Indian Institute of Management Bangalore

PGP 1 - Section E

MANAGERIAL ECONOMICS- Term 1

2020
Instructor: Tirthatanmoy Das Class Days: Mon, Tue
Office: Faculty Block C- 208 Class Time: 2:30 - 4:15 PM
Email: [email protected] Class Room: Online
Office Hours: TBA

Teaching Assistant: Neha Vinod Betai

Email: [email protected]
Office Hours: TBA

**Given the unusual situation caused by the coronavirus outbreak, this syllabus may
be changed or modified during the term

COURSE DESCRIPTION

All functional areas of management derive their basic principles and concepts from
economics. A proper understanding of Managerial Economics leads to a deeper
appreciation of areas such as Marketing, Organization Behavior, Accounting and
Finance, Operation, and Strategic Management. An important aspect of Managerial
Economics, Game Theory gives foundations for competitive strategic behavior of firms.
Policy decisions in the realms of agriculture, healthcare, environment, infrastructure
provision, and competition policy find their main thesis in economics. Thus, a
comprehensive study of Managerial Economics is integral for any manager or policy
maker.

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 COURSE OBJECTIVES

The objective of this course is to introduce students with microeconomic tools and
concepts available to managers for business and management decision making. This
course will enable students to analyze consumer-level and firm-level economic
problems and understand their consequences, to compare various solutions to these
problems, to understand the market and regulatory environment in which they operate,
and to take informed and optimal decisions subject to various constraints and targets.
This course will also enable students to find economics in their daily happenings.

COURSE PEDAGOGY

A variety of approaches may be adopted during the class – lectures, critiques, cases,
short cases called ‘caselets’, newspaper articles, in-class exercises, problem solving,
assignments, team project, and exams.

READINGS

1. Microeconomics by Pindyck, Robert S., and Daniel L. Rubinfeld (Latest Edition).

Most of the lectures would be based on chapters from this textbook. The book requires a
consistent and regular study. If you wish to refer to another supplement feel free to ask.

2. Other articles may be used and can be obtained for free, as and when a relevant
topic is discussed.

CLASS DISCUSSIONS

Each student is expected to participate regularly in class discussions, as called upon by

the instructor (a.k.a. ‘warm’ calling) and on a voluntary basis. To a substantial extent,
the benefit that a student derives from the course is related to his/her willingness to
expose his/her viewpoint to the critical judgment of the class, and to his/her active
participation in building upon the ideas of others. To a considerable degree the quality
of your alert class participation will provide me with information about your individual
understanding of the material.

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 ATTENDANCE POLICY

The Institute’s attendance policy will be enforced. As such, the minimum attendance is
80% (16 class sessions out of 20). Those who fall below this threshold will be subjected
to a grade point drop as per the Institute policies. However, attending classes itself is
not sufficient. Being attentive and alert in class will help you do well in exams.

EVALUATION

Team Project: 20%

Mid Term Exam : 40%
Final Exam: 40%

There will be a project, a midterm and a final examination. The project will carry a
weight of 20%, and the midterm and final will carry a weight of 40% each.

All evaluation components are compulsory. The midterm and final exams would have
MCQs, numericals/short answer/open-ended questions, and will be of 180 minutes
each. All exams would be open book. Date: as per PGP schedule.

TUTORIAL

There will be 4 to 6 tutorials where numerical problems will be discussed and solved.
The tutorials will be (tentatively) held on August 14, 21 and 28, September 25. Time:
TBA.

TEAM PROJECT

You need to work in groups of up to five members and submit a comprehensive project
report. The purpose of this project is to understand the industry and external context of
a firm, analyze the firm’s demand and cost structures, identify the firm’s resources and
capabilities that help it compete in the industry, and provide recommendations on how
the firm can sustain or improve its performance. The Project requires you to apply your
knowledge of Managerial Economics to a real life situation. You should ideally choose
an Indian company, preferably a firm listed in any of the Indian stock exchanges, to
help you source sufficient data. You can also choose a foreign firm if sufficient
information is available. However, you are encouraged to relate your analyses to the
current scenario.

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 MAKE-UP EXAMS

There will be NO make-up exams unless the Institute policies mandate for it. If you
happen to miss an exam due to foreseen circumstances there would be NO way in
which you would be able to make up for it. It remains your responsibility to manage
your time.

ACADEMIC DISHONESTY

Academic dishonesty, in any form, will not be tolerated. If you are unsure about what
constitutes academic dishonesty, please refer to the PGP guidelines or contact the PGP
office for rules and regulations on academic dishonesty. Any violation of these norms
would attract penalty as per instructor’s discretion and the Institute policies. I will not
hesitate from assigning you an F in case these norms are violated.

A Personal Note

I rely on full cooperation from every member in the class to make this course a mutually
rewarding course for everyone. Effective learning is a joint effort of students and
faculty. Violation of rules and norms may lead to penalty as per the discretion of the
instructor and the Institute policies. I will try to ensure that this course adds
tremendous value to your learning experience at IIM Bangalore.

Welcome to

PGP – 1: MANAGERIAL ECONOMICS

2020-2021

GOOD LUCK

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 PROVISIONAL SESSION PLAN

Sessio Topic Readings

n

1 Introduction to Microeconomics

What is economics? What is Microeconomics? Difference between Micro Chap 1

and Macro Economics; etc.

Module 1: Demand and Supply

This module provides an understanding of the determinants of demand

and supply, the nature of demand and supply curves and their
interaction in the market, and important concepts such as price
elasticity of demand and supply, and market equilibrium.

2 Demand and Supply

What is Demand? What influences Demand? Chap 2

What is Supply? What influences Supply?

Movement along and shift in demand and supply curves; etc.

3 Market Equilibrium Chap 2

What is an equilibrium price? What determines the price?

Solving equations of supply and demand to get market equilibrium;

Consumer and producer surplus and welfare loss in interfering in

markets; etc.

4 Elasticity Chap 2

Definition and measurements of elasticity; implication to pricing

decisions;

Elasticity and Revenue;

Factors affecting demand elasticity, elasticity of supply, other measures

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 of elasticity; etc.

Module 2: Consumer Behavior

This module introduces students with the basic concepts and theories
relating to consumer behavior under certainty. It introduces important
concepts such as utility maximization, preferences, indifference curves,
budget constraints and consumer choice. The link between consumer
theory and demand curves is also explained.

5 Consumer Preferences Chap 3

How to represent consumer preferences?

Assumptions on preferences

Utility, Indifference curves, Properties of Indifference Curves

Law of Diminishing Marginal Utility; etc.

6 Consumer Choice and Budget Constraint Chap 3 & 4

How to represent Budget Constraints?

What affects changes in Budget Constraints? How?

How consumers choose how much to consume?

Substitutes and complements; Normal, Inferior; etc.

Module 3: Demand Estimation and Decision Making Under

Uncertainty

7 Demand Estimation: The statistical approach to Demand Estimation Chap 4

8 Decision making and its analysis under uncertainty. Chap 5

Representing Uncertainty: Concepts of Lottery and Expected Value

Expected Utility Risk Aversion, Certainty Equivalent, Risk Premium

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 Module 4: Production and Costs

The focus of this module is to explain important concepts in production

theory. These include total and marginal product, diminishing returns,
input substitution, choice of optimal input combinations, returns to
scale, costs, revenues, profits, and short run and long run decision
making by firms. The link between production theory and the supply
curve is explained.

9 Production Chap 6

Firm’s problem of how to produce? Concept of Short Run and Long

Run

Short Run: Total Product, Average Product and Marginal Product

Returns to scale, expansion path.

Law of diminishing returns; etc.

10 The Cost of Production Chap 7

Different types of costs that firms incur.

Marginal cost, opportunity cost; sunk and relevant costs. Fixed and
variable costs; AVC, AFC, ATC; MC;

When should a firm stop producing? Break even and shut down points,
minimum efficient scale.

Economies of Scale and Scope, Learning Curve

Module 5: Market Structures and Firm Behavior

This module considers different kinds markets structures. It first looks

at benchmark market structures: perfect competition, and monopoly.
Next, it introduces Game Theory as a tool and discusses a more realistic
market structure of strategic interaction: Oligopoly.

It highlights the sources of differences in these various market

structures and the implications for firm and industry output, prices,
efficiency, and profits. While discussing these different market
structures, this module also touches upon important topics such as

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 pricing strategies of firms and government interventions

11 & 12 Monopoly Chap 10, 8

How does a monopolist operate? How does it decide how much to

produce? Decision of a firm with multiple plants?

How to measure Monopoly Power: Rule of Thumb of Pricing- Relation

between elasticity of demand and Mark Up, Learner’s Index

Inefficiencies created by Monopoly: Deadweight Loss; Perfect

Competition.

Costs of Monopoly: Antitrust Laws

13 Price Discrimination Chap 11

Price as an instrument to extract consumer surplus.

Different types of Price Discrimination- First, Second and Third Degree

Price Discrimination.

Conditions for Price Discrimination

Economics of Coupons and Rebate

Module 6: Oligopolies and Game Theory

This module deals with strategic aspects of firms. To begin with it

discusses in detail Game Theory as a tool to analyze strategic
environment. Next, it discusses basic oligopolistic structures in which
firms’ interactions are analyzed. Concepts of cartels, anti trust issues
and collusion are discussed briefly.

14 Monopolistic competition & Game Theory Chap 12, 13

Market in which firms can enter and exit freely, each producing its own
brand of a differentiated product.

15 Game Theory & Oligopoly Chap 13, 12

Tool to understand and analyze strategic environments

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 Dominant Strategy, Best Response Function, Nash Equilibrium

16 Oligopoly Chap 12

Firms compete in quantities (Cournot); prices (Bertrand)

Module 7: Market Failure:

This module deals with sources of market failure - when some parties
know more than others – i.e., when there is asymmetric information

17 Markets with Asymmetric Information Chap 17

Quality Uncertainty and the Market for Lemons

Moral Hazard

18 Markets with Asymmetric Information Chap 17

Market Signaling and The Principal-Agent Problem

19 & 20 Student Presentations