24MBA103 – MANAGERIAL ECONOMICS

Hours/Week Total Credit Maximum Marks

Semester
L T P Hours C CIAT ESE Total
I 3 0 0 45 3 40 60 100
Course Objective
 To introduce the concepts of scarcity & efficiency; principles of micro economics & macro
economics to have the understanding of economic environment of business and its impact
on economy.
UNIT I – INTRODUCTION TO MANAGERIAL ECONOMICS
Nature and Scope of Business Economics, Macro and Microeconomics, Basic problems of
an Economy, Organization and Economy – Objectives of business, Production Possibility Curve,
Production and Cost analysis Opportunity Cost principle, Economics of Information. 9

UNIT II - CONCEPT OF DEMAND AND SUPPLY

Different Concepts of Demand, Demand Curve, Determinants of Demand, Law of Demand,
Demand Forecasting Methods, Market Equilibrium, Concepts of Elasticity. Concept of Supply, 9
Supply Curve, Conditions of Supply, Elasticity of Supply, Economies of Scale.
UNIT III – MARKET STRUCTURE
Perfect Competition, Monopoly, Sources of Monopoly Power, Monopolistic Competition,
Oligopoly, Oligopolistic Market, Price rigidity, Cartels and Price Leadership Models, Economic 9
Inefficiency, Price
Determination Under Perfect Competition, Monopolistic Competition and Monopoly.
UNIT IV – MACRO-ECONOMIC INDICATORS
Price Indices, Inflation-Types of inflation, Deflation, Business Cycle and Stabilization Policies,
Monetary and Fiscal Policy, National Income and its Components- GNP, NNP, GDP, NDP, Tax 9
Regime.
UNIT V – INTRODUCTION TO BEHAVIOURAL ECONOMICS
Origins of Behavioural Economics, Nature of Behavioural Economics, Principles of
Behavioural Economics- Loss Aversion, Anchoring, Nudging, Discounting, Social Proof, 9
Decision Fatigue.
Total Hours 45
Textbook(s)

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 Geetika, Piyali Ghoshand, Purba Roy Chowdhury, Managerial Economics, 3rd Edition, Tata
2 McGraw Hill, 2017.
Paul A. Samuelson, William D. Nordhaus, Sudip Chaudhuri and Anindya Sen, Economics, 19th
1
edition, Tata McGraw Hill, New Delhi, 2010.
2 William Boyes and Michael Melvin, Textbook of economics, Biztantra,9th Edition , 2012.
Reference(s)
1 N. Gregory Mankiw, Principles of Economics, 7th edition, Cengage, New Delhi, 2014
2 Richard Lipsey and Alec Charystal, Economics, 12th edition, Oxford, University Press, New
Delhi, 2011.
Karl E. Case and Ray C. fair, Principles of Economics, 12th edition, Pearson, Education Asia, New
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Delhi, 2014.
4 D N Diwedi, Managerial Economics , 7th edition, Vikas Publication, 2009

On the successful completion of the course, students will be able to

Course Outcome Level

CO1 Interprets principles of micro and macro economics K2
CO2 Compare and contrast the behaviour of consumer and producer K3
CO3 Identify the product and factor market K3
CO4 Evaluate the performance of an economy K3
CO5 Outlines the macroeconomic elements and its impact on the Economy K3

Mapping with Program Outcomes

Cos PO1 PO2 PO3 PO4 PO5 PO6 PSO1 PSO2

CO1 3 3 - 3 - 2 2 2
CO2 3 3 - 3 - 2 2 2
CO3 3 3 - 3 - 2 2 2
CO4 3 3 - 3 - 2 2 2
CO5 3 3 - 3 - 2 2 2
3 – Strong, 2 – Medium, 1 - Low

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UNIT V – INTRODUCTION TO BEHAVIOURAL ECONOMICS
1.Origin of Behavioural Economics
2.Nature of Behavioural Economics
3.Principles of Behavioural Economics
4.Loss Aversion,
5.Anchoring
6.Nudging
7. Discounting
8. Social Proof
9.Decision Fatigue

1.Origins of Behavioural Economics

What is meant by behavioral economics?

Behavioral economics combines elements of economics and psychology to understand how and
why people behave the way they do in the real world. It differs from neoclassical economics,
which assumes that most people have well-defined preferences and make well-informed, self-
interested decisions based on those preferences.

Origins of Behavioral Economics

Richard Thaler

Considered to be one of the founding fathers of behavioral economics, Richard Thaler in 2017
received the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

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Behavioral economics is the study of the psychological (e.g. cognitive, behavioral, affective,
social) factors involved in the decisions of individuals or institutions, and how these decisions
deviate from those implied by traditional economic theory.

Notable individuals in the study of behavioral economics include Nobel laureates Gary
Becker (motives, consumer mistakes; 1992), Herbert Simon (bounded rationality; 1978), Daniel
Kahneman (illusion of validity, anchoring bias; 2002), George Akerlof (procrastination; 2001),
and Richard H. Thaler (nudging, 2017).

In the 18th century, Adam Smith noted that people are often overconfident with their own
abilities, noting "the chance of gain is by every man more or less over-valued, and the chance of
loss is by most men under-valued, and by scarce any man, who is in tolerable health and spirits,
valued more than it is worth.”1 In this sense, Smith believed individuals are not rational with
their own limitations.

More recently, behavioral economics took shape as early as the 1960's when several economists
identified key biases when recalling information. This idea called availability heuristic was
explained by Amos Tversky and Daniel Kahneman, and it leads individuals to irrationally
interpret data.

For example, shark attacks tend to happen less than people think, but headlines may make
people feel otherwise. Tversky and Kahneman are also credited with developing prospect
theory, how people are potentially more adverse to losses as opposed to receiving an equal win.

In 2017, Richard Thaler received the Sveriges Riksbank Price in Economics Science for his
work in identifying factors that guide individuals' economic decision-making. Thaler's work
included limited rationality, social preferences, lack of self-control, and individual decision-
making.

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 2.Nature / Characteristics of Behavioral Economics

Here are some characteristics of behavioral economics:

 Focus on human behavior
Behavioral economics focuses on the individual as the central unit of analysis.
 Experimental methodology
Behavioral economics uses experiments as its primary methodological focus.
 Influence of social and emotional factors
Behavioral economics considers how social elements, emotional factors,
psychological influences, and cultural dynamics influence decisions.
 Limited information processing
Behavioral economics acknowledges that people have limited knowledge and
computational capacities, which can restrict their information processing.
 Framing effects
Behavioral economics considers how people's choices are influenced by how options
are presented to them.
 Nudge theory
Nudge theory is an area of behavioral economics that uses choice architecture to
encourage people to make decisions that improve their own welfare and society's
welfare.

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 3.Principles of Behavioural Economics
Principles of behavioral economics include:
 Anchoring
The importance of being careful about what is presented to users, especially early in
interactions.
 Choice architecture
The layout of choices can affect decisions, such as placing products at eye level in a store.
 Loss aversion
People tend to place more importance on losses than gains of equal value.
 Bounded rationality
The ability to make good decisions is limited by several factors, leading people to settle for a
satisfactory solution.
 Heuristics
People prefer to make decisions using mental shortcuts rather than long, reasonable reasoning.
 Framing effect
Choices can be presented in a way that highlights the positive or negative aspects of the same
decision.
 Nudge theory
A political approach to behavioral economics that has a substantial influence on public policy
debates.

Behavioral economics is the study of how emotional, social, and other factors affect human
decision-making.

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 4.Loss Aversion

In behavioral economics, loss aversion is the tendency for people to perceive a potential or
actual loss as more psychologically or emotionally severe than an equivalent gain. It's often
described by the phrase "losses loom larger than gains".

Loss aversion is a cognitive bias that can impact decision-making and how people approach risk
and uncertainty. For example, people who are loss-averse may be more likely to avoid risks or
making changes in their lives, even if it might bring potential benefits.

Here are some reasons why loss aversion might occur:

 Attachment: People can develop an attachment to objects they own, and may feel bad about
selling them.
 Bad luck: People may feel that losing something is bad luck or carelessness.
 Image or reputational costs: People may feel that losing something makes them appear weak,
which can have reputational costs.
Loss aversion was popularized by Nobel Prize winners Daniel Kahneman and Amos Tversky
through their work on prospect theory. It's been applied in a variety of contexts, including
advertising, sales, negotiations, and presentations. However, overusing loss aversion can make a
company experience unpleasant for customers and reduce the chance to build credibility.

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 5.Anchoring

Anchoring is a cognitive bias in behavioral economics that describes how people use
an initial number or value as a reference point to make subsequent judgments:
 Explanation
Anchoring is a type of priming effect that occurs when people are exposed to a
number first and use it as a reference point for future judgments. This process often
happens without people realizing it.
 Examples
For example, if you see a T-shirt that costs $1,200 and then see another one that
costs $100, you might perceive the second shirt as cheap. The first price you saw
was the anchor that influenced your opinion.
 Applications
Anchoring can be used to advantage in sales and price negotiations. For example,
sellers may sort products from high to low on a menu, so the high prices at the top of
the list act as an anchor.
 Research
Tversky and Kahneman's 1974 study on anchoring is considered a pioneering work
in the field. In the study, participants were asked to estimate the average temperature
in Antarctica after being given a random number from a roulette wheel. The initial
number had a significant effect on their final estimate.

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 6.Nudging

In behavioral economics, a nudge is a small change to the environment that influences people's
choices without forbidding options or changing economic incentives. The goal of a nudge is to
help people make better decisions that lead to desirable outcomes.
Here are some examples of nudges:
 Placing healthy food at eye level
In a cafeteria, putting fruit at eye level or near the cash register can encourage students to
choose healthier options.
 Making salad the default side option
At a restaurant, making salad the default side option to a burger can encourage people to order
salad instead of fries.
 Putting an image of a housefly in the urinal
In Amsterdam's Schiphol Airport, etching an image of a housefly into the men's room urinals
improved aim and lowered cleaning costs.
Nudges are based on the idea that people often choose the option that is easier and more
convenient, rather than one that could lead to better outcomes. They work by:
 Understanding how people think and make choices
 Incorporating cognitive psychology and behavioral economics insights
 Using heuristics, cognitive shortcuts, or rules of thumb to steer behavior
 Making choices linked to better outcomes the easiest to make
Nudges are not coercive, and they are easy and cheap to avoid. For example, banning junk food
is not a nudge.
 Nudge theory was popularized in the 2008 book Nudge: Improving Decisions about
Health, Wealth, and Happiness by Richard H. Thaler and Cass R. Sunstein. The
ideas have been applied in a variety of fields and settings, including by businesses,
governments, and policymakers.

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 7. Discounting

In behavioral economics, discounting is the tendency to value immediate rewards over future
rewards, even if the future rewards are larger. This phenomenon is also known as time
discounting, delay discounting, or temporal discounting.
Discounting can lead to poor financial decisions, unhealthy lifestyle choices, and societal issues
like climate change. It can also affect emotional well-being, sometimes leading to regret or guilt.
Here are some things to know about discounting in behavioral economics:
 Factors that influence discounting
Age, income, race, risk, and temptation can all influence an individual's time preference.
 Models of discounting
The main models of discounting include exponential, hyperbolic, and quasi hyperbolic.
 Hyperbolic discounting
This is a time-inconsistent model of discounting that is more closely aligned with
psychological studies than exponential discounting.
 Discount rate
The discount rate is useful in many fields, such as finance and climate change.
 Strategies to reduce discounting
Awareness is the first step in reducing the effects of discounting. Goal visualization and
automated systems can also help.

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 8. Social Proof

Social proof is a behavioral economics principle that describes the tendency of people to follow
the actions of others, especially when they are unsure of what to do:
 Explanation
Social proof is a psychological effect that's rooted in the desire to fit in and be accepted by
others. It's also known as "informational social influence".
 Examples
People often look to others for cues on what to buy or which service to use. For example,
consumers often read online reviews to gauge a company's trustworthiness.
 Impact on marketing
Social proof is a powerful tool in online marketing. Marketers can use social proof to increase
credibility and trust by:
 Featuring testimonials
 Showcasing user-generated content
 Collaborating with influencers
 Using referral programs
 Embedding review widgets on their website
 Other examples
 Restaurants and bars often make sure there is a queue outside the entrance.
 Websites use different strategies to create a sense of group consensus.
 Social norms messages can help reduce dishonesty in insurance claims.
 Showing job seekers that a position has already attracted applicants can increase
interest.

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9. Decision Fatigues/ Ego Depletion

Decision fatigue is a phrase popularised by John Tierney, and is the tendency for peoples'
decision making to become impaired as a result of having recently taken multiple decisions.
Decision fatigue has been hypothesised to be a symptom, or a result of ego depletion.

The phenomena of decision fatigue can affect even the most rational and intelligent
individuals, as everyone can become mentally exhausted. The more decisions made throughout
the day, the harder each decision becomes for us. Eventually, the brain looks for shortcuts to
circumvent decision fatigue, leading to poor decision-making.

Decision fatigue is a fascinating phenomenon that describes how people's ability to make good
decisions deteriorates over time. It occurs when someone has to make a lot of decisions in a short
amount of time, and it's been shown to have a negative impact on decision quality. For example,
judges have been shown to give more lenient sentences at the end of the day, when they're more
likely to be suffering from decision fatigue. Similarly, shoppers are more likely to make
impulsive purchases later in the day, when they're more likely to be experiencing decision
fatigue

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