Foundation Course in Managerial Economics

Introduction

• Dr. Bernali Nag from Vinod Gupta School of Management, IIT Kharagpur.
• Focus on microeconomic theories for decision-making in organizations.
• Interactions between stakeholders in the economy: consumers, producers, government, etc.

What is Economics?

• Economics involves decision-making by individuals and organizations.
• Scarcity of resources leads to the need for choices.
• Unlimited wants vs. limited resources.

Scarcity and Choices

• Scarcity creates trade-offs in decision-making.
• Everyone (individuals, households, governments) faces scarcity.

Principles of Economics

• Based on Gregory Mankiw's 10 principles.

Principles of How People Make Decisions

1. Trade-offs: Choices have to be made due to scarcity.
   • Example: Government taxing the rich to provide a minimum standard of living could reduce efficiency.
2. Costing Principle: The cost is what you give up to get something (opportunity cost).
   • Example: Opportunity cost of further education is the salary foregone.
3. Rational People Think at the Margin: Decisions are made by comparing costs and benefits of the next unit.
   • Example: Students comparing costs of education vs. potential income.
4. People Respond to Incentives: Changes in incentives influence behavior.
   • Example: Taxes on cigarettes reduce smoking; tax benefits encourage saving.

Principles of How People Interact

5. Trade Can Make Everyone Better Off: Exchange of goods leads to mutual benefits.
   • Individuals and countries specialize in what they do best.
6. Markets Organize Economic Activity: Markets determine what, how much, and who produces.
   • Prices act as signals for production.
7. Governments Can Improve Market Outcomes: Governments intervene when markets fail.
   • Markets fail due to externalities, public goods, or inequality.
   • Example: Pollution from production requires government intervention.

Principles of How the Economy Works as a Whole

8. Standard of Living Depends on Ability to Produce: Economic growth relies on productivity.
9. Prices Rise with Too Much Money: Inflation occurs when there is an excess of money chasing limited goods.
10. Short-Run Trade-off between Inflation and Unemployment: Policies to reduce unemployment may increase inflation.

Focus of the Course

• Primarily on microeconomics and managerial decision-making.
• Understanding consumer, government, and producer decisions in various market structures.
• Development of economic models to analyze market behavior.
• Next module: Supply and demand framework.