Chapter 1

Foundations of Managerial
Economics

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What is Economics?
What to produce How to produce How to distribute

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Definition, scope and functions

Microeconomics Macroeconomics Decision Sciences

Managerial Economics

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The BIG Picture

Income spent Goods demand Product Market Revenue earned R e v Goods supplied e n u Firms e

Households

Inputs supplied Income earned Factor Market

Inputs demand

Factor costs

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Objective of the Firm

Profit maximization - economic profit: total revenue minus total economic costs - economic costs are relevant costs

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Invisible Hand
Furthering selfish interest

Furthers growth of the Nation

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Problems in Managerial Economics

Classified into two broad categories: Those requiring optimal solutions - Total, Average and Marginal magnitudes Those requiring equilibrium solutions - Supply Demand Analysis

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Graphical Solution to Supply- demand Analysis

P
D

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Algebraic Solution
P = 300 Qd P = 60 + 2Qs

a = 300; b = 1; c = 60; d = 2

300 Q = 60 + 2Q
Q* = 80 P* = 220

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Total, Average, and Marginal magnitudes

Q P TR MR (=AR) 0 10 0 1 9 9 9 2 8 16 7 3 7 21 5 4 6 24 3 5 5 25 1
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Q P TR MR
6 4 24 -1 7 3 21 -3 8 2 16 - 5 9 1 9 -7

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Relation between Total, Average and Marginal Magnitudes

When Total is rising, Marginal is positive When Total is falling, Marginal is negative When Total is maximum, Marginal is zero When Average falls/rises, Marginal falls/rises at a faster rate

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Concept of Margin
Rate of Change
Derivative- Calculus

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Chapter 2

Household as a Consumer

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The decision making process of the consumer

Preference set

Constraints

Optimal decision

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Assumptions
Completeness Transitivity Non satiation

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Utility and Optimization

Utility: - reflects a rank ordering of preferences. - is a magnitude indicating the direction of preferences Optimization: - Cardinal Approach and Ordinal Approach
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Optimization The Cardinal Approach

Utility is cardinally measurable and the objective is to maximize utility The Law of Diminishing Marginal Utility Optimization Rule 1: When only one good is consumed and is available for free, consume till MUx = 0
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Optimization
Optimization Rule 2:

When only one good is consumed and is available for a price: Consume till MUx = Pricex
Optimization Rule 3:When more than one good is consumed and the goods prices are different: Consume till MUx/Px = MUy/Py = MUz/Pz
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Optimization- The Ordinal approach

Rank ordering of preferences Combinations of goods Two inputs required to arrive at optimal combination: 1. Preference set 2. Opportunity set
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Preference Set- Indifference Curves

Indifference Curve: Combination of goods that yield the same level of satisfaction. Properties of Indifference curves: - Slope downward - Convex to the origin - Non intersecting
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Shapes of Indifference curves

MRS decreasing Normal substitutes

MRS Constant=1 perfect substitutes

One fixed proportion Complements

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Opportunity Set
Defined by Budget Constraint. 6x + 3y = 60 Given Px = 6 and Py = 3 Graphically,
Y
20

-Px/Py is the Slope

10
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Consumers Equilibrium- The Optimal Combination

y
e

x At e slope of the budget line is equal to the slope of the Indifference curve.
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Consumers Equilibrium
Slope of the budget line: - Px/Py
Slope of Indifference curve: MUx/MUy Equilibrium : MUx/MUy = Px/Py or MUx/Px = MUy/Py
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Chapter 3 Comparative Statics and Demand

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Meaning of comparative statics

The analysis which enables us to arrive at new optimal decisions when underlying assumptions change

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Changes in equilibrium when prices change

Relative price changes get reflected in changes in slope of the budget line. New point of tangency between the indifference curve and the new budget line

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Changes in equilibrium
Joining all these points of tangency gives the Price Consumption Curve. (PCC)
Y
PCC

Price of X is falling.

X
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Derivation of the demand curve

Data contained in the PCC: - Optimal level of consumption of X - Optimal level of consumption of Y - Prices of X and Y Demand curve for X requires - Price of X. - Quantity consumed of X.
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Demand Curve
Every point on the PCC gives the price of X and quantity demanded/consumed of X Thus,
Px

Qx
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Shifts in and movements along a Demand Curve

Effect on demand of changes in its own price results in movement along the demand curve. Effect on demand of changes in other factors results in shifts in demand curve

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Changes in equilibrium when income changes

Income changes show up as parallel shifts of the budget line New points of tangency between indifference curves and the new budget lines

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Changes in equilibrium
Joining all these points of tangency gives the Income Consumption Curve (ICC)
Y ICC

X
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Slope of the ICC

If the goods are Superior, the ICC is upward sloping
If one of the goods is Inferior, the ICC is downward sloping

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Slope of the PCC

If the goods are normal, PCC is upward sloping If PCC is downward sloping, then one of them is a Giffen Good

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Giffen good

Income effect Price effect + Substitution effect Substitution effect is inversely related to price. Income effect can be inversely related to changes in income Inferior Good Income effect can be positively related to income-Superior good
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Giffen Good

If income effect is inverse and large enough to offset the substitution effect, then it is a Giffen Good The Demand curve for Giffen Good will have a positive slope

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Elasticity
Price Elasticity: Proportionate change in quantity demanded due to a proportionate change in price - Qx/ Px * Px/Qx - negative for normal goods - negative sign is ignored while making comparisons among normal goods
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Elasticity
Pe Greater than1 (ignoring sign): Elastic Pe Equal to 1 (ignoring sign) : Unit Elastic Pe Less than 1 ( ignoring sign): Inelastic Price Elasticity and Expenditure: - Pe less than 1 a fall in price lower exp - Pe equal to 1 a fall in price exp constant - Pe greater than 1 a fall in price higher exp
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Elasticity
Income Elasticity Qx/I * I/Qx Could be negative or positive: Negative for Inferior goods Positive for Superior goods

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Elasticity
Cross Price Elasticity: Qx/Py * Py/Qx Could be negative or positive - Negative for complements - Positive for substitutes

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Chapter 4 Demand Estimation and Forecasting

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Demand Estimation Techniques

Qualitative - consumer Surveys - Market Experiments - Consumer Clinics Quantitative - Statistical estimation Techniques - Regression

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Steps in Demand Estimation Exercise

Identification of variables Collection of Data Mathematical specification of the relationship Estimation of the parameters Using these estimates to arrive at estimates of variables

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A Simple Linear Regression Model

Y = a + BX + u Where Y is the dependent variable X is the independent variable a is the intercept ; b is the slope ; u is the error term.

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Method of Estimation
Method of Ordinary Least Square( OLS) - minimizes the sum of the squared deviations of each of the points from the mean.

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Coefficient of Determination
Regression Sum of Squares (RSS) / Total Sum of Squares (TSS) is R2 Coefficient of Determination If R2 = 1, the best fit. If R2 = 0.4, 40% of the total deviations is explained by the regression
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Graphical Representation

R2 = 1

R2 = 0

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Problems in using Regression

Multicollinearity where there is dependency amongst independent variables Identification problem Auto correlation

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Forecasting Techniques
Opinion polls and market research Expert opinion Surveys Economic indicators Projection Techniques Econometric Models

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Time Series Projection using Least Square method

How the dependent variable moves with time Yt = f (Tt , St , Ct , Rt ) where
Yt is the actual value of the data in time series Tt is the trend component at time t St is the seasonal component at time t Ct is the cyclical component at time t Rt is the random component at time t
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Chapter 5 Firm as a Producer

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Creation of a firm
To minimize Transaction costs One entity takes the responsibility to bring all the factors together required for production

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Motive behind existence of a Firm

Profits - economic Profits - total revenue minus total economic costs
Economic costs are relevant costs using the principle of opportunity costs

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Marginal Analysis
Used to arrive at the profit-maximizing output level Uses the concepts of Marginal revenue and Marginal Cost Marginal revenue is the change in total revenue due to an additional unit of output Marginal cost is the change in total cost due to an additional unit of output
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Profit-maximizing Rules
Rule- The level of output at which MR = MC Should this level of output be produced at all? - Shut Down Rule: If at the optimal level of output, Average Revenue is less than Average (economic) Cost, then, SHUT DOWN.

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Do Firms really maximize Profits?

Satisficing Theory Other Objectives: - provide good products/services to customers - a good work place for employees - responsibility to society

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Control Mechanisms
Principal Agency Cost Therefore CONTROL MECHANISMS Internal -board of Directors - ESOPs External - Takeovers

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Non- Profit Firms

No right to accumulate Profits
Operate with funds from external sources Exempt from Corporate Tax

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Public Sector Firms

Operate in areas where Private sector will not operate Involved in the provision of Public goods

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Chapter 6 Analysis of Production

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Production function
A production function is a functional specification that provides the most efficient combination of input with which a chosen target level of output can be produced It is specific to each industry and technology

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Production Function with two variable inputs

Q = f (K , L) where K is capital and L is labour

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Isoquants
Graphical representation of production function A curve drawn through the technically feasible combinations of inputs to produce a target level of output

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Map of Isoquants
K

Output 260 Output 200 Output 160 L

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Properties of Isoquants
They are downward sloping
They are convex to the origin They do not intersect

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Production function with one variable input

Total Product: Q = 30L+20L2-L3 Average Product : Q /L Marginal Product : MP = dQ/dL = 30+40LL2

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Production Elasticity
Q / X * X / Q = MPx * 1 / APx

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Three Stages of Production

Stage 1: AP is increasing, MP is increasing and Production Elasticity is > 1. Stage 2: AP and MP are decreasing and Production Elasticity is 0 < Prod.Elas < 1 Stage 3: MP and AP continue to decrease and Production Elasticity < 0.

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Returns to Scale
Increasing Returns to Scale When output increases by a proportion greater than the proportionate increase in all inputs. Decreasing returns to scale Constant returns to scale

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Cobb Douglas Production Function

Q = A L K Where, + indicates Returns to Scale If > 1, it exhibits Increasing Returns to Scale If < 1, it exhibits Decreasing Returns to Scale If = 1, it exhibits Constant Returns to Scale

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Optimal Input Levels

With one variable input: Marginal Revenue Product (MRP) = Marginal Variable Cost. MRP = MP * MR With many variable inputs: MPL / PL = MPK / PK = .

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Chapter 7 Analysis and Estimation of Costs

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Concepts of costs
Economic costs Relevant costs defined in terms opportunity costs Sunk costs Expenditures that are irrelevant for decision making during the concerned period Normal Profit this is as much a component of costs as wages, interest, etc. It is a payment for entrepreneurship

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Long-run total Cost (LRTC)

Steps to derive: - select level of output - find the point of tangency between the relevant isoquant and the isocost line - repeat the first two steps for different levels of output - the line joining all these points of tangency is the LRTC
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Short run Total Cost (SRTC)

The relevant cost is the Short-Run Variable cost Fixed costs are irrelevant in the short run The slope of the SRTC varies with the returns from the variable input

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Average and Marginal Cost Curves

The LRAC is derived from LRTC ; is Ushaped reflecting Returns to Scale SRAC is derived from SRTC; is U-shaped reflecting variable returns from the variable input in the short run Marginal Cost is derived from LRTC or SRTC; is U- shaped

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Relationship between Marginal and Average Cost

When MC is below the AC, the AC falls When MC is above the AC, the AC rises When AC is at the minimum, MC is rising MC cuts AC at the minimum of the AC

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Relationship between LRAC and SRAC

Points on the LRAC gives the lowest cost of producing a target level of output The lowest point on the SRAC gives the level of output at which the AC is lowest in the short run

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Cost Functions
Polynomial Function: - Cubic Fn: TC = a + bQ - cQ2 +dQ3 - Quadratic Fn: TC = a + bQ + cQ2 - Linear Fn: TC = a + bQ Logarithmic Function: - ln TC = a + b ln Q

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Breakeven Analysis
Qb = TFC / ( P AVC) P AVC is Contribution Quantity at which a target profit can be earned: Q = TFC + Profit Target / Contribution

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Chapter 8 The Competitive and Monopoly Models

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Optimizing rules in Competitive Model

Marginal Output Rule: MR = MC Shut-down Rule: If P (price) is less than Min AC , then SHUT DOWN

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Marginal output Rule and Supply Curve Graphical Representation

Rs/unit
B

MC
AEC (Avg Eco. Cost AR=MR=P

Every point above B on the MC curve is a point on the Short run supply curve
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Long Run (LR) Supply curve

The relevant curves are the Long run MC curve and the Long run Avg Cost curve. Derived from these two curves just as the Short run supply curve.

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Elasticity of supply
Ess = % change in quantity supplied / % change in price Flatter the supply curve , larger the elasticity

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Characteristics of a Perfectly competitive Market

Large number of sellers. Each seller is therefore a price taker Large number of buyers Homogeneous product- hence uniform price Perfect information Free entry and exit- so no supernormal profits

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Equilibrium Long run and Short run

Short run
Rs/unit SRSS LRSS LRDD SRDD Q Q

Long run

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Normative analysis of Perfect Competition

Total Surplus is maximum

SS A B DD

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Monopoly
A single firm faces the entire demand - Price Maker No role for strategy No substitutes No entry

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Pricing and Output decisions of a Monopolist

Downward sloping demand curve or AR curve Hence a falling MR curve MC=MR at E MC
E

MR

AR

Q
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Monopoly Vs Competitive Solution

Output lower and price higher in a monopoly than in competition. This is because : MR = P in Competition and MR < P in Monopoly In competition, MC =MR =P. In monopoly, MC=MR and MR < P

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Regulation of Monopoly
Regulation of prices Antitrust Policies to prevent the monopolist from exercising Monopoly Power. In India , we had the MRTP Act of 1969 We now have the competition Act 2002 Patent Policy

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Rationale behind Price Discrimination

To transfer as much as possible of the consumers surplus over to the seller

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Price Discrimination
Practice of charging different prices in different markets for the same product The seller should be a price maker Price elasticity of demand has to be different for different market segments The different market segments should be insulated

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Chapter 9 Monopolistic Competition and Oligopoly

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Features of monopolistic Competition

Large number of sellers but each seller is a Price Maker Large number of imperfect substitutes due to product differentiation Large number of uninfluencing buyers both informed and uninformed Free entry

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Equilibrium- Short run and Long run

In the Short run at MR =MC , the seller makes Super normal Profits In the Long run, Free entry squeezes out the Profit So at the Long run equilibrium, MR = MC= AC

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Features of Oligopoly
Few sellers Interdependence Intense rivalry Strategy plays a dominant role. Barriers to entry; Natural and Strategic

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Equilibrium in Oligopoly
Cournot Equilibrium Bertrand Equilibrium Stackelberg Equilibrium The kinked demand model Cartel Collusion Price Leadership
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Game Theory and Oligopoly

A Pay off Matrix:
WIPRO without remote with areas

remote without areas H remote areas 40,70 35,55 C L With remote areas Managerial Economics Oxford University Press, 2006 30,60

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A Game Tree
Rs 4000,4000
high Atlas high low high

Rs 6000,1000 Rs 1000,6000
low

Hero

low Atlas

Rs 3000,3000

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Strategies
Maximin Strategy Dominant Strategy Dominated Strategy Pure and mixed Strategy

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Different Games
Entry Game Games of imperfect and incomplete information Prisoners Dilemma Games Sequential Games Repeated Games Finitely repeated Games
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Chapter 10 Alternative Pricing Practices

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Pricing of Multiple Products

Products with interdependent demands but independent production Optimizing rule: MCx = MRx MRx = dTRx/dQx + dTRy/dQx

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Pricing of Multiple Products

Products related in production but independent in demand: Optimizing rule: 1. MC of Production = MR1 + MR2+. Eg. Petroleum Products 2. MC = MRt (Total MR) Eg. Hide and Meat- A Product Package
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Other Pricing Principles

Fully distributed Cost based pricing Incremental Cost Pricing Ramsey Pricing

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Other Pricing Principles (contd)

Transfer Pricing: - a firm with multiple divisions where each is treated as an autonomous profit centre. - where Market exists, the rule is: Transfer the product at Market Price - where external market exists, transfer at P=MC - where external market is imperfect, behave like a discriminating monopolist Managerial Economics Oxford University Press, 2006 All rights reserved

Other Pricing Principles (contd..)

Two Part Tariff: - a lump sum fixed Charge and a Variable component Peak Load Pricing: - where the product is not storable. - Where demand varies with time. - Differing price elasticities - The same facility is being used to meet all the different demands

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Chapter 11 Market for Factor Inputs

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Competitive Factor Markets

Demand for a single variable factor: MRPl = MFCl ( MPl * MR = MRPl ) Demand for several variable factors: MC = w/MPl = r/MPk Or MC/MR = w/MRPl = r/MRPk

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Economic rent
In the context of factor markets, the excess of payment over the minimum required to buy the use of the factor is economic rent. Economic Rent earned varies with supply elasticity

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Monopsony in the factor market

A single buyer of a factor Minimum Wage Law to protect labour from exploitation by monopsonist

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Factor market with Monopoly Power

A single seller of a factor

A classic example is the Labour Union

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Bilateral Monopoly
A monopolist seller meets a monopsonist buyer
Each would bargain and the price gets fixed

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Chapter 12

Long Term Investment and Risk Analysis

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Evaluation of Capital Expenditure

Large investments in assets which, once undertaken, are irreversible Revenue occurs in the future

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The Capital Budgeting Process

Generation of capital investment projects Estimation of the cash flows Evaluation of the projects Ex-post evaluation of projects

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Methods of evaluating investment projects

Payback period Average return on investment or Accounting rate of return Net Present Value Internal rate of Return

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Discounting
The process of bringing the future stream of revenues to the present Choice of the discount rate is important The discount rate should reflect the opportunity cost of capital to the firm

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Economic Cost Benefit Analysis

Used to evaluate projects where profits are not very relevant Used in situations: - with externality - where distributional impact is important - of merit goods

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Risk
A decision making situation in which the possible outcomes can vary and the probability of occurrence of each outcome is known

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Incorporation of Risk
Subjective approach Utility function approach Decision tree approach Risk adjusted discount rate approach

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Managing Risk and Uncertainty

Seek more information Diversification Hedging Insurance Controlling the operating environment Restricting use of firm-specific assets

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The Case of Depletable Resources

Cost of Production
Cost of Depletion

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Interest Rates
Interest rate is the price of funds - Prime lending rate - Commercial paper rate - Discount rate or Bank rate - T- Bill rate

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Chapter 13
Economics of Information

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Imperfect Information
Incomplete Information - where both sides to a transaction do not possess complete information Asymmetric Information - where one of the parties to a transaction has more information than the other

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Asymmetric Information (contd)

Two sources: - the characteristic (e.g. quality of a used car) - a hidden action (e.g. actions of an employee such as shirking work)

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Signalling
Ways of conveying and getting information on hidden characteristics (e.g. airlines offering various Packages)

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Adverse Selection
an outcome of asymmetric information wherein you select precisely the ones you should not (e.g. the unhealthy and weak taking up health insurance) this is due to asymmetric information on some hidden characteristics

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Responses to Adverse Selection

Market response: - the insurance industry makes medical examination compulsory, higher premiums Government Response: - making information mandatory

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Hidden Action
Characterized by: - one side of the transaction not being able to observe the action taken by the other. - The unobservable action affects the other side. - no agreement on whether the action should be taken or not. * The result of hidden Action is Moral Hazard
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Principal Agent Problem

Principal Owner of a firm Agent Employee (Manager) Conflicting objectives between the two - The above is a situation conducive to hidden Action - Incentives to managers to dissuade from hidden Action- ESOPs and other compensation packages
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Moral Hazards in Product Markets

Brand Name Reputation as Hostages

Guarantees and Warrantees

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Chapter 14 Externalities and Public goods

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Externalities
The effect of an economic activity that is not incorporated into or reflected in the market price is called an Externality Externality if negative, imposes a cost unaccounted for Externality if positive, gives rise to a benefit not accounted for

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Externalities (contd..)
Pollution is a negative externality; development of an area due to industrial units being set up is a positive externality
The result is that costs and benefits are either overestimated or underestimated

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Internalizing Externalities
Governments response: - Taxes - Regulation - Effluent Fee - Transferable Emission Permits - Recycling

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Internalizing Externalities
Markets Response - Mergers - Social Conventions - Property Rights

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Public Goods
Public goods are Non Rival Public Goods are Non Excludable The result: no reason for the consumer to reveal his/her valuation of the good or service HENCE MARKETS FAIL

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Provision of Public Goods

Government alone being responsible. Public Private Partnerships (P3s)

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Public Private Partnerships (PPP)

PPPs are contractual arrangements between a government and a private party for the provision of Assets and the delivery of services that have been traditionally provided by the public sector The central point is the sharing of decision making authority The not-so central point is the sharing of rewards and risks

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Chapter 15 Macroeconomic Aggregates

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Macro Aggregates
Aggregate output levels Aggregate Price levels Aggregate Investment levels Aggregate Consumption levels Balance of Payments

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Fundamental Identity

Agg output Factor Income Expenditure

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Measures of Aggregate Output

At Market Price At Factor Cost

* Gross Domestic Product * Gross National Product * Net Domestic Product * Net National Product * PPP Gross Domestic Product National Income NNP at Factor Cost
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Price Indices
CPI (Also called Cost of living Index)
WPI (Wholesale Price Index) GDP Deflator

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Price Indices
CPI : Weighted Average Retail Price of a specific basket of goods. WPI : Based on wholesale prices of a specific basket of goods ( different from CPIs basket both in composition and in weights). GDP Deflator: Ration of Nominal GDP to Real GDP.

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Aggregate Consumption
Keynesian Consumption function - Concept of Marginal Propensity to consume Irving Fishers Hypothesis Life-Cycle Hypothesis Duesenberrys Hypothesis Random walk Hypothesis
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Investment
Investment as a function of changes in income(Y) - The Accelerator A relationship between Investment and the stock market is Tobins Q Investment as a function of Real Interest Rate
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Inflation and Unemployment

Cost-Push
Inflation Demand- Pull

Remedy in the Short Run: Squeezing Aggregate Demand

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Phillips Curve
Inflation (Wage rate) and Unemployment are inversely related NAIRU: Non Accelerating Inflation Rate of Unemployment
w W is wage rate

Unemp rate
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Balance of Payment
Captures all transactions between any economy and the rest of the world. Current Account
Capital Account

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Balance of Payment
Items keenly watched: - ratio of current account Deficit/surplus to GDP - ratio of Capital Account surplus/deficit to GDP - extent of intervention through reserves.

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Chapter 16 Fiscal, Monetary and Exchange Rate Policies

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Business Cycles
Fluctuations in economic activity. - low level of economic activity: Recession - Peaking levels of economic activity: Boom Economic activity is measured by rate of change in GDP Policy interventions are called for to reduce the severity of fluctuations and to stabilize the economy
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Stabilization Policies
Reliance on Demand management Policies in the Short Run.

Fiscal Policies

Monetary Policies

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Fiscal Policy
Instruments: Taxes and Government Spending
These two instruments dont work through the market. Both these are reflected in the Budget.

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Monetary Policy
The central bank of a country is the sole authority.
Interest Rate is the instrument which is manipulated by changes in Money supply. Interest rate is the price of funds.

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Money Supply
Is primarily determined by the central bank.
The banking sector plays a key role through the fractional reserve system and the multiple expansion of deposits.

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Money Multiplier
Given by :
Cu /D + 1 ----------------------------Cu/D + RR/D + ER/D Where Cu is the currency, RR is Required reserves and ER is Excess Reserves.
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Exchange Rate Policies

Fixed Exchange rate Policy
Market determined Exchange rate Policy Between these two, there is a system of Managed Floats

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Stability of Exchange Rates

Depends on elasticities of imports and exports. An elastic import basket and an elastic export basket results in stable rates. An inelastic import basket and a relatively highly elastic export basket also results in stable rates. An inelastic import basket and a not so elastic export basket results in instability in exchange rates.
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Devaluation
A reduction in the value of a currency.
Devaluation is done when: - a country cannot maintain the Fixed Exchange rate due to scarcity of Reserves. - a country chooses to consciously improve trade.

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Exchange Rates
Nominal Exchange Rate: No correction for inflation. Real Exchange Rate: -Nominal rate * Foreign price level / Domestic Price level PPP (Purchasing Power Parity) rate is that rate which makes the dollar price of a commodity the same across all countries.
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Relationship between Monetary policies and Exchange rate Policies

Fixed Exchange Rate Policy: monetary Policys role is exclusively to maintain the fixed rate for which it requires reserves of foreign and domestic currencies. Flexible Exchange rate policy gives freedom to use monetary policies for other purposes.

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Chapter 17
The New Economy

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Definition
Outcome of the Information Revolution. It has 3 distinguishing characteristics: - it is leaning on intangibles - it is global - it is intensely interlinked The New Economy is thus a Network Economy.

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Information Goods
These are digitized information. Eg. Encyclopedias, Directories Characteristics: - High fixed costs but very low variable costs of reproduction. - The above results in non excludability and market failure. - Pricing is Value based (since MC is near zero)
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Network and Network Industries

Industries which provide Information goods are called Network industries. A network is a set of connections between nodes. Networks could be real or virtual. Larger the network size, more viable the production and usage.

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Networks

Network Externality: The value to each user being in the network rises at a rate much higher than the rate of increase in the size of the network.

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Old Economy Industries (OEI) Vs Network Industries

In old eco.Industries (OEI), economies of scale occur on the supply side, whereas in the Network industries, they occur on the Demand side. In OEIs, demand is downward sloping and this shifts when factors change. For network industries, demand increase as accumulated demand increases- a positive feedback chain. In OEI, scarcity gives rise to value. In Network industries, abundance gives rise to value.
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Rise and Fall of Dot-Coms

Dot-Coms emerged to deal with products and services that used the Internet. Focused on mind share(market share) to realize Network externalities.
Ignored the result of the outcome of the above- a winner takes all situation.
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Fundamental Laws and Concepts of Old Economy

Profit Maximization Economies of scale results in one or few winners. Demand estimation and elasticities are important. Cost estimation is essential.
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Internet Pricing Models

Flat rate Pricing Usage sensitive Pricing Transaction- based Pricing Priority Pricing Precedence model Smart Market Mechanism Model
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Role of Government
Public policy to facilitate adoption and adaptation. Policy to actively promote innovation.

Policy to provide education.

Policy to promote digitization.

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