INTRODUCTION TO BUSINESS ADMINISTRATION ECONOMICS

8/7/2019 INTRODUCTION TO BUSINESS ADMINISTRATION ECONOMICS

1/26

INTRODUCTION TO BUSINESS

ADMINISTRATION: ECONOMICS


2/26

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


3/26

Grading Policy

75% - final exam (30 points)

25% - individual in-class assignments (10

points)


4/26

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


5/26

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


6/26

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/


7/26

Topic 1.

Basics of economic analysis

Economics the science of making

decisions in the presence ofscarceresources


8/26

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


9/26

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


10/26

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)


11/26

Reasons for the Existence of Profit

Innovation

Risk

Monopoly power


12/26

The Five Forces Framework and

Industry Profitability

Entry

Power of input suppliers

Industry (market) rivalry

Substitutes and complements.

Power of buyers


13/26

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


14/26

Markets

Consumer-producer rivalry

Consumer-consumer rivalry

Producer-producer rivalry

Government and the market


15/26

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


16/26

Economic Optimization Process


17/26

Economic Optimization Process

Choices involve benefits and costs

Optimal decision choice alternative that produces aresult most consistent with managerial objectives


18/26

Profit Maximization

Maximizing profit means maximizing the value of the

firm, which is the present value of current and futureprofits


19/26

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


20/26

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


21/26

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


22/26

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


23/26

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


24/26

Marginal Analysis in Decision Making

Finding maximums or minimums

Distinguishing maximums from minimums

Maximizing the difference between two functions


25/26

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


26/26

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

Documents

INTRODUCTION TO BUSINESS ADMINISTRATION ECONOMICS