Some Tips for Mba

Economic Analysis for Business Decisions
(August 2013-15)

MBA – Semester I

Dr. Samik Shome

Highway Blues
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Mr. Nair opened a petrol pump cum retail store on Bangalore-Mysore Highway (SH17) – two-hour drive from Bangalore – fast foods, cold drink, chocolate, coffee, etc. – charges more price compared to Bangalore & Mysore – but good sale – Yours’ Special Pack (YSP) – cold drinks & light snacks. Highway travelers prefer to stop – petrol-filling and meantime can enjoy YSP, etc. Each year substantially enhance sales – special summer price (YSP) – half of its regular price. Last year while returning from Bangalore – Mr. Nair found a new, big and modern grocery shop – 15km from Bangalore – affected sale marginally. Last month – another large convenience store – 5km away – challenge to his doorsteps. Needs to meet the challenge – decides to use pricing strategy – permanently reduces price of YSP to half – still at the end of the year 20% decline in sales. Where has Mr. Nair gone wrong? How do you think he would have handled the situation?

Involvement of Economics

Deals with dynamic business environment.  Talks about how markets work under complex situations.
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Why Economics in MBA?

To introduce students to an understanding of the domain of economics as a social theory and relate with business environment.  To introduce students to the analytical tools which are used in economic analysis.  To develop students’ understanding of their organizational and policy implications through economic analysis.
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What is Economics?
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Adam Smith – “an inquiry into the nature and causes of wealth of nations.” (Economics studies how wealth is produced and consumed) – Wealth definition

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Alfred Marshall – “Economics is a study of mankind in the ordinary business of life. It is on the one side the study of wealth and on the other, and more important side, a part of the study of man.” – Welfare definition
Lionel Robbins – “Economics as a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” – Scarcity definition

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Classification of Economics
1. 2.

3.
4. 5. 6.

7.
8. 9. 10. 11. 12. 13. 14. 15.

Microeconomics Macroeconomics / Monetary Economics International Economics Financial Economics Mathematical Economics / Econometrics Industrial Economics Agricultural Economics Health Economics Public Economics Labour Economics Business Economics / Managerial Economics Environmental Economics Regional Economics Economic History Economic Development, Technical Change and Growth

Definition of Micro and Macro Economics
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MICROECONOMICS: Study of the economic system from the perspective of households and business firms. In other words, the study of how individuals and firms find solution to the problem of maximizing their gain from their limited resources. MACROECONOMICS: Study of the economic system as a whole, of the aggregate national income, aggregate consumption, aggregate demand and aggregate savings, investment and employment.

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Structure of Microeconomics
MICROECONOMICS

Pricing (Theory of Value)

Distribution (Factor Pricing)

Welfare (Welfare Economics)

Theory of Demand

Theory of Production

Theory of Pricing

General Theory of Distribution

Theories of

Rent

Wage

Interest

Profit

Structure of Macroeconomics
MACROECONOMICS

Theory of Income & Employment

Theory of Money & Prices

Theory of Savings & Investment

Theory of Business Cycle

Theory of Growth

Demand for Labour

Supply of Labour

Demand for Money

Supply of Money

Consumption & Savings

Investment

What is EABD?

EABD is economics applied in decision-making.  Branch of economics which serves as a link between abstract theory and managerial practice.  Based on economic analysis for identifying problems, organizing information and evaluating alternatives.
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EABD is the integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management.

EABD and Business Decision Making
Decision Problem

Traditional Economics

EABD

Decision Science
(Tools & Techniques)

Optimal Solution to Business Problem

Economic Issues
• Economic problems
– Scarcity: the central economic problem – Choice: production and consumption

• Macroeconomic issues
– Growth

– Unemployment
– Inflation – Balance of Trade deficits – Cyclical fluctuations

Economic Issues
• Microeconomic issues
– choices:
• what

• how
• for whom

– the concept of opportunity cost – rational decision making
• weighing up marginal costs and marginal benefits

– the social implications of choice

Production Possibility Curve (PPC / PPF)
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Various combinations of output that the economy can possibly produce given the available factors of production and technology.
8 7 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8

Units of food (millions)

Units of clothing (millions)

Shift of PPC
The outward shift of the PPC represents growth of the economy. The three main sources of economic growth are: Increase in the quantities of economic resources available. Improvement in the quality of resources, and Advances in technology.
8 7

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Units of food (millions)

6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8

Units of clothing (millions)

Opportunity Cost
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It arises because of scarcity and alternative uses of resources. When firms opt for best opportunities, they lose the returns expected from other alternatives. The firm has to forego the gains expected from the second best alternative use of their resources. The foregone benefit is called Opportunity Costs of the gains from the chosen use of the resources.
Applications

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Consumer choice Production possibilities Cost of capital Time management Career choice Analysis of comparative advantage