INTRODUCTION TO BUSINESS ADMINISTRATION: ECONOMICS

(MANAGERIAL ECONOMICS, Part I)

Lecturer: Ekaterina Vladimirovna Sokolova(Public Administration Department)

E-mail: sokolova@som.pu.ru

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

Grading Policy MIB (Economics)MIB (Economics)• 70% - mid-term (or final) exam • 30% - individual in-class assignments

MITIM (Managerial Economics) 2 gradesMITIM (Managerial Economics) 2 grades1st : • 70% - mid-term (final for MIB) exam • 30% - individual in-class assignments2nd :• 70% - final exam (Winter session, Managerial Economics,

Part II)• 30% - individual in-class assignments (Managerial

Economics, Part II)Final grade = 1st *1/3 + 2nd * 2/3

Economics (Managerial Economics, Part I),Final Evaluation (Mid-term or final exam)

35 points

•for written mid-term exam (for MITIM students)

or• final exam (for MIB students)

Economics (Managerial Economics, Part I), Current Evaluation

• 15 points for 3 in-class assignments (5 points each)

– after the end of the corresponding group of topics

– each assignment includes 5 multiple choice questions • The student can receive 5 points for each group of

topics and these points will be considered in final mark

– respectively the individual assignment can give 15 points

Economics (Managerial Economics, Part I), Individual In-class Assignments

• Three individual assignments (after the end of the corresponding group of topics)

• Each assignment includes 3 tasks

– The student can receive 3 points for each group of topics and these points will be considered in final mark

• Respectively the individual assignments give 12 points for final mark

In-class Group Work

• In-class group work will take place at seminars

• Discussion of cases and answering given questions

• Doesn’t give any points for final mark

Literature• Microeconomics: Optimization, Experiments,

and Behaviour.  Burkett, John P.  2006.  Oxford Univ. Press., Source: http://site.ebrary.com/

• Microeconomics Demystified.  Depken, Craig.  2005.  The McGraw-Hill Companies., Source: http://site.ebrary.com/

• Baye M. Managerial Economics and Business Strategy [Text] / M. Baye. – McGraw-Hill, 2006. – 620 p.

Topic 1. Basics of economic analysis

• Economics – the science of making decisions in the presence of scarce resources

Managerial Economics vs. Microeconomics: Common and Different

Microeconomics Managerial Economics

How should the prices be set?

In which way were the prices set?

Computer Manufacturer (e.g.: IBM)

Similar concepts

Opportunity Cost

• Def #1: the cost of the explicit and implicit resources that are forgone when a decision is made

• Def #2: the value of the other products that the resources used in its production could have produced instead

• The opportunity cost of using a resource includes both the explicit (or accounting) cost of the resource and the implicit cost of giving up the next-best alternative use of the resource

Economic vs. Accounting Profits

• Def : Accounting profit – the total amount of money taken in from sales (total revenue, or prices times quantity sold) minus the money cost of producing goods or services

• Def : Economic profit – the difference between total revenue (TR) and total opportunity cost (TC)

Reasons for the Existence of Profit

• Innovation

• Risk

• Monopoly power

The Five Forces Framework and Industry Profitability

• Entry

• Power of input suppliers

• Industry (market) rivalry

• Substitutes and complements.

• Power of buyers

Incentives

• Def: Incentives – affect how resources are used 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

Markets

• Consumer-producer rivalry

• Consumer-consumer rivalry

• Producer-producer rivalry

• Government and the market

Managerial Interests and Sales Maximization

• Separation of ownership from control in large corporations

• Sales represent a measure of management’s success, especially since many observers focus attention on a firm’s share of the market as an indicator of its performance

Economic Optimization Process

Economic Optimization Process

• Choices involve benefits and costs

• Optimal decision – choice alternative that produces a result most consistent with managerial objectives

Profit Maximization

• Maximizing profit means maximizing the value of the firm, which is the present value of current and future profits

The Role of Constraints

Value of firm Input, legal, and other constraints

Limited by

n

tttt

i

TCTR

1 1

equals

The value of i depends on:

Values of TRt depend on:

Values of TCt depend 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

Expressing Economic Relations

• spreadsheet – table of electronically stored data• graph – visual representation of data• equation – analytical expression of functional

relationship

• dependent variable – Y variable determined by X values

• independent variable – X variable determined separately from the Y variable

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

Total, Average, and Marginal Relations (2)

Units of output, Q

Total profits, Marginal profits,

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

Graphing Total, Marginal, and Average Relations

• Marginal profit is the slope of the total profit curve

• Total profit is maximized when the marginal profit equals zero

• Average profit rises (falls) when marginal profit is greater (less) than average profit

Marginal Analysis in Decision Making

• Finding maximums or minimums

• Distinguishing maximums from minimums

• Maximizing the difference between two functions

Multivariate Optimization

• The marginal effect of each 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

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 resulting from a decision– E.g.: Incremental profit is the profit gain or loss associated

with a given decision