MICROECONOMICS FOR

MANAGERS

Biresh Sahoo, Ph.D.

Lecture 1: The Core Principles of Economics

MICROECONOMICS FOR
MANAGERS (MEM)

• COURSE DESCRIPTION
• LEARNING OBJECTIVES
• COURSE MODULES
• EVALUATION CRITERIA
• READING LISTS

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COURSE DESCRIPTION

The course deals with an application of

microeconomics principles to business decision
making. It examines:
the factors underlying demand and supply
 the behavior of firms under various market
structures
the role of price system in the economy

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LEARNING OBJECTIVES
Learn how the four core principles of economics
can be used to analyze choices and make better
decisions by individuals (consumers and
producers).
Understand how demand and supply respond to
changing market conditions and forecast the
consequences of government policies.
To learn how the concept of production
technology can be used to perform benchmarking
exercise against the industry best practice.
Learn how businesses set prices to remain
profitable when they have market power.
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COURSE MODULES
Module I: Theory of the consumer and
demand analysis (8 sessions)
Module II: Theory of the producer and
supply analysis (8 sessions)
Module III: Pricing strategy under market
structure with monopoly power (4 sessions)

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EVALUATION CRITERIA

Quizzes (4 out of 7) : 40 points (= 4 10)

Assignment : 05 points
Presentation : 10 points
Classroom participation : 05 points
End-term examination : 40 points
Total : 100 points

Minimum points to pass: 40 points

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READING LISTS
Textbook
Stevenson, B. and Wolfers, J. Principles of Microeconomics,
London: Palgrave Macmillan.
Reference Books
Varian, H.R., Intermediate Microeconomics: A Modern
Approach, New York: W. W. Norton & Company.
McEachern, William A. and Kaur, S. MICRO ECON, New Delhi:
Cengage Learning.
Baye, M.R. and Prince, J.T., Managerial Economics and
Business Strategy, New Delhi: McGraw Hill Education (India)
Pvt. Ltd.
Frank, R.H., Microeconomics and Behavior, New York:
McGraw-Hill Publishing Company.
Salvatore, D. and Srivastav, R., Managerial Economics:
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CHAPTER 1
The core principles of economics
Learn the four core principles that provide the
foundation of all economic analysis
 Use these four core principles to analyze
choices and make better decisions.

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Roadmap (1 of 5)
 A principled approach to economics
 Understand economics as a way of thinking, grounded in a set of broadly
applicable principles that you’ll find useful “in the ordinary business of life.”
 (1) The cost-benefit principle
 Costs and benefits are the incentives that shape decisions. You should
evaluate the full set of costs and benefits of any choice and only pursue those
whose benefits are at least as large as their costs.
 (2) The opportunity cost principle
 The true cost of something is the next best alternative you must give up to get
it. Your decisions should reflect this opportunity cost, rather than just the
out-of-pocket financial costs
 (3) The marginal principle
 Decisions about quantities are best made incrementally. You should break
“how many” decisions down into a series of smaller or marginal decisions.
 (4) The interdependence principle
 Your best choice depends on your other choices, the choices others make,
developments in other markets, and expectations about the future. When any
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A principled approach to economics
Economics is the science of making decisions in the
presence of scarce resources.
Resources are anything used to produce a good or
service or achieve a goal.
Decisions are important because scarcity implies trade-
offs.
You will learn four core principles of economics that
help you make better decisions at two levels:
 Microeconomics: The study of individual decision
making and the implications for specific markets.
 Macroeconomics: The study of decision making
across the whole economy.
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A systematic framework for making
individual decisions (Microeconomics)
 Individual decisions — choices — are the
foundation of all economic forces.
 Four core principles provide a systematic
framework for analyzing decisions:
1. the cost-benefit principle.
2. the opportunity cost principle.
3. the marginal principle.
4. the interdependence principle.

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Discussion question (1)
What decisions did you make today?

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Roadmap (2 of 5)
 A principled approach to economics
 Understand economics as a way of thinking, grounded in a set of broadly
applicable principles that you’ll find useful “in the ordinary business of life.”
 The cost-benefit principle
 Costs and benefits are the incentives that shape decisions. You should
evaluate the full set of costs and benefits of any choice and only pursue those
whose benefits are at least as large as their costs.
 The opportunity cost principle
 The true cost of something is the next best alternative you must give up to get
it. Your decisions should reflect this opportunity cost, rather than just the
out-of-pocket financial costs
 The marginal principle
 Decisions about quantities are best made incrementally. You should break
“how many” decisions down into a series of smaller or marginal decisions.
 The interdependence principle
 Your best choice depends on your other choices, the choices others make,
developments in other markets, and expectations about the future. When any
08/29/2022 of these factors change, your best choice might change. 13
The cost-benefit principle
 Costs and benefits are the incentives that shape
decisions.
 The cost-benefit principle says that you
should
 evaluate the full set of costs and benefits of any
choice.
 pursue only those choices whose benefits (B) are
at least as large as their costs (C).

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 Quantifying costs and benefits: an
example
 You walk into a coffee shop and need to decide
whether to buy a cup of coffee.
 The coffee costs $3.
 Should you buy the coffee?

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 Example continued …
 The cost-benefit principle says you should
buy the coffee if the benefit is at least as large
as the cost of $3.
 What is the benefit of your consumption of
the coffee?

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 Example continued …

 How do you compare intangible benefits to

monetary costs?
 Economist trick: Convert each cost and each
benefit into its monetary equivalent.
 What is your willingness to pay?
 That is, what is the most that you would be
willing to pay to obtain a particular benefit?

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 Example continued …
 Your willingness to pay is how much you
value the good.
 Are you willing to pay $5 for a cup of coffee?
 How about $4? Maybe $3? How about just
$2?
 The amount you are willing to pay depends
on how much you like coffee, not the price.

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 Example continued …
 Suppose you are willing to pay up to $4 for a
good cup of coffee.
 You are always willing to pay less than $4!
 Now apply the cost-benefit principle:
 The cost of coffee (C) = $3.
 The benefit of coffee (B) = $4.
 Since B > C, you purchase the coffee.

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Discussion question (2)
 Think about something you purchased
today. What was its cost?
 Using willingness to pay, what was its
benefit?
 Did you correctly apply the cost-benefit
principle?

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 Money is the measuring stick, not the
objective.

 Money is a common measuring stick that

allows you to compare a wide variety of costs
and benefits.
 Money allows you to take account of a wide
variety of nonfinancial issues, such as
satisfaction or time.

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Maximize your economic surplus
 When you follow the cost-benefit principle,
every decision you make will yield larger
benefits than costs.
 Economic surplus is the total benefits (B) minus
the total costs (C) flowing from a decision.
 It is a measure of how much your decision has
improved your well-being.
 By maximizing your economic surplus, you
can make good decisions.
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 Discussion question (3)
Think about the last time you purchased a good
or service.
 What were your benefits? What were your
costs?
 What were the seller’s benefits? What were the
seller’s costs?
 Did you both benefit more than your costs?

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 Applying the cost-benefit principle

 Nerida Kyle, a 23-year-old economics

graduate, is about to start her first full-time job.
She likes her new apartment, but there is no
metro rail station nearby, buses come only
rarely, and she’s too far from work to bike or
walk.
 Should she buy a car or take an Uber each
way?

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 Nerida came up with the following costs:
 The cost of purchasing a car is $10,000.
 However, she can sell it for $8,000 after a year.
 Work is 5 miles away, and the car gets 25
miles to the gallon.
 She works 50 weeks per year.
 Gas costs $3 per gallon.
 Insurance costs $1,500 per year.
 Repairs cost $500 per year.
 Parking costs $5 per day.
 Uber fares are $10 per ride.
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 Practice question
Suppose that you are willing to pay up to $15 to
purchase a meal at your favorite restaurant. The
meal currently costs $16. Should you buy it?
A. Yes because $16 is not that much higher than
$15
B. Yes because the benefit is higher than the
cost
C. No because the cost is higher than the
benefit
D. No because you cannot quantify the benefit
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 Thank you
for your patience

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