PGP Presentation Time: 90 Minutes Slides: 46

Introduction

Session 01

Economics: Scope and Methods

Indian Institute of Management Lucknow

1 July, 2010; Thursday

A relevant quote to begin with

Our envy goes to you, setting out to explore the exciting world of economics for the first time. This is a thrill that, alas, you can experience only once in life!
~ Paul A Samuelson (with William D Nordhaus) Economics, Twelfth Edition, Preface McGraw-Hill, 1955 [Emphasis Added]

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Plan of the Presentation

_____________________________________________________________

Part Part I:

Topic Motivation

Time (Min) .. 15

Two Examples What is Economics? Early History and Major Landmarks

Part II: Part III:

Towards Building a Foundation Managerial Economics

.. ..

20 20

Economics and the Business Environment Is Learning Economics Useful for Managers? How Should Managers Study Economics?

Part IV: Part V:

Rules on Evaluation .. Resources ..

20 05

Questions & Answers / Discussions?

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Part I: Motivation

Two Examples
Example 1: The Refugee Camp, Corruption and the Census that Could Not Take Place! (Source: Statistics and Truth by C.R. Rao) Example 2: Babur and the Spanish conquistadors (Source: Tuzuk-i-Baburi)

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What is Economics?
Economics is the study of how men and society choose to employ scarce productive resources, which could have alternative uses, to produce various commodities over time and distribute them for consumption, now and in the future, among various people and groups in the society Paul A Samuelson (With William D Nordhaus) Economics, McGraw-Hill, 1955, 12th Edition, P. 4, [My emphasis]

Problem in a Rigorous Definition: Expanding Frontier Economics is not a clearly defined discipline. Its frontiers are constantly expanding. An Example of Expanding Domain: Experimental Economics Implication: Any definition of economics could be a subject of debate!
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Major Landmarks in Economic Thought

Early History: Mercantilists, Physiocrats etc. (If you are interested, read A Science in Its Youth by A. Anikin, Progress Publishers). Some Benchmark and Influential Studies:
 Adam Smith: The Wealth of Nations, 1776.  Karl Marx: Das Capital, 1867.  John Maynard Keynes: The General Theory of Employment, Interest and Money, 1936.  Milton Friedman and Anna J Schwartz: A Monetary History of the United States, 1867-1960, 1971.

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Evolution of Modern Economics

Marxs prediction on market economy and the experience of great depression in the United States. Market Economy: Emphasis on quantitative aspect of economic problems:
  Evolution of statistics as an independent discipline Two other important but unrelated events
Evolution of econometrics: Formation of Econometric Society (1931) and the journal Econometrica (1933) (Reference Document: First Editorial of Econometrica, Ragnar Frisch, January 1933) Advent of Keynes and General Theory (1936)

Implications: understanding of the market economy improved greatly. Why are applications of scientific techniques easier on a market economy than on a command and control one?
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Influence of Economists in Modern Society: I

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. John Maynard Keynes (1833-1946) [Emphasis Added]

The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists." Joan Robinson (1903-1983) [Emphasis Added]

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Influence of Economists in Modern Society: II

Influence Influence Influence Influence of of of of Adam Smith Karl Marx Keynes Milton Friedman

A Recent Example:  Antitrust enforcement and policy: MIT economists Franklin M. Fisher and Richard Schmalensee were on opposite sides of the Microsoft Antitrust case! Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently. Alan S. Blinder: Hard Heads, Soft Hearts, 1987
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Part II: Towards Building a Foundation

How to Build a Scientific Theory?

Two types of reasoning:
        Deductive reasoning Inductive Reasoning Start with a set of axioms & definitions With the axioms and definitions, try to derive results. Example? Start from observations Try to build a theory that explains those observations. Example?

Deductive reasoning

Inductive reasoning

Which way of reasoning do you feel is better?

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How to Build a Theoretical Foundation in Economics? Microeconomics and Macroeconomics

 Microeconomics focuses on explaining the behavior of individual units (households, firms etc. often termed as economic agents!)  Macroeconomics, in contrast, looks at the economy as a whole.

What type of reasoning would be better suited for microeconomics? For macroeconomics?
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Models in Economics
Role of axioms / assumptions and definitions Models in science are mathematical approximations of reality. Economics is no exception! Models should tell you the essential features of aspects of reality that are being studied. Analogy:

 Maps  Photographs
A model in science must be falsifiable. In microeconomics, we shall try to model the economic decision making of an individual or a firm.
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Please Do Not Feel Intimidated by This Slide!

Economics and Optimization under Constraints Nearly all problems of economics can be expressed as a constrained optimization problem: Max F(X1, X2, , Xn) subject to G1(X1, X2, , Xn) e 0 G2(X1, X2, , Xn) e 0 .. GK(X1, X2, , Xn) e 0
The General Specification
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Here, a multi-variable objective function F() is optimized under a set of constraints. Note that, if F() and G1(), G2(), GK() are linear in X1, X2, , Xn, then it becomes a linear programming problem. However, in typical economic problems, F() and G1(), G2(), GK() may or may not be linear!

Implications
Depending upon your confidence in mathematics, you can look at economics either as a threat or as an opportunity!
 Threat: Oh! It is so complex! We, would-be-managers, should be taught more PRACTICAL things!!  Opportunity: To master economics like a real scholar, I need to master only one type of mathematical problem!

Instructors Guarantee: If you know how to specify and solve general constrained optimization problems, none (including me!) can stop you from doing well in economics in any university of the world. At the end of the day, mathematical models in economics teach would-be-managers the art of simplification!
 Example of Absurd Level of Simplification: The story of a physicist, a chemist and an economist  The KISS principle of modelling!
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Limitations of Economics
Assumptions on Rationality Lack of scope of controlled experiments
 Experimental economics: attempts to remove some of the lacunae

Precise measurement is difficult

 Example 1: Collection of data on income  Example 2: Discrepancy in international trade data

Normative Issues
 Equity-efficiency debate  Positive and Normative Economics
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Part III: Managerial Economics

Economics and the Business Environment

The business of America is business -- Calvin Coolidge (in the 1920s) The world of business is the most important part of the economy. Economics helps us to understand the environment in which all businesses operate. (The name of our group in IIM Lucknow is Business Environment Group!) Managerial Economics: What do we mean?
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Is Learning Economics Useful for Managers?

Backgrounds of CEOs of Top Firms: International

Economics appears to be a good choice of major for those aspiring to become a CEO of S & P 500 companies! Economics ranked third with 9% of the CEOs of S & P 500 companies in 2004 being Economics majors, after Business Administration and Engineering majors, each of which accounted 20%. However, when adjusted for the size pool of graduates, Economics comes first!
Source: Flynn and Quinn Economics: Good Choice of Major for Future CEOs
[A Copy of the Study Has Been Uploaded in Claroline for You!]

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Is Learning Economics Useful for Managers?

Backgrounds of CEOs of Top Firms: India

Good News:
 Among top 200 Indian companies, IIMs alone groomed about half of Indian CEOS, while IITs contribute about one-third of the total. The potent IIT-IIM combination has contributed about 13 per cent of Indias business leaders in top-level firms.

Bad News:
 Of the IIM CEOs, 62 per cent are from IIM Ahmedabad and 27 per cent from IIM Calcutta!

Source: A Study by EMA Partners International

[A Copy of the Main Highlights of the Study Has Been Uploaded in Claroline for You!]

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Common Reasons Given for Desirability of Economics

Analytical and Problem solving skill Knowledge of Markets The Big Picture Perspective (Birds Eye View):

For any event in any part of the world, a good manager must answer How shall it affect the world economy? How shall it affect the economy in which I am operating? How shall it affect the sector in which I am operating? How shall it affect my company? Visionary Role: To Foresee Demand for a Good or a Service before Others!
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Some Major Points of Interest of Managers

How can I sell more? Will a price cut help?  Output market
Who are my consumers / potential consumers?

Can I cut my cost of production more?  Input market

Labor market Capital market Market for raw materials

 Technology What will be my sources of fund? How shall I use my fund? How do I manage risk effectively?

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Managers and Economics

Managers need to be familiar with both the input and the output market. In a few industries, say Airline Industry, the number of raw materials could be more than 10,000. Most features of labor and capital market will be common across industries. Implications:  Managers need to be aware of the general economic environment in which they operate.  In case of domestic firms, managers must be aware of all major economic developments taking place in the economy.  In case of multinational firms, such awareness should extend to the entire world.
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The Big Picture:

Managers in Economic Policymaking

Managers in Public Sectors:  Have to advise politicians on policies Entrepreneurs / Managers in Private Sector:  Understand the forces that dictate government policy  Business leaders are regularly consulted in policy matters. Often, they are the policymakers. Any example that you can think of?

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Example:

Who are / were the members of the Central Board of Reserve Bank of India (RBI)?
At this moment, the total strength of the RBI Central Board is 19. Well known business representatives in RBI Central Board (Along with a few other business representatives):
   Shri Azim S Premji Shri Kumar Mangalam Birla Shri Suresh Neotia

Some other well known business representatives in RBI Central Board in the past:
  Ratan Tata Narayana Murthy

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Economic Issues and Common Sense

Real life problems are either absurdly simple, or simply absurd!

Economics is one of the core subjects for managers, not the only subject. Some of the greatest leaders of men were not formally trained in economics. Real life economic problems, in many cases, just require common sense, which, by the way, is not so common!
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Relevance of the Topics in Economics I to Other Courses in IIML

Sessions 2-3 4-5 6-7 8-10 Topic in Economics I Operations of Markets Theory of Consumer Behavior Demand Forecasting Theory of Production and Cost Other Areas Marketing Marketing All areas of management! MANAC, Operational Management, Supply Chain Management Marketing, Strategy, Operational Management, Supply Chain Management HR, Strategy HR (Organizational Behavior) All areas of management

11-15

Market Structures and PriceOutput Determination Factors of Production Information Asymmetry Government Regulations

16 17 18

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To What Extent Non-Economics Faculty in Business Schools Find Economics Relevant?

Source: Prenshaw and Taylor (2007). The full study has been made available in Claroline.

Participants ranked concepts on a scale of 1 (Very Important) to 5 (Not Important). Thus, a figure less than 3 indicates importance. Some particular concepts in economics were found to be especially important by some other areas and scored less than 2.0, e.g., Operation of Markets (Finance and Marketing), Consumer Behavior (Marketing), Opportunity Cost (Finance), Comparative Advantage (Marketing), Elasticity (Marketing), Production and Cost (Accounting). Note: Demand Forecasting was not included as a topic or a concept in the study!
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Part IV: Rules on Evaluation

Individual and Team Performance

Significance of team activities in a business school
  Importance of teamwork Problems created by free riders

Form ten teams among yourselves

  Each team should not have more than seven persons. The teams should be heterogeneous and should cover all societal and academic cleavages to the extent possible.

Action: Class Representative!

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Allocation between Individual and Team Performance

Individual Performance (Weight: 80.0 per cent):  Individual class performance (10.0)  Written examinations (60.0)  Quizzes (10.0) Team Performance (Weight 20.0 per cent):  Performance of a team in class discussions and preparations of briefings and reviews and solving problems (8.0)  Project (12.0)

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Individual Class Performance

Classes should, to the extent possible, be interactive and participatory! Individual class performance carries 10.0 per cent weight. The break up is:  Attendance: 3.0
Attendance record in the range of 18 - 20 | 3.0 marks With each absence after second time, you loose 1.0 mark

 Discipline and Alertness: 1.0  Good Questions:3.0

Good questions carry rewards!
Judge a man by his questions rather than by his answers ~ Voltaire

Instructors Judgment: 3.0

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Written Examinations: Syllabus etc.

Mid-Term Examination (Weight: 20.0 per cent):
Pindyck and Rubinfeld, Chapters 1-6. Petersen and Lewis, Chapters 4-5.

End-Term Examination (Weight 40.0 per cent):

Syllabus of Mid-Term Examination Pindyck and Rubinfeld, Chapters 7,9,11-13,17 . Petersen and Lewis, Chapter 12. Materials from www.cci.gov.in
(Details on the syllabus will be revealed as we progress.)

In both mid-term and end-term examinations, questions will be short answer type.
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Quizzes: Syllabus etc.

Quiz 1 (Weight: 5.0 per cent)  Syllabus: Sessions 01-05 Quiz 2 (Weight: 5.0 per cent)
 Syllabus: Sessions 11-15

In both the quizzes, you have to write a single essay or a critical review (Time: 15 - 30 Minutes) Note: Syllabi for written examinations and quizzes do not include polycopy articles!

Why are then so many articles in the polycopy?

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Team Performance: Polycopy Articles

Do NOT attempt to memorize the polycopy articles! But you still have to read and assimilate these articles! (How?) Emphasis on Critical Reading! Managerial Reading: How is it different from an academic reading? Typical plan of a class:  Attendance: 5 minutes  Instructors presentation: 60-75 minutes  Discussion of a polycopy article / Problem Solving: 25-10 minutes Read and discuss the polycopy articles with your team members! A part of your marks will depend on how well you grasp the polycopy articles as a team! In some sessions between 03 and 18, I shall ask questions on a polycopy article to teams in turn!
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Typical Questions that I Shall Ask on Each Polycopy Article

Give us a brief (about 2 minutes)! What are the useful points in the article from an academic perspective? In what way has the article improved your understanding of economics? Is the article relevant for business? If so, in what way? What are the limitations of the article? Does it need any improvement? If it is an empirical article and the data analyzed do not cover India, are the conclusions applicable for India? If the article is an old one, are the conclusions valid in the current context? Related concepts: treasure hunt! Can you think of some interesting questions on the article?
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Additional Teamwork on Review Write a critical review on a paper / article

Deadline of submission: Each team has to submit the review within seventy two hours after the paper / article is circulated.

How to write critical reviews?

 A critical review is not just a summary!  Clue: Look at the list of questions!

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Team Performance: Projects

Project carries 12.0 per cent weight.
   Written report and/or presentation : 10.0 Independent thinking and performance: 1.0 Leadership: 1.0

Size of the project report should not exceed six typewritten pages. Deadline of submission of the written report: One week before the last class in Term I Exact date to be announced later. Any member of any group may be questioned separately on their work in any of the last two sessions.

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Project Topics
1. 2. 3. 4. 5. 6. Price variations in India Engel curve estimation for a particular region in India Forecast of cellphone subscription in a particular region in India Project on sales forecasting Estimation of cost function Estimation of production function

Notes on Projects: Each group will work on one particular city / region / group of firms. Details on city/region/group etc. will be given later.
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Grades: Indicative Cut-Off Points

Marks (In Per Cent) 00.00 35.00 45.00 50.00 55.00 60.00 65.00 70.00 75.00 77.50 34.99 44.99 49.99 54.99 59.99 64.99 69.99 74.99 77.49 79.99 F D CC C+ BB B+ AA A+
1. IIML convention restricts the percentage of students in this range. 2. The cut-off points are indicative only and may change a bit later.
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Grade

Comments
The range of failure.

80.00 100.00
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Part V: Resources

Books
Pindyck Rs and DL Rubinfeld and PL Mehta: Microeconomics, Pearson Education. (Please Follow the Seventh Edition) Petersen HC and WC Lewis: Managerial Economics, Prentice-Hall of India. Additional Reference Books:
 Samuelson PA and WD Nordhaus: Economics, McGraw-Hill.  Salvatore D (Adapted by R Srivastava): Managerial Economics: Principles and Worldwide Applications, Oxford University Press.  Henderson JM and RE Quandt: Microeconomic Theory: A Mathematical Approach, McGraw-Hill.  Palgrave Dictionary on Economics, Volumes I-III.

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Journals
Important International Journals:
 Journal of Economic Literature (JEL)
Every issue contains a few surveys written by experts. Lists the current contents of every important journals on economics JEL category of issues and subjects in economics

 Journal of Economic Perspectives

Important Indian Journals

     Economic and Political Weekly Journal of Quantitative Economics Indian Economic Review Indian Journal of Economics Sankhya: The Indian Journal of Statistics
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Websites I (International)
Inomics: (http://www.inomics.com) American Economic Association: (http://www.aeaweb.org) NBER: (http://www.nber.org) IMF: http://www.imf.org [Contains separate country pages] World Bank: http://www.worldbank.org [Contains separate country pages] BIS: http://www.bis.org [Contains a page that has links for more than 80 central banks in the world, e.g., European Central Bank (ECB) and Federal Reserves (Fed)]
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Websites II (Indian)
Reserve Bank of India (http://www.rbi.org.in) (Contains links to websites of banks and other financial institutions) Government of India Website (http://www.nic.in) Planning Commission (http://planningcommission.nic.in)

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Major Microeconomic Data Sources in India*

National Sample Survey
    Surveys on Consumption Surveys on Employment and Unemployment Annual Survey of Industries All India Debt and Investment Survey

National Family Health Surveys Prowess Database Reserve Bank of India

  Panel Database on Companies Panel Database on Banks

Office of the Economic Adviser, Ministry of Commerce and Industry, Government of India Labour Bureau, Government of India * For some major US microeconomic data sources, see Cameron AC and PK Trivedi, 2005: Microeconometrics: Methods and Applications, Cambridge University Press.
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Annexure

Keywords, Important Concepts and Additional References

Keywords and Important Concepts:
 Economics, Deductive and Inductive Reasoning, Microeconomics, Macroeconomics, Concept of a Model in Science, Constrained Optimization Problems, Managerial Economics

Additional References:
 As indicated in the texts and slides.

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Plan for the Next Session Demand and Supply

Read: Chapter 2, Pindyck, Rubinfeld and Mehta. Treasure Hunt:
   Linear Expenditure System Stocks and Flows The Latin phrase: Ceteris paribus

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Acknowledgements
All slides in this presentation have been prepared by the instructor himself.

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Dedication
When you share your wealth with others, your own wealth shrinks. When you share your knowledge with others, your own knowledge increases. ~ Chanaky These slides are dedicated to you all. You are free to use it and to distribute it to any student of economics; but for heavens sake, though you all are students of a business school, do not make any business out of it!

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