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8/7/2019 INTRODUCTION TO BUSINESS ADMINISTRATION ECONOMICS
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INTRODUCTION TO BUSINESS
ADMINISTRATION: ECONOMICS
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Course Structure
(Economics or Managerial Economics, Part I) Topic 1. Basics of economic analysis
Topic 2. Demand and supply Topic 2.1. Individual consumer demand
Topic 2.2. Market demand and supply
Topic 3. Production analysis and cost analysis Topic 3.1. Production policy
Topic 3.2. Theory of cost
Topic 4. Market structure analysis Topic 4.1. Perfect competition and monopoly
Topic 4.2. Monopolistic competition and oligopoly
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Grading Policy
75% - final exam (30 points)
25% - individual in-class assignments (10
points)
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Individual In-class Assignments
Two individual assignments (after the end of thecorresponding group of topics)
Each assignment includes 5 multiple choicequestions
The student can receive 5 points for each group of
topics and these pointsw
ill be considered in final mark
Respectively the individual assignments give 10points for final mark
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Schedule of Classes
September, 2
September, 8
September, 16 in-class#1
September, 22
September, 24 in-class#2
September, 30, 10-45 a.m. test
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Literature
Baye M. Managerial Economics andBusinessStrategy [Text] / M. Baye. McGraw-Hill,2006. 620 p.
Microeconomics: Optimization, Experiments,
andBehaviour. Burkett, JohnP. 2006. Oxford Univ. Press., Source:http://site.ebrary.com/
Microeconomics Demystified. Depken,Craig. 2005. The McGraw-Hill Companies.,Source: http://site.ebrary.com/
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Topic 1.
Basics of economic analysis
Economics the science of making
decisions in the presence ofscarceresources
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Managerial Economics vs. Microeconomics:
Common and Different
Microeconomics Managerial Economics
How shouldthe prices
be set?
In which way
were the prices
set?
ComputerManufacturer (e.g.: IBM)
Similar concepts
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Opportunity Cost
Def #1: the cost of the explicit and implicit resourcesthat are forgone when a decision is made
Def #2: the value of the other products that theresources used in its production could have producedinstead
The opportunity cost of using a resource includesboth the explicit(or accounting) cost of the resourceand the implicitcost of giving up the next-bestalternative use of the resource
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Economic vs. Accounting Profits
Def : Accounting profit the total amount of moneytaken in from sales (total revenue, or prices times
quantity sold) minus the money cost of producinggoods or services
Def : Economic profit the difference between totalrevenue (TR) and total opportunity cost (TC)
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Reasons for the Existence of Profit
Innovation
Risk
Monopoly power
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The Five Forces Framework and
Industry Profitability
Entry
Power of input suppliers
Industry (market) rivalry
Substitutes and complements.
Power of buyers
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Incentives
Def: Incentives affect how resources areused and how hard employees work
E.g.: A manager should be doing a good job
mistake
But!: the effect of a per hour salary for workers to
increase output
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Markets
Consumer-producer rivalry
Consumer-consumer rivalry
Producer-producer rivalry
Government and the market
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Managerial Interests and Sales
Maximization
Separation of ownership from control in largecorporations
Sales represent a measure of managementssuccess, especially since many observers focusattention on a firms share of the market as anindicator of its performance
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Economic Optimization Process
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Economic Optimization Process
Choices involve benefits and costs
Optimal decision choice alternative that produces aresult most consistent with managerial objectives
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Profit Maximization
Maximizing profit means maximizing the value of the
firm, which is the present value of current and futureprofits
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The Role of Constraints
Value of firmInput, legal, and
other constraints
Limited by
!
n
t
t
tt
i
TCTR
1 1
equals
The value ofi
depends on:
Values ofTRtdepend on:
Values ofTCtdepend on:
1. Riskiness of firm
2. Conditions in
capital market
1. Demand and forecasting
2. Pricing
3. New product developing
1. Production techniques
2. Cost functions
3. Process development
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Expressing Economic Relations
spreadsheet table of electronically stored data
graph visual representation of data
equation
analytical expression of functionalrelationship
dependent variable Y variable determined by Xvalues
independent variable X variable determinedseparately from the Y variable
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Total, Average, and Marginal Relations
(1)
Marginal change in the dependent variable caused
by a 1-unit change in an independent variable
Marginal revenue
Marginal cost
Marginal profit
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Total, Average, and Marginal Relations
(2)Units ofoutput,
Q
Total profits,T Marginal profits,
(T
Average
profits,
0 0 0 -
1 19 19 19
2 52 33 26
3 93 41 31
4 136 43 34
5 175 39 35
6 210 35 35
7 217 7 31
8 208 -9 26
T
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Graphing Total, Marginal, and Average
Relations
Marginal profit is the slope of the total profit curve
Total profit is maximized when the marginal profitequals zero
Average profit rises (falls) when marginal profit isgreater(less) than average profit
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Marginal Analysis in Decision Making
Finding maximums or minimums
Distinguishing maximums from minimums
Maximizing the difference between two functions
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Multivariate Optimization
The marginal effect ofeach independent variable on
the dependent variable
holding constant the effect of all other independent variables
Partial derivatives
The unchanged variables are treated as constants in the
differentiation process
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Incremental Concept in Economic
Analysis Marginal relations measure only the effect associated
with unitary changes in variables
The incremental concept is often used as the
practical equivalent of marginal analysis
Def: Incremental change is the total change resultingfrom a decision
E.g.: Incremental profit is the profit gain or loss associated
with a given decision
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