Course Manual: Basics of Economics
Academic Year: PGPM 2013-14
Course credit: 3
Course marks: 30
1
1. Introduction to the Module and Module Objective
Executives, consultants, investment bankers and many other practitioners make daily economic
decisions that explicitly or implicitly follow economic laws. ‘Basics of Economics’ give an
introduction to the economics of business decision-making. It is an introductory course in the
application of microeconomics to business decision making.
Managers would be confronted with situations where they have to decide upon important business
questions like - How much to produce? How to allocate the resources in an optimal manner? What
price to charge in order to maximize profits? etc. This course provides the analytical skills and
economic insights to analyze such managerial problems. It covers the broad principles of marginal
analysis - from cost analysis to pricing. These principles shape managerial decisions in all other
functional areas of business: accounting, finance, marketing, and strategy.
By the end of this course, students will have learned how to do at least four things:
1. Identify the categories of costs that are relevant for critical business decisions such as pricing,
market entry or exit, and growth or downsizing of business lines or projects.
2. Construct fact-based, logically-grounded analyses of competition in highly fragmented markets
that will allow them to make educated conjectures about prices and future profitability, and guide
capacity expansion or disinvestments in these markets.
3. Use demand and cost fundamentals to determine profit-maximizing pricing decisions, evaluate
the profitability of current pricing policies, and use pricing strategy to enhance value creation.
4. Identify problems arising due to external factors and market solutions for externalities.
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2. Introduction to the Tutor
2.3 Tutor
S.No
Tutor
email
1
Dr Monika Jain
[email protected]
2.
Dr Taruna Gautam
[email protected]
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3. Module Pre-Requisites
In order to pursue this course, students are required to have an ability of reading/intepreting graphs
and should have understanding of key economic terms. They should have viewed the lectures that
have been made available through the following video links, before the start of the course:



Fundamentals of Demand & Supply

http://www.youtube.com/watch?v=ZR2255CEhvk

http://www.youtube.com/watch?v=qdOqAWo8vFw

http://www.youtube.com/watch?v=OYaoc2N2lhI
Fundamentals of Cost & Shape of Cost Curves

http://www.youtube.com/watch?v=4f89dVC7CzE

http://www.youtube.com/watch?v=jNL9PNfrKZI
Fundamentals of Revenue & Shapes of Functions


http://www.youtube.com/watch?v=ZtAhQ_VzOSE&feature=relmfu
Glossary of Key Economic terms

http://www.digitaleconomist.org/glossary_micro.html
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4. Module Overview
Session No.
Topics
Lecture/Seminar
Individual Decision Making – Understanding Costs
Session 1
Cost in Business Production
Lecture
Session 2
Decision-Making for Business Managers: The Break
Lecture
Even Analysis
Session 3
Assessing the Influence of Price and Non-price Factors
Lecture
on Demand
Consumer Decision Making - Understanding Demand Dynamics
Session 4
Application of Price Elasticity in Business Decisions
Lecture
Session 5
HBS Case Study – “Alusaf Hillside project”
Seminar
Session 6
HBS Case Study – “Alusaf Hillside project”
Seminar
Session 7
Stanford Case Study - “Global Coffee Trade”
Seminar
Session 8
Stanford Case Study - “Global Coffee Trade”
Seminar
Session 9
Maximising
Profit
vis-a-viz
Sales
–
Tradeoff Lecture
Considerations
Session 10
Public Policy and Decision Making for Managers
Lecture
Session 11
Mid-Term Assessment
Seminar
Market and Business: An Economic Perspective
Session 12
Competitive Environment in the Short Run: How
Lecture
Profits are Earned?
Session 13
Competitive Environment in the Long Run
Lecture
5
Market Power – Pricing and Management
Session 14
Market Power and its Business Implications: Impact on
Lecture
Pricing Strategy – I
Session 15
Market Power and its Business Implications: Impact on
Lecture
Pricing Strategy – II
Session 16
Pricing Decisions in Segmented Markets: Price
Lecture
Discrimination Degree I & II
Session 17
Pricing Decisions in Segmented Markets: Price
Lecture
Discrimination Degree III
Session 18
HBS Case Study on “The London 2012 Olympic
Seminar
games” - II
Session 19
HBS Case Study on “The London 2012 Olympic
Seminar
games” - II
Session 20
Final Assessment
Seminar
6
5. Module Readings
5.1 Main Reading
Course Pack
5.2 Additional References
1. Dominick Salvatore: Managerial Economics, Sixth Edition, Oxford University Press.
2. Mankiw:
Principles
of
Microeconomics,
Fourth
Edition,
Cenage
Learning
3. Pindyck Robert S and Rubinfeld Daniel L, (2006), Microeconomics, Sixth Edition, PHI
4. Hirschey: Economics for Managers, Thomson, 1st Indian Ed., 2007
5. Satya P. Das: Microeconomics for Business, Sage India, 2007
6. Dean, Joel: Managerial Economics, PHI
7. Keat , Paul G. & Philip K.Y.Young,: Managerial Economics, Pearson Education, 4th Ed.,
2003
8. Boyes, William: New Managerial Economics, 1st Ed., 2005, Biztantra
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6. Session Plan
Topic 1: Individual Decision Making – Understanding Costs & Profits
6.1-Session 1: Cost in business production
With profit maximization being one of the primary objectives of a firm, it is imperative for a
manager to understand the drivers of profit. Profit can be maximized by optimising revenue and
costs. Understanding component of costs would enable a manager to focus his efforts in managing
them effectively. For example for a financial services company, the major cost element is the cost of
funds while for a manufacturing company this would be the raw material cost. Some of these costs
may be fixed in nature and others may be variable. Once a manager identifies these costs and
segregates them on the basis of their nature (whether controllable or not), he would be able to put in
place right control measures. First session will cover various cost concepts and their relevance in
managerial decision making.
Pre-Reading Link: 1. http://www.youtube.com/watch?v=Q4iKuKAjzK0,
2. http://www.youtube.com/watch?v=IWvycn8LJWw&feature=related
3.http://www.metacafe.com/watch/ytqKMstmcTN3o/economics_marginal_cost_and_average_varia
ble_cost/
Required Reading: HBS background note on “Relevant costs and revenue”, 9-892-010
Additional Reading: Dominick Salvatore, Managerial Economics, Sixth Edition, OUP, Chapter 7
pp 263-268.
Learning Outcome: To understand the use of the cost concepts in order to manage the costs
effectively and fix the costs at minimum level.
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6.2 - Session 2: Decision-Making for Business Managers: The Break Even Analysis
With limited resources at their disposal, managers are often in a situation where they have to decide
whether to quit or continue with the production. And if they decide to continue, the next question is
- how many units to produce? Before expenditures are incurred, managers want to be sure that they
will get an adequate return on their investment. One way of assessing this is by calculating the
breakeven point. This session introduces the concept of breakeven analysis and shows how it is
used to aid decision-making.
Pre-Reading Link: http://www.youtube.com/watch?v=ar7mVYY-AO0&feature=related
Required Reading: HBS background paper on “Marketing Analysis tool Kit: Break Even Analysis,
Thomas Steenburgh and Jill Avery, 9-510-080, Feb 2010.
Learning Outcome: To understand how much sales volume is required by the firm to break even or
to be in a situation of no-profit no-loss.
Topic 2 – Consumer Decision Making - Understanding Demand Dynamics
6.3 - Session 3: Assessing the Influence of Price and Non-price Factors on Demand
Managers often invest ample time in understanding the demand and supply dynamics of their
products and prospective product launches. Such knowledge provides the background needed to
make pricing decisions, forecast sales, and formulate marketing strategies. Well planned business
strategies often rely on the various fundamental determinants of demand to assess the market,
identify the changing consumer preferences and quantify the impact of competitor moves. This
lecture will sensitise the students on how demand and supply of products/services is influenced by
changes in own product price, prices of competitors, income of consumers and advertising
expenditure.
Pre-Reading Link: 1. http://www.youtube.com/watch?v=OyJGYTE4HgE&feature=related
2. http://www.youtube.com/watch?v=IYZqlOCA9cw&feature=related
Required Reading: HBS background note on “Price-Quantity determination”
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Learning Outcome: Understand the sensitivity of sales or production to various variables like price
of own product, competitors' prices, income of consumers and advertising expenditure.
6.4-Session 4: Application of Elasticity in Business Decisions
Information about price, cross-price and income elasticities is extremely useful to managers as they
contemplate pricing and product launch decisions, more so, as some of these variables which
influence demand are under the control of management, such as price, advertising, product quality,
and customer service. They also often use this tool to measure the effect of changing the price of
one product they sell on the demand of other related product sold as it affects their overall business
revenue and profitability.
Pre-Reading Link: http://www.youtube.com/watch?v=MNiEHvw6TTg
Required Reading: HBS background note on “Interpretation of Elasticity Calculation”
Additional Reading: Dominick Salvatore, Managerial Economics, Sixth Edition, OUP. Chapter 3,
pp 83-100
Learning Outcome: Understanding the utility of price elasticity in evaluating the feasibility of
business decisions.
6.5 - Session 5: HBS Case Study – “Alusaf Hillside project” 9-704-458, December 15, 2003
The aluminium industry has suffered from long periods of depressed prices and profits interspersed
with relatively short-lived price and profit peaks. The case investigates why, this has occurred,
focusing on the decision Alusaf must make on whether to invest in a major new facility in the face
of depressed aluminium prices. Courseware provides cost data on all the facilities in the industry to
develop a supply curve. It also provides a supply and demand model that allows students to
investigate: the drivers of average industry profitability and relative profitability of individual
players in it; the impact of changes in demand over the economic cycle on the price of metal.
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Required Reading: Case study
Learning Outcome: To introduce students to concepts of supply and demand and show how these
impact strategic decisions. Students go beyond a simple financial analysis of a capacity addition
decision to factor in the impact the decision is likely to have on industry structure and profitability.
6.6 - Session 6: HBS Case Study – “Alusaf Hillside project” 9-704-458, December 15, 2003
The aluminium industry has suffered from long periods of depressed prices and profits interspersed
with relatively short-lived price and profit peaks. The case investigates why, this has occurred,
focusing on the decision Alusaf must make on whether to invest in a major new facility in the face
of depressed aluminium prices. Courseware provides cost data on all the facilities in the industry to
develop a supply curve. It also provides a supply and demand model that allows students to
investigate: the drivers of average industry profitability and relative profitability of individual
players in it; the impact of changes in demand over the economic cycle on the price of metal.
Required Reading: Case study
Learning Outcome: To introduce students to concepts of supply and demand and show how these
impact strategic decisions. Students go beyond a simple financial analysis of a capacity addition
decision to factor in the impact the decision is likely to have on industry structure and profitability.
6.7 - Session 7: Stanford Case Study - Global Coffee Trade, Case: IB-53, 2004, pages 1-15
In 2003, the 25 million international coffee growers faced a crisis as prices for coffee beans were
the lowest they had been (in real terms) in 100 years. Several countries had to dominate the market
and raise prices, only to attract new entrants that increased total production, resulting in oversupply
and price collapse. The case examines coffee supply and demand. It asks what changes in the
market, or actions by governments, can help to correct the existing market problems.
Required Reading: Case study
Learning Outcome: To understand how movements & shifts in demand and supply contribute to
the volatility of commodity prices in national/international markets and in turn impact strategic
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business decisions.
6.8 - Session 8: Stanford Case Study - Global Coffee Trade, Case: IB-53, 2004, pages 1-15
In 2003, the 25 million international coffee growers faced a crisis as prices for coffee beans were
the lowest they had been (in real terms) in 100 years. Several countries had to dominate the market
and raise prices, only to attract new entrants that increased total production, resulting in oversupply
and price collapse. The case examines coffee supply and demand. It asks what changes in the
market, or actions by governments, can help to correct the existing market problems.
Required Reading: Case study
Learning Outcome: To understand how movements & shifts in demand and supply contribute to
the volatility of commodity prices in national/international markets and in turn impact strategic
business decisions.
6.9 - Session 9: Maximising Profit vis-a-viz Sales – Tradeoff Considerations
This session will focus on interlinkage between sales revenue and profitability of a business
and its relevance in managerial decisions and the tradeoffs between objectives of short-run revenue
and long-run profit maximisation for gains in form of enhanced product awareness among
consumers, increased customer loyalty, potential economies of scale in marketing and promotion,
and increased customer loyalty, and possible limitations in competitor entry and growth.
Required Reading: Managerial Economics: Concepts and Principles, by Donald N. Stengel,
Harvard Business Publishing, Digital Chapters, Chapter 2, Key Measures and Relationships
Learning Outcome: To understand the tradeoffs inherent in pursuing the objectives of sales
revenue maximisation and profit maximisation
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6.10 - Session 10: Public Policy and Decision Making for Managers
Managers may face a problem when thing do not work as per their expectations due to some
external factors such as change in tax, excise or any other factor. This session will cover how these
externalities arise and market solutions for externalities.
Pre- Reading Link: http://www.youtube.com/watch?v=fKCmVJV4olQ&feature=related
Required Reading: HBS background paper on “An Economic Framework for assessing
Development impact” HBS 9-202-052, February 2003
Additional Reading:
Dominick Salvatore, Managerial Economics, Sixth Edition, OUP. Chapter 12
Learning Outcome: Understanding the effect of external factors on decision making of a firm.
6.11 - Session 11: Mid-Term Assessment
This session will assess the application of cost, breakeven, demand-supply dynamics and elasticity
in managerial decisions
Topic 3 – Market and Business: An Economic Perspective
6.12 - Session 12: Competitive environment in the short run: How profits are earned?
Pricing and output decision being crucial to business warrants lot of managerial attention. Students
as prospective managers will be required to give inputs in pricing and product market strategies. At
the same time, they will be required to assess the impact of competitor's move on their business.
This lecture will focus on the process by which price and output are determined in the real world
and to what extent does it get strongly affected by the structure of the market. It will also discuss the
possible scenarios in which it is no longer feasible to firm to continue in business.
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Pre-Reading Link: http://www.youtube.com/watch?v=NAtbiV1I98w&feature=related
Required Reading: HBS background note on “Pricing and Public Policy” , 9-794-027
Additional Reading: Dominick Salvatore, Managerial Economics, Sixth Edition, OUP Chapter 8
pp 315-322
Learning Outcome: Understanding the operation of a firm in the short run in a competitive
environment and defining the shut-down point of the firm in terms of variable or running cost.
6.13 - Session 13: Competitive environment in the long run
Profits of a competitive firm changes significantly in the long run and impacts the attractiveness of
operation in the industry. It is imperative for students as budding managers to understand how the
product markets behave in long run. This lecture will focus on the industry and firm dynamics in the
long run and related issues in profit-maximisation
Required Reading:
HBS background note on “Pricing and Public Policy” , 9-794-027
Additional Reading: Dominick Salvatore, Managerial Economics, Sixth Edition, OUP, Chapter 8
pp 322-324.
Learning Outcome: Understanding the operation of a firm in the long run in a competitive
environment.
Topic 3 – Market Power – Pricing and Management
6.14 - Session 14: Market Power and its business implications: Pricing Strategy -I
Firms with market power (monopoly) operate differently from firms operating in competitive
environment. Indian cellular market is an example of perfect competition, where no individual
service provider has the price setting power. On the other hand, an internet service provider within a
gated community has an inherent monopoly power (because of physical entry barriers) and can
define the terms of service (though his power too is not unfettered). It is essential for the students to
have a fair understanding of how market power operates and how pricing and business strategies
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have to be devised under different market circumstances. This session will focus on the working of
markets having market power. Various caselets from Indian business scenes such as the case of
Indian Railways, well known financial institutions such as Axis Bank, Kotak Mahindra etc. will be
used to facilitate a deeper understanding of the concept.
Required Reading:
HBS background note on “Pricing and Public Policy” , 9-794-027
Additional Readings: Dominick Salvatore, Managerial Economics, Sixth Edition, OUP, Chapter 8
pp 324-438
Learning Outcome: Understanding how price is determined and profits are maximized by a firm in
imperfect competition.
6.15 - Session 15: Market Power and its business implications: Pricing Strategy- II
Required Reading:
HBS background note on “Pricing and Public Policy” , 9-794-027
Additional Readings: Dominick Salvatore, Managerial Economics, Sixth Edition, OUP, Chapter 8
pp 324-438
Learning Outcome: To identify the factors that bring about differences in profits, output and prices
of firms operating under competitive and imperfect competition.
6.16 - Session 16: Pricing Decisions in Segmented Markets: Price Discrimination
Why is it that in the world cup final, one spectator paid Rs. 500/-, while another ended up paying
Rs.5000/-. Is the higher price justified by the additional amenities provided? Price discrimination is
the practice of charging different set of prices for different groups of people for the same product
that are-not cost-justified. In this session students will be given an insight on how a seller charges
different prices to different consumers for similar goods and the factors that guide the pricing
decisions.
15
Pre-Reading Link: http://www.youtube.com/watch?v=4NNGP9gWnSg
Required Reading: HBS- Background note on “Price Discrimination” HBS 9-191-105 , June
17,1995
Additional Reading: Dominick Salvatore, Managerial Economics, Sixth Edition, OUP. Chapter 11
pp 436-438
Learning Outcome: To understand in what conditions a firm can charge different prices for the
same product from different consumers in order to maximise profit in different markets like
hospitality industry, airlines, and financial services.
6.17 - Session 17: Pricing Decisions in Segmented Markets: Price Discrimination
Why is it that in the world cup final, one spectator paid Rs. 500/-, while another ended up paying
Rs.5000/-. Is the higher price justified by the additional amenities provided? Price discrimination is
the practice of charging different set of prices for different groups of people for the same product
that are-not cost-justified. In this session students will be given an insight on how a seller charges
different prices to different consumers for similar goods and the factors that guide the pricing
decisions.
Pre-Reading Link: http://www.youtube.com/watch?v=4NNGP9gWnSg
Required Reading: HBS- Background note on “Price Discrimination” HBS 9-191-105 , June
17,1995
Additional Reading: Dominick Salvatore, Managerial Economics, Sixth Edition, OUP. Chapter 11
pp 436-438
Learning Outcome: To understand in what conditions a firm can charge different prices for the
same product from different consumers in order to maximise profit in different markets like
hospitality industry, airlines, and financial services.
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6.18 - Session 18: HBS Case Study on “The London 2012 Olympic games” 5-511-027, August
2,2010
It's 2009 and Paul Williamson, Head of Ticketing, must finalize ticket prices for the 2012 London
Olympic Games. Yet, there are many criteria to consider. First, given the importance of ticketing to
the Games' bottom line, he has a strong incentive to maximize revenues. Second, because the entire
world will be watching, he wants to maximize attendance - not just at the Opening Ceremony and
swimming finals, which are easy sells, but also at events such as handball and table tennis, which
are not. Third, he wants to fill seats with the right people - knowledgeable fans who add to the
energy and atmosphere of the event. Finally, tickets had to be accessible not only to the world's elite
but also to average Londoners, many of whom lived around the corner from the Olympic Park.
Required Reading: Case study
Learning Outcome: To examine the tradeoffs inherent in pricing. Specifically, how should a firm
think about balancing revenues, profits, and unit sales? In the case of the Olympics, one of the
world's biggest and most visible sporting events, is it better to maximize attendance and access to
the average citizens at the expense of lower ticket prices or to maximize ticket revenues (via high
ticket prices) at the expense of lower attendance and a dissatisfied public?
6.19 - Session 19: HBS Case Study on “The London 2012 Olympic games” 5-511-027, August
2,2010
It's 2009 and Paul Williamson, Head of Ticketing, must finalize ticket prices for the 2012 London
Olympic Games. Yet, there are many criteria to consider. First, given the importance of ticketing to
the Games' bottom line, he has a strong incentive to maximize revenues. Second, because the entire
world will be watching, he wants to maximize attendance - not just at the Opening Ceremony and
swimming finals, which are easy sells, but also at events such as handball and table tennis, which
are not. Third, he wants to fill seats with the right people - knowledgeable fans who add to the
energy and atmosphere of the event. Finally, tickets had to be accessible not only to the world's elite
but also to average Londoners, many of whom lived around the corner from the Olympic Park.
Required Reading: Case study
17
Learning Outcome: To examine the tradeoffs inherent in pricing. Specifically, how should a firm
think about balancing revenues, profits, and unit sales? In the case of the Olympics, one of the
world's biggest and most visible sporting events, is it better to maximize attendance and access to
the average citizens at the expense of lower ticket prices or to maximize ticket revenues (via high
ticket prices) at the expense of lower attendance and a dissatisfied public?
6.20 - Session 20: Final Assessment
This session will assess the understanding of market structures, market power, price discrimination
and externalities covered through the course.
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7. Details of Assessment
Assessment Method
Weightage in Percentage
Problem sets (a total of 2)
Breakup as follows:

1 (10 marks)

1 (10 marks)
66.67%
Class Participation (5 marks)
 Engagement,
16.67 %
 Discipline,
 Classroom Discussions
& Interactions
Attendance (5 marks)
Total
16.67 %
100
Component 1: Problem Sets (66.67 %)
There are three main topics in the module. Students will be assessed on understanding of topics in
the form of answering two closed book problem sets.
These problem sets will comprise of
application based questions. The first set will test their understanding of the concepts of cost, break
even and the understanding of demand and supply. Second set will test their understanding of the
working of firm in competitive market, imperfect competition and price discrimination and
externality.
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In each session of problem set comprising of 2hrs, 1 hour will be given to students to solve
problems which they will be solving individually. Students should write the answers, making sure
they understand how to solve the problem step by step. Remaining 1 hour will be used to give
feedback to students on their submissions by the instructor in form of comments and discussions in
the classroom sessions. Solving the problem sets in this way is important because the primary value
of the problem sets is building their own understanding and ability to solve the problems.
Completion of the problem sets is required for the course and the performance on them will be
considered in the final grades. Problem sets are challenging and intended to move them beyond
class material. It will test students understanding of the concepts and their analytical reasoning and
problem solving skills.
Feedback on student performance will be provided by the instructor in form of comments, when
answer scripts will be shown to students.
Component 2: Class Participation & Interaction (16.67 %)
This form of assessment will be continuous in nature and used to test understanding of concepts,
recall, analysis and critical thinking among students. The case-based discussions and other related
classroom interactions based on pre-reads/videos will maximise the opportunities available to
students to practise, foster development of social skills and also improve their awareness of own
learning processes. Based on their performance across the lectures, an average score will be
assigned to each student, which will serve as motivation for successful learning. Hence, student
learning will be further improved with active participation.
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Component 3: Attendance (16.67%) - Students will be marked for their attendance in the 18
lectures. A minimum of 75% needs to be maintained across lectures. A shortfall in attendance will
result in penalty of 20% from the overall marks. Students are advised to be present for both the
problem solving seminars to facilitate uniform recording of marks across all components. No
request for re-scheduling of assessments will be entertained. Student’s absence from assessment
will be only considered in case of urgent medical emergency on a case by case basis. The student
needs to send across an formal intimation within two day of medical leave to faculty via email and
medical prescription and bill to validate the absence should be submitted.
The marks for attendance will be allotted as follows:
75 %-80%- 1 mark
81 %-85 %- 2 marks
86%-90%- 3 marks
91 %-95 %- 4 marks
96 %-100 %-5 marks
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9. Assessment
9.1 – Assessment Map
This table shows main assessment methods which are used across module and its stages:
Methods of Assessment
Module
A1
BOE
*
A2
A3
A4
A5
*
Notes
A1: Individual test/ Assignment
A2: Group Assignment/ Project
A3: Open Book Examination
A4: Close Book Examination
A5: Group Presentation
9.2 - Teaching Map
This table shows main delivery methods which are used across module and its stages:
Methods of Delivery
Module
BOE
T1
T2
*
*
T3
T4
T5
T6
*
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Notes:
T1: Lectures
T2: Seminar/ Tutorials
T3: Live Projects & Presentations
T4: Case Discussion
T5: Guest Lectures/ Industrial Visits
T6: Lab Session
9.3 - Curriculum Map
This table shows the main learning outcomes which are developed and/or assessed in this module:
Module
L1
L2
L3
L4
L5
L6
BOE
*
*
*
*
*
*
L7
L8
L9
Notes
L1: An understanding of organizations, their external context and their management.
L2: An awareness of current issues in business & management which is informed by research &
practice in the field.
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L3: An understanding of appropriate techniques sufficient to allow investigation into relevant
business & management issues.
L4: The ability to acquire & analyze data and information.
L5: The ability to apply relevant knowledge to practical situation.
L6: The ability to work & lead effectively in a team based environment.
L7: An improvement in both oral & written communication skills.
L8: Be cognizant of the impact of their individual & corporate actions on society and recognize
ethical business practices.
L9: Be sensitive to the social economic and environmental responsibilities of business.
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