Managerial Economics:An Intro

7/30/2019 Managerial Economics:An Intro

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Economics and Managerial Decision Making

The Economics of a Business

Review of Economic Terms


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Learning Objectives

Define managerial economics Relationship to microeconomics and related fields

Cite important types of decisions regarding

allocation of scarce resources Provide examples of how changes affect

companys ability to earn an acceptable return

Cite and compare the three basic economicquestions from the standpoint of a country and acompany


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Economics and Managerial

Decision Making Economicsis the study of the behavior of

human beings in producing, distributing andconsuming material goods and services in aworld of scarce resources. (McConnell, 1993)


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Decision Making Management is the discipline of organizing

and allocating a firms scarce resources toachieve its desired objectives. Involves theability to organize and administer varioustasks in pursuit of certain objectives.


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Decision Making Managerial economics is the use of

economic analysis to make business decisionsinvolving the best use (allocation) of anorganizations scarce resources.


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Decision Making

Relationship to other business disciplines Marketing: Demand, Price Elasticity

Finance: Capital Budgeting, Break-Even Analysis,

Opportunity Cost, Economic Value Added Management Science: Linear Programming,

Regression Analysis, Forecasting

Strategy: Types of Competition, Structure-Conduct-Performance Analysis

Managerial Accounting: Relevant Cost, Break-EvenAnalysis, Incremental Cost Analysis, Opportunity Cost


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Decision Making

Questions that managers must answer: What are the economic conditions in a

particular market?

Market Structure? Supply and Demand Conditions? Technology? Government Regulations? International Dimensions? Future Conditions? Macroeconomic Factors?


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Decision Making Questions that managers must answer:

Should our firm be in this business?

If so, what price and output levels achieve ourgoals?


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How can we maintain a competitive advantageover our competitors? Cost-leader?

Product Differentiation?

Market Niche?

Outsourcing, alliances, mergers,

acquisitions?

International Dimensions?


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What are the risks involved?

Risk is the chance or possibility that actualfuture outcomes will differ from thoseexpected today.


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Decision Making Types of risk

Changes in demand and supply conditions

Technological changes and the effect ofcompetition

Changes in interest rates and inflation rates

Exchange rates for companies engaged in

international trade Political risk for companies with foreign

operations


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Economics of a business refers to the keyfactors that affect the ability of a firm toearn an acceptable rate of return on itsowners investment.

The most important of these factors are competition

technology customers


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Four Stage Model of Change Stage I

The good old days

Market Dominance High Profit Margins

Cost Plus Pricing

Changes in Technology, Competition, Customers

forced into Stage II


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Four Stage Model of Change

Stage II

Cost management

Cost Cutting

Downsizing

Restructuring

Reengineering to deal with changes


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Stage III

Revenue Management

Cost cutting has limited benefit

Focus on top-line growth


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Stage IV

Revenue Plus

Grow revenues profitably


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Microeconomics is the study of individualconsumers and producers in specificmarkets. Supply and demand

Pricing of output

Production processes

Cost structure Distribution of income and output


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Macroeconomics is the study of theaggregate economy.

National Income Analysis (GDP) Unemployment

Inflation

Fiscal and Monetary policy

Trade and Financial relationships among

nations


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Scarcity is the condition in which resourcesare not available to satisfy all the needs andwants of a specified group of people.


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Resources are factors of production or inputs.

Examples:

Land

Labor

Capital

Entrepreneurship


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Opportunity cost is the amount or subjectivevalue that must be sacrificed in choosing oneactivity over the next best alternative.


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Because of scarcity, an allocation decisionmust be made. The allocation decision iscomprised of three separate choices: Whatand how many goods and services

should be produced?

Howshould these goods and services beproduced?

For whom should these goods and services beproduced?


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Economic Decisions for the Firm What: The product decision begin or stop

providing goods and/or services.

How: The hiring, staffing, procurement, andcapital budgeting decisions.

For whom: The market segmentation decision targeting the customers most likely to purchase.


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Three processes to answer what, how, andfor whom Market Process: use of supply, demand, and

material incentives Command Process: use of government or central

authority, usually indirect

Traditional Process: use of customs and

traditions


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Entrepreneurship is the willingness to takecertain risks in the pursuit of goals.

Documents

Managerial Economics:An Intro