiscal policies.
The over-riding goal of the course is to make students better decision-makers in a business or
institutional context but the principles and techniques are also applicable to personal financial
and economic decisions. A subsidiary purpose of the course is to sharpen analytical skills so that
students will be better able to recognize and solve decision problems in different contexts.
Forecast the demand of any particular product with the help of a questionnaire. You can take any
product of your choice.
Assignment 2
Analyze any sector of the latest budget and study the trend of changes that has taken place in that
particular sector in the past 3 years.
Purpose- To give the students an understanding of how our economy is operating and what are
the various sectors which are contributing the most to our economy.
Assignment 3
Analyze in detail the latest monetary policy. Also study the various measures that have been taken by RBI to stabilize the economy.
Purpose- Practically understanding the topic discussed in the class and analyzing how the theoretical concepts are actually put into practice.
Activity 1
Read Economic Times!!
This activity involves discussion of latest news related to economy and business. News of every
Wednesday will be discussed on next Wednesday.
Purpose: To inculcate the habit of reading newspaper in students.
Activity 2
Group Discussion
Students will be given topics related to economy and business and will be asked to discuss them
in a group.
Lecture Lecture Content Assignments
1 Introduction to Managerial Economics as a part of MBA programme –
Its meaning and utility Why do managers need to know Economics? What does it includes and how it helps an MBA
in his/her life Application of Economics to Business decisions:
an example
2 Introduction to the concept of Economics
10 Principles of Economics
1. People face tradeoffs.2. Meaning of Opportunity Cost3. Rational people think at margins4. People respond to incentives5. Trade can make everyone better off
3 6. Markets are usually a good way to organize economic activity.
7. Governments can sometimes improve market outcomes.
8. A country’s standard of living depends on its ability to produce goods and services.
9. Prices rise when government prints too much money.
10. Society faces a short-run tradeoff between inflation and employment.
4 Application of Micro and Macro in ME Distinction between Micro and
Macroeconomics. Scope of ME Interdependence of ME and various
other disciplines.
5 Basic principles Of ME
Opportunity Cost principle Marginal and incremental principles
6 Basic principles Of ME
Discounting and Compounding principles Equi Marginal Principle
7 Demand Analysis- Meaning Of demand- Quantity demanded at any given time
Effective demand- Desire + Willingness to Buy + ability to buy
Types Of goods- Categorization on the basis of types of demand
8 Determinants Of Demand
Price Effect Income Effect
9 Determinants Of Demand
Prices of Related Goods Tastes Expectations
10 Elasticity Of Demand- Degree of Responsiveness of demand due to change in any one factor Factors affecting Elasticity - Type of Product, Number of Substitutes
11 Types of elasticity-
Price Elasticity of demand Income Elasticity of demand, Cross Elasticity of demand and Promotional Elasticity of demand
Relationship between Elasticity and total Revenue
12 Case Study 1- Making Magic: the Multiplex Way
13 Demand Forecasting- Ability to predict demand of various products, Need of Forecast - How does it affect Costs, Revenues Production, Types of Forecast - Active Forecasts, Passive Forecasts
Assignment 1
14 Market experiment Method - When actual or sample product is tried and tested in market 1. Actual Market, 2. Market simulation Method
15 Survey of Consumer Intentions- 1. Census Survey, 2. Sample Survey, 3.Test Marketing
Concept of Utility- Want Satisfying Power of Product,
Indifference Curve - Locus of points showing different
combinations of two products consumed and yielding
same level of satisfaction
18 Properties of Indifference curve
Consumer Equilibrium- Best satisfaction level of
consumer under Indifference curve analysis
19 Production Function- Relationship between factors of
production and output
Short Run- When atleast one factor of production is a
variable factor
Long Run Production Function - When all the factors
are variable factors
Law of Variable Proportions- Rate of change in output
due to change in proportions of one factor of production,
keeping other factor constant
20 Long Run Production Function- Application of Law of
returns to scale ie rate of change in output when all the
factors are variable
Iso Quants and Iso Cost Line- locus of combinations of
factors of production yielding same level of output and
same level of cost respectively.
21 Introduction to Cost Function- Relationship between production and cost function i.e. level of output will decide cost
22 Theory of Costs Concept of Cost- Payment made to all the factors of production Types of Costs- 1. Fixed Cost 2. Variable Cost 3. Short Run Cost 4. Long Run Cost
24 Short Run Cost Function- Explanation of different cost Curves under Short Run Function
25 Long Run Cost Function- Behavior of cost when all the factors are variable Short Run Vs Log run- Which Function to adopt at what level of output
26 Price Function- Function decided by demand and supply forces Movement of Price- Case where Demand and supply moving in same direction Case Where demand and supply move in opposite Direction
Factors affecting Price of Product
27 Types of Pricing Techniques-
Cost based Pricing, Marginal Pricing, Penetration Pricing, Price Skimming Strategy
Breakeven analysis - Point of No Profit No Loss
28 Market Structure
Concept of Market - Place where buyers and sellers
come together to sell a product,
Classification of market on the basis of degree of
competition
Perfect Competition- characterized by Large number of
players selling alike Product
Monopolistic Competition- characterized by large
number of buyers and sellers selling heterogeneous
products e.g. daily use Products like Toothpaste
Oligopoly - Characterized by few big players selling
Heterogeneous or homogenous Products e.g. Automobile
Market
Monopoly - characterized by one Player selling unique
Product
29 Perfect Competition- Price and output determination under perfect competition giving rise to
Supernormal Profits, Normal Profits, Losses
Case Study 2- Indian Stock Market: Does it explain perfect Competition?
30 Monopoly - Features, Price Discrimination Charging different set of prices for same Product, Degrees - Ist Degree, IInd Degree, IIIrd Degree output Price and output determination under Pure monopoly
31 Price and output determination under discriminating
monopoly - In two different markets, where in one is
perfect competition and other has monopoly
Myths under Monopoly markets
32 Monopolistic competition- Price and output determination
Case Study 3 : Microeconomics : Wal-Mart and Monopolistic Practices
33 Oligopoly
Cournot model: Price and output is determined under
zero Cost Structure Ex Mineral Water.
Perfect Collusion model- when cartel is being formed
by all players on mutual understanding and agrees to
share profits equally
34 Kinked Demand Model- when upper part of demand
curve is highly elastic and lower portion is highly
inelastic gives rise to kink in demand curve at its centre
and making a price of product a rigid price.
35 Introduction to Macro Economics - Study of group of
variables, Macroeconomic Policies
36 National Income- Amt of goods and services produced
within one fiscal year at their market Prices
GDP- Amt of goods and services produced within
domestic boundaries if country by anybody including
foreign national
GNP- Amt of goods and services produced by Indian
National residing in any part of world.
Assignment 2
37 Methods of Measuring National Income-
Income Method, expenditure Method, Value added Method
38 Social Accounting- Meaning, Method
39. Consumption Function- Relationship between
Consumption and income of an individual,
Attributes- Marginal propensity to consume and
Average Propensity to consume,
Keynes Psychological Law of Consumption
40. Dussenbery and fried Man Hypothesis- Shows the
movement of APC and MPC over a long period of time
41 Classical Theory of Income, output and Employment
Assumes Level of Full employment is a normal situation
42 Principle of effective Demand point where aggregate
demand price is equal to Aggregate supply Price,
Keynes theory of Income, Output and employment-
Proves level of Full employment is abnormal situation
and level of under employment a normal situation for any
economy
43 Theory of Multiplier- Relationship between investment
and income generation
Static Multiplier- That does not take into consideration
any time lag between income and consumption
Dynamic Multiplier- that takes into consideration time
lag between income and consumption,
Leakages of Multiplier
44 Government Multiplier, Tax Multiplier, Balanced
Budget Multiplier
45 Inflation- When too much money is chasing too few a goods
Types of Inflation causes of Inflation- Supply or Demand
46 Monetary Policy & Fiscal Policy Assignment 3
Case Study 1: Making Magic: the Multiplex Way
The middle class of India, a virtual nonexistent entity on Independence, has gradually become
more sensible, educated and demanding. The overall growth of the economy has given a
tremendous thrust to the middle class, expected to grow by 5 to 10 percent annually. It has grown
over 57 million by 2001-02 and is expected to cross 153 million by 2009-10.
The average household income in urban India has grown at a CAGR of 5 per cent over the last
decade. Not only is this, but the age profile of the Indian spenders is also undergoing a sea of
changes. NCAER has identified five categories of households on the basis of income which is
summarized in Table 1 below
Table 1: Classification of Indian Households on the basis of Income
No. of Households (In Millions)
1994-95
1999-2000 2006-07
Very Rich
Consuming
Climbers
Aspirants
Destitute
1
29
48
48
35
3
55
66
32
24
64
91
74
15
13
(Source: NCAER)
Table 1 reveals the paradigm shift in Indian households over the last decade. The number of
effective consumers is expected to exceed 600 million by 2010. This big bang consumerism in
India is being seen as the driving force in the emergence of various new businesses, which aim at
riding the consumer tide. Availability of easy financing schemes is another aspect of the story:
owning a house, or buying a car, or going abroad on a pleasure trip is no more a distant dream to
the average Indian Consumer! With the consumers’ composition gradually getting skewed
towards the young, there is a greater tendency towards increased spending on consumption. A
very interesting piece of information is that average Indian Household has increased its spending
on movies and theatres from 1 to 4.6 per cent of its disposable income. This amazing spurt in
spending on entertainment has affected the quality and delivery of films as an industry. The
single screen theatres with poor maintenance and inadequate infrastructure are gradually paving
way for high tech multiplexes with three to as many as eleven screens, digitalized films and
Dolby surround audio system. The industry is undergoing a swing, driven by consumer behavior.
Reports indicate that multiplexes account for 0.6 per cent of the total cinemas, 2.3 per cent of the
total screens and have a total capacity of more than two lac seats. The average gross collection
per multiplex is around Rs.5.72 crore fetching about 29 to 35 per cent of the revenue for the film
industry.
India’s multiplex bandwagon has spread its tentacles beyond the metros to redefine
entertainment in B and C class towns. While the first phase of the growth of multiplexes was in
metros, now this growth is spreading to tier two and three cities like Lucknow, Indore, Nasik,
Aurangabad and Kanpur. Top multiplex players like PVR, Adlabs Films, Inox Leisures, Shringar
Cinemas (Fame Multiplex), Fun Multiplex and Cinemax India are venturing to small towns
across the country and redefining entertainment to the vast Indian masses.
The multiplex business has rightly tapped the growth of consumerism in India as it has
understood the pulse of the Indian consumer’s preference towards superior ambience,
comfortable seating, air-conditioning and good quality snacks, even at the cost of paying a higher
price. The average price of ticket in a conventional theatre is Rs. 15-35, while a multiplex
charges on an average price of Rs. 75-350 and consumer is willing to dish out this extra amount
to enjoy the “complete” movie experience, which most of the traditional theatres could not
render and are thus facing the fate of near extinction. It thus promises to take the moviegoers’
experience to a whole new level and giving a new dimension to watching movies at theatres.
Posers
1. What lessons can you draw from the above case regarding consumer behavior?
2. Do you think change in consumer perception in middle class has been instrumental in
emergence of multiplexes? What can be the other reasons?
3. Observe Table 1. Which of the groups, according to you, would have demand for
multiplexes?
4. Would law of diminishing marginal utility apply to movie watching? Will this affect the
growth rate of multiplexes? Or can it be seen as a cause for establishment of multiplexes?
Give argument in support of your contention.
5. Can multiplexes use the concept of consumer surplus for attracting more consumers?
How?
Case Study 2: Why Does Popcorn Cost So Much at the Movies?
Moviegoers aren't being gouged when they pay big bucks for
popcorn, says economist Ricard Gil.
Movie theaters are notorious for charging consumers top dollar for concession items such
as popcorn, soda, and candy. Are moviegoers just being gouged?
New research from Stanford and the University of California, Santa Cruz suggests that there is a
method to theaters' madness--and one that in fact benefits the viewing public. By charging high
prices on concessions, exhibition houses are able to keep ticket prices lower, which allows more
people to enjoy the silver-screen experience.
The findings empirically answer the age-old question of whether it’s better to charge more for a
primary product (in this case, the movie ticket) or a secondary product (the popcorn). Putting the
premium on the "frill" items, it turns out, indeed opens up the possibility for price-sensitive
people to see films. That means more customers coming to theaters in general, and a nice profit
from those who are willing to fork it over for the Gummy Bears.
Indeed, movie exhibition houses rely on concession sales to keep their businesses viable.
Although concessions account for only about 20 percent of gross revenues, they represent some
40 percent of theaters' profits. That's because while ticket revenues must be shared with movie
distributors, 100 percent of concessions go straight into an exhibitor’s coffers.
Looking at detailed revenue data for a chain of movie theaters in Spain, Wesley Hartmann,
associate professor of marketing at the Graduate School of Business, and Ricard Gil, assistant
professor in economics at University of California, Santa Cruz, proved that pricing concessions
on the high side in relation to admission tickets makes sense.
They compared concession purchases in weeks with low and high movie attendance.
The fact that concession sales were proportionately higher during low-attendance periods
suggested the presence of "die-hard" moviegoers willing to see any kind of film, good or bad--
and willing to purchase high-priced popcorn to boot. "The logic is that if they’re willing to pay,
say, $10 for a bad movie, they would be willing to pay even more for a good movie," said
Hartmann. "This is underscored by the fact that they do pay more, even for a bad movie, as is
seen in their concession buying. So for the times they’re in the theater seeing good or popular
movies, they’re actually getting more quality than they would have needed to show up. That
means that, essentially, you could have charged them a higher price for the ticket."
Case Study 3: Microeconomics: Wal-Mart and Monopolistic Practices
QUESTION: Should Wal-Mart be considered a monopoly?
I. Why Wal-Mart Should Be Considered A Monopoly:
For the fifth time in six years Wal-Mart has been named the biggest company in the world. Below are some figures from CNNMoney’s section on fortune 500 (global) companies for 2007: