welcome to the foundation course in managerial economics uh i am dr barnali nag from vinod
gupta school of management iit kharagpur uh this course is about we are primarily going
to focus on microeconomic theories which i used in decision making in different organisations
we are basically going to go through different uh tools and concepts of economic theory to
see how the different organisations people in the organisations the stake holders the
the government the consumers the producers firms banks how they interact with each other
so they make decisions at different their own uh levels and these decisions interact
with each other in the market and uh result in certain kinds of market outcomes so we
are going to see uh how people make decisions and how are choices made in the economy . so
uh but uh this is about managerial economics now what is economics all about
economics is about it is actually uh many of us might think that economics is about
how banks function how investment is made uh how prices are determined yes but uh more
importantly economics is about how people make decisions it is about people actually
uh and how people be it a homemaker a student a enterprenueur a a policy maker who is in
the government making policies how they make decisions so this is about uh so economics
is more about uh how people make decisions by but why why is it complicated why is it
complicated its complicated because everyone is faced
with scarcity of resources theres scarcity of resources in the economy and uh be it a
person who is running a household be it a student who is uh basically surviving on some
uh stipend or uh some help from his home uh or be it a government who is surviving on
taxes be it a nation which has its own endowments of natural resources so everyone is faced
with some amount of scarcity and why are we using the term scarcity we are using the term
scarcity because uh wants and needs are unlimited and resources are limited so that is the reason
that scarcity is a problem because everyone has his everyone a person would like to uh
has innumerable wants and desires but he has limited income
similarly a government would like to do everything it would like to eradicate poverty it would
like to take care of its environment it would it would like to uh focus on its economic
growth and boost its producers to improve uh production so everyone has lot of goals
in mind but resources are limited so scarcity of resources is a problem and that leads to
choices basically you have to make a trade off you cannot have everything together and
and how people make choices that is the question that we are trying to understand through different
kinds of economic theories so before i move on to the various lectures
we are going to discuss lot of economic theories and uh concepts and we are going to study
lot of models uh later but in the first module of this lecture let me focus on certain principles
some fundamental principles of economics uh there are there are 10 principles of economics
which has been laid down beautifully by uh professor gregory mankiw whose book also i
have recommended for this course and this is about principles of how people make decisions
how people interact with each other and how different nations how they interact and how
what what are the principles which guide the nations uh their macroeconomic decisions .
so the first set of principles of how people make decisions as i earlier already said its
principle number one is people face tradeoffs people face tradeoffs uh as i already said
there is scarcity of resources and you have lot of goals and you have to make a choice
so people make tradeoffs people face tradeoffs rather and they have to choose between uh
two three kinds of uh options one of the very important uh tradeoff in economics
that uh which is which is a huge challenge for all economists is a tradeoff between efficiency
and equality i will give an example i am not going to discuss this is this is a very uh
vast uh area of research and a huge problem but i am not going to focus too much on it
but but ill it it it is worth a mention so i am i am going to just give a small example
say for example the government decides that everyone should be uh should have a minimum
standard of living should have some minimum income now uh so it decides where is the government
going to give this money to the poor from so the government is basically going to tax
the rich now when they tax the rich its a this incentive
for the rich to work hard so in indirectly when the government is trying to improve the
equality in the economy by taking the money away from the rich and distributing in the
poor what the government is doing is its basically reducing the efficiency in the economy right
so efficiency versus equality is a very important and very challenging tradeoff that every economy
faces second principle is the cost of something
is what you give up to get it what you give up to get it and this brings us to a very
uh very important concept in economics which we are going to uh come across frequently
later in the in the course its called the opportunity cost the opportunity cost of any
item is whatever must be given up to get it say for example uh a student decides after
uh completing his engineering that i am going to instead of taking the job that has been
offered through the campus interview i am going to pursue my pursue further education
what is the opportunity cost of the further education the opportunity cost is basically
the salary or the income that the student is foregoing by taking up the option of doing
higher education so this is what opportunity cost is so basically
nothing comes for free its every every every choice has a opportunity cost uh third principle
is rational people think at the margin uh what does this mean this is this is also very
important principle because later whenever we develop any kind of uh models and any kind
of decision making we are going to use this principle repeatedly
say for example again taking the example of the same student who is going to say he decides
that i am going to do a 1year mba course 1 year management education course for which
he has to pay some fee now the the decision is going to depend on only the cost that he
is going to incur during this 1 year of education against the income that he is foregoing for
this 1 year of education he is not going to look at any other of its expenses or his incomes
in the past or say another example say say a person is
hiring people a person a producer he is a manufacturer he is hiring people now one more
person whether he should hire that person or not will depend on how much salary or how
much wage he has to pay to the person against how much output he is going to get from the
person so it is always at the margin he does not think about the in totality what his production
is what his cost is no he is basically thinking at the marginthis is what we all of us do
so the fourth principle is people respond to incentives this is easy to understand say
for example the government decides that people need to smoke less so the government basically
imposes a tax on smoking cigarettes there is a tax on cigarettes and smoking the amount
of smoking comes down so this is a negative incentive to smoke similarly
you could have positive incentives also say the government wants people to save more so
it has lot of it it offers a lot of tax benefits for saving saving uh more so people respond
to incentives and this is this is true everywhere in all walks of life right uh .
now second is principles of how people interact so people not only they make decisions for
themselves they also interact with others others in the sense they interact with other
consumers other producers firms when they go and go to look for job they interact with
the employers so there is always interaction across people different people interact and
they they these interactions influence their decisions
so uh these principles are going to guide us to understand how people interact with
each other so one of the principles is trade can make everyone better off now when i say
trade can make everyone better off i don’t necessarily mean trade between countries when
i say trade its basically exchange of uh goods uh for money across different individuals
also what this basically means is if i am good
at producing something and another person is good good at producing something else it
makes sense for us to exchange the goods that we are good at making instead of trying to
make everything myself okay so uh principle 5 is trade can make everyone
better off and this is so true for countries also like the countries they dont have to
if what whatever they are good at making uh they basically manufacture that and export
those commodities and they import commodities which other countries are good at making so
as a result what is happening we are getting cheaper products from other countries and
other countries are being able to utilize the uh efficient production or the quality
of production that we are uh able to offer so uh the the next principle is markets are
usually a good way to organize economic activity uh here 2 things are important one is what
do i mean by organize economic activity and the second is uh the word usually so that
means its not always the case that markets are good way to organize economic activity
but mostly they are so what do you mean by organize economic activity
now organize economic activity means basically what to produce in the economy how much to
produce of anything how to produce it and who is going to buy it as i said in the beginning
that there are unlimited needs and wants in the economy and various things are demanded
in the economy right from fundamental basic stuff like food clothes and shelter to something
as fancy as having a birthday party on moon so so there is there is uh maybe its possible
to have at least some consumers at some part of the world who would like to have something
like as fancy as this but whether it gets produced in the economy or not that gets easily
decided in the market so market is a good way to organize economic activity and it decides
but how how does it do so how does the market do so
so basically people can go to the market with their demands they can go to the market looking
for stuff they would like to buy and they have certain willingness to pay they would
like to pay a certain price for every stuff so they can go to the market and express their
needs and wants and the firms can decide that whether its uh it makes sense for me to produce
this these stuff and sell in the market or not and if they do so then there is the the
stuff gets produced in the market so this is how the market basically uh resolves
the problem of what gets produced in the market but how does it do so it does by the the demand
there is there is a demand for a certain products people are willing to pay a certain price
for it and price acts as a signal in the market so when price acts as a signal in the market
the basically the producer decides that if i am able to provide this stuff at this price
and if he does so then that get stuff gets produced in the market and this is how the
price is acting as signal in the market they they are like the invisible hand the
the term coined by adam smith which says that uh basically the market guides people where
they they are they are basically trying to satisfy their own interest people are satisfying
their own interest the consumer is trying to meet his own interest producer is trying
to meet his own interest of maximizing profit and the people and the product that are being
demanded in the market they get produced in the market so this is how the market are is
usually a good way to organize economic activity but now the second the the next principle
basically talks about its the continuation of the previous principle where we used the
term usually now markets are usually a good way but not always and when the markets are
not good way to organize economic activity governments can sometimes improve market outcomes
so when do governments improve market outcomes basically governments improve (mark) market
outcomes when markets fail what do i mean by markets failing when do markets fail
markets fail under lot of uh situations like externalities public goods the governments
attempt to uh to to have more equality in the economy these these are certain situations
where the markets may fail and what do i mean by externity what is externality externality
basically means that a certain all activities do not have do not always uh its its not that
uh when say say for let me let me explain through example
say for example a tannery its producing uh its tanning leather and its polluting the
nearby stream water stream now the people who are buying the products from this tannery
they are not affected by maybe may may or may not be affected by this pollution similarly
tannery itself its its it will be it will be charging the price depending price of tannery
depending on how much cost it is incurring it is not going to take into account the fact
that it is polluting the water stream nearby so who pays for it so basically a activity
is causing or affecting people or stakeholders who are not directly involved in this economic
activity these are not people who are either producing the leather these are not people
who are consuming the leather nevertheless they are getting affected these are maybe
people staying nearby who are using the water from the stream so there is a cost to the
economy there is someone has to incur that cost and
who is going to incur that cost who is going to impose that cost on this activity the government
so the government can impose a certain so the government can come and say to the tannery
that look you are polluting the nearby stream and so you have to pay certain taxes extra
with which we will clean the stream or the government might say that you have to directly
pickup incur the cost of cleaning this stream so this is where the government has to intervene
in the market another example is public goods say for example uh keeping the air clean who
is going to do it its a its a public good public good is something from which you cannot
exclude anyone so uh if a organization says that look i am going to clean the air air
nearby and you pay for it can it exclude people who are not paying for it no it cannot so
these are examples of public good where the government needs to step in and it needs to
take the initiative to produce because here you cannot exclude people from consuming these
goods and another example is say the say the government wants more equality
say for example in the labour market or where people are getting hired people are willing
to work for a very very low wage which is not acceptable to the government or which
is not acceptable to the society in general because its in inhuman so there the government
needs to step in and say that look you have to pay a wage which is minimum the minimum
amount should be this amount so these are situations where the government can intervene
and these are situation where the markets fail .
now the third set of principles is principle of how the economy works as a whole basically
how the economy works as a whole uh this these uh principles are more applicable in macroeconomics
which we are not going to focus on which is beyond the scope of this course but nevertheless
i am going to go through the uh through these principles uh one is that a countrys standard
of living depends on its ability to produce goods and services
so uh how well a economy does or what is the amount of economic growth in a (eca) for a
country solely depends on how the country is able to produce out of its limited resources
every country has certain amount of uh say uh (cer) certain amount of natural endowment
of resources uh some amount of labour some amount of capital stock say for example machineries
equipments infrastructure that a country has and given all these all this setup the (govn)
the the economy basically produces now how well the economy does and how how
uh how the economy growth can be rapid in a country depends on how efficiently the country
is able to produce out of its limited resources so so and that would basically depend on the
productivity of these countries so if a country is able to improve the productivity of its
economic activities then it is able to do well another principle is that prices rise
when the government prints too much money uh price rise is what
price rise is basically inflation so inflation happens when the government prints too much
money that means there is too much money in the economy which is chasing too little goods
you are not producing enough but government has printed lot of money so lot of money is
chasing little amount of goods so the prices of these goods go up
so this is this is the general principle that prices rise when the government prints too
much money and uh and that the last but not the least the principle that society faces
a short run tradeoff between inflation and unemployment so it has been seen very often
that various policies of the government which try to address unemployment or uh unemployment
is basically what when economic activity is falling when the
when uh not enough is getting produced in the economy then the organizations are going
to lay off workers so when they lay off workers unemployment is going to rise so basically
there the what does the government do to target improvement in (un) in employment in the economy
basically they try to boost economic activity in the short run
so when the government tries to boost economic activity through various policies it has been
seen that in the short run they cause inflation or price rises and its easy to understand
because (prince) from principle 8 we already know that you cannot increase your output
or economic activity from your resources unless and until you improve your productivity which
is not possible in the short run and if you are not able to increase your productivity
other ways of trying to increase output in the short run is done at the cost of inflation
so these are the 10 principles of how the uh how the economy works how people interact
how the different stakeholders they make decisions in the economy and later we are going to uh
study various uh economic models to see how managerial decisions are made and we are going
to use these principles often we are going to come back and revisit these
principles uh while we discuss the different kinds of different uh models and quickly since
i have gone through these 10 principles another thing that i would like to emphasize is that
this course is on primarily on microeconomics and we are calling it managerial economics
because this is about decision making process of individuals or managers who are who need
to understand how consumers make decisions how governments make decisions how the producers
they themselves need to make decisions in different kinds of market structures so this
is more about microeconomics where the individual is involved
so the first 2 types of principles are more relevant here but uh nevertheless uh we are
going to uh going to keep on referring to the the the first uh 7 principles that we
have discussed here and and macroeconomics is more about understanding the overall economy
macroeconomics is more about understanding the how the the economy in totality functions
the different uh so we are going to primarily focus on microeconomics and the another thing
that i would like to emphasize is we are going to develop various models uh these models
say for example we would like to see uh how is price determined in the market we would
like to see uh what kind of markets what are the different kinds of market structures
so there are various products that are sold so each we are going to see these products
the nature of these products determine what kind of market they have say for example they
are i am going to explain them later but like say they uh say monopoly or oligopoly or competitive
market a monopolistic competition so to understand each of these market structures we are going
to develop models now what are these models these models are basically they try to replicate
the reality and we are going to make certain assumptions to make it very simple to understand
the basic functioning of these markets so they do not necessarily mean that they
take into account all the problems associated with this market but its its like if you are
building a airplane you would like to first see how the plane functions how it takes off
from the ground and flies in the so you are not going to look at the small intricacies
how the seats are laid and how the window shutter works and so similarly we are going
to exclude some uh many of the details of a market yet try to understand what is the
fundamental functioning of these models so this is what we are going to do and in the
next module i am going to start with the supply demand framework thank you