Lecture 1: Welcome to Fundamental of Business
Economics
Abdul Quadir
XLRI
November 13, 2021
Syllabus
▶ Introduction: Scope of economics and methods, Scarcity,
Opportunity Cost, Marginalism, sunk cost 1 lecture
▶ Use of Opportunity Cost In International Trade 1 Lecture
▶ Demand, supply and market Equilibrium and their applications
2 lecture
▶ Firm decision of production, short run and long run cots 2
lectures
▶ Perfect competition, efficiency, producer surplus, monopolistic
competition and monopoly 2 Lecture
Textbook and Evaluation
Textbook: The Principle of Economics by Case, Fair and Oster
Evaluation
▶ Mid-term 40 points
▶ Final Exam 60 points
Why Economics For Managers?
▶ Economics provide a framework for thinking
▶ To understand Society
▶ To understand domestic and global business affairs
▶ To understand government complex policy making
▶ Economics is broadly divided into:
▶ Microeconomics
▶ Macroeconomics
▶ Methods to study economics are broadly divided into:
▶ Theories and models
▶ Economics policy (Empirical methods)
Why Economics For Managers?
▶ Economics provide a framework for thinking
▶ To understand Society
▶ To understand domestic and global business affairs
▶ To understand government complex policy making
▶ Economics is broadly divided into:
▶ Microeconomics
▶ Macroeconomics
▶ Methods to study economics are broadly divided into:
▶ Theories and models
▶ Economics policy (Empirical methods)
Scope and Methods of Economics
Economics is the study of how individuals and societies choose to
use the scarce resources that nature and previous generations have
provided.
▶ Economics is a behavioral, or social, science.
▶ In broad sense it is the study of how people make choices
Scope and Methods of Economics
Economics is the study of how individuals and societies choose to
use the scarce resources that nature and previous generations have
provided.
▶ Economics is a behavioral, or social, science.
▶ In broad sense it is the study of how people make choices
Economics Framework of Thinking
▶ Three fundamental concepts:
▶ Opportunity cost
▶ Marginalism
▶ Efficient markets
▶ Opportunity cost: The best alternative that we forgo, or give
up, when we make a choice or a decision
▶ Example: What is the cost of doing MBA?
▶ Opportunity cost arises because resources are scare.
Economics Framework of Thinking
▶ Three fundamental concepts:
▶ Opportunity cost
▶ Marginalism
▶ Efficient markets
▶ Opportunity cost: The best alternative that we forgo, or give
up, when we make a choice or a decision
▶ Example: What is the cost of doing MBA?
▶ Opportunity cost arises because resources are scare.
Marginalism
▶ The process of analyzing the additional or incremental costs
or benefits arising from a choice or decision
▶ Example: Consider the following table
0 1 2 3
English 0 40 60 70
Economics 0 30 55 60
▶ I have three hours of time with me.
▶ How do I allocate my time between English and Economics to
maximize my total score?
Marginalism
▶ The process of analyzing the additional or incremental costs
or benefits arising from a choice or decision
▶ Example: Consider the following table
0 1 2 3
English 0 40 60 70
Economics 0 30 55 60
▶ I have three hours of time with me.
▶ How do I allocate my time between English and Economics to
maximize my total score?
Marginal Analysis and Optimization
Consider that a manager has 1 million rupees at her disposal to
spend on advertisement for a product: either TV advertisement or
Radio
Total Spent TV Radio
0 0 0
100,000 4,750 950
200,000 9,000 1,800
300,000 12,750 2,550
400,000 16,000 3,200
500,000 18,750 3,750
600,000 21,000 4,200
700,000 22,750 4,550
800,000 24,000 4,800
900,000 24,750 4,950
1,000,000 25,000 5,000
Marginal Analysis and Optimization
Total Spent TV Marginal Radio marginal
Increment Increment
0 0 0
100,000 4,750 4,750 950 950
200,000 9,000 4,250 1,800 850
300,000 12,750 3,750 2,550 750
400,000 16,000 3250 3,200
500,000 18,750 2750 3,750
600,000 21,000 2250 4,200
700,000 22,750 1750 4,550
800,000 24,000 1250 4,800
900,000 24,750 750 4,950 150
1,000,000 25,000 250 5,000 50
Marginal Analysis and Optimization
Total Spent TV Marginal Radio marginal
Increment per Rs Increment per Rs
0 0 0
100,000 4,750 0.047 950 0.0095
200,000 9,000 0.0425 1,800 0.0085
300,000 12,750 2,550 0.0075
400,000 16,000 3,200
500,000 18,750 3,750
600,000 21,000 4,200
700,000 22,750 4,550
800,000 24,000 0.0125 4,800
900,000 24,750 0.0075 4,950 0.0015
1,000,000 25,000 0.0025 5,000 0.0005
Marginal Analysis and Optimization
▶ The solution depends on marginal impact of the decision
variables on the value of the objective function
▶ The marginal impact of money spent on TV advertising is
how much new sales go up for every additional dollar spent on
TV advertising
▶ The marginal impact of money spent on radio advertising is
the rate at which new sales go up for every additional dollar
spent on radio advertising
Sunk Cost
▶ Sunk costs: Costs that cannot be avoided, regardless of what
is done in the future, because they have already been incurred.
▶ Example: Why airlines use dynamic prices?
▶ Suppose an airline such as indigo incurs 6 lacs rupees per
flight from Delhi to Ranchi
▶ Is it better to charge a fixed price whenever the customer
books the ticket?
▶ Suppose the airlines charges 4000 rupees per seat.
▶ If the airline succeeds in selling 150 seats, then it can recover
the operating cost of the flight
▶ After 150, the marginal cost of a passenger is zero.
▶ Better to increase the prices of the ticket and generate more
revenue.
No Free Lunch
▶ Efficient market: A market in which profit opportunities are
eliminated almost instantaneously
▶ Example: Shorter queue in supermarket gets equalized
immediately
▶ If you receive a call on your phone from person claiming to be
a stock expert and promising you 20% return, your immediate
reaction is skepticism.
Methods of Economics
▶ Positive economics: An approach to economics that seeks to
understand behavior and the operation of systems without
making judgments. It describes what exists and how it works.
▶ Normative economics An approach to economics that
analyzes outcomes of economic behavior, evaluates them as
good or bad, and may prescribe courses of action. Also called
policy economics
▶ An economic theory is a statement or set of related
statements about cause and effect, action and reaction
▶ Example: Law of demand q(p) = a + bp
▶ Model: A formal statement of a theory, usually a
mathematical statement of a presumed relationship between
two or more variables.
▶ Variable: A measure that can change from time to time or
from observation to observation.
Economic Model
▶ Economic models are abstractions from realities to get insight
for explaining real situations.
▶ They could be expressed in words, graphs or in equation
▶ A graph is a two-dimensional representation of a set of
numbers, or data
▶ Example: Disposable income over time
Principles of Economics
There are in general three principles of economics:
1. Optimization: Economists believe that optimization explain
most of our choices.
2. Equilibrium: The second principle holds that economic
system tend to be in equilibrium, a situation where no agent
would benefit personally by changing his own behaviour
3. Empiricism: The third principle of economics is an emphasis
on empiricism - an analysis that uses data or analysis that is
evidence-based
Economic Policy
▶ Criteria for judging economic outcomes:
▶ Efficiency: In economics, allocative efficiency. An efficient
economy is one that produces what people want at the least
possible cost.
▶ Equity: fairness
▶ Growth: An increase in the total output of an economy
▶ Stability: A condition in which national output is growing
steadily, with low inflation and full employment of resources
TIME SERIES GRAPH
GRAPHING TWO VARIABLES ON A CARTESIAN
COORDINATE SYSTEM
y
x
Slope
▶ The slope of the line indicates whether the relationship
between the variables is positive or negative
▶ The slope of a line between two points is the change in the
quantity measured on the Y -axis divided by the change in the
quantity measured on the X -axis
▶ That is ∆Y Y2 −Y1
∆X = X −X 2 1
▶ For smooth curve, we can use calculus for increasing and
decreasing curves
▶ dy
dx > 0 implies increasing slope
▶ dy
dx < 0 implies decreasing slope
Slope
Non-Linear Graphs
