LECTURE ONEIMBA NCCU

Managerial Economics

Lecturer: Jack Wu

INTRODUCTION TO INTRODUCTION TO MANAGERIAL ECONOMICSMANAGERIAL ECONOMICS

CASE: BOEING AND AIRBUS Airbus: Until 2001, established under French

law as a “Groupe d’Intérêt Economique” Boeing: Listed company April 2004: Boeing launches 787 December 2004: Airbus launches A350

QUESTIONS OF MANAGERIAL ECONOMICS RELATED TO THE CASE

Why did Airbus corporatize in 2001? What are benefits from corporatization?

Why did Airbus Chief Commercial Officer John Leahy remark that A350 would “put a hole in Boeing’s Christmas stocking”?

How should Boeing respond?

HOW SHOULD BOEING RESPOND?

Should Boeing proceed with its plan to develop the Dreamliner or should it alter its development plans?

Should Boeing respond by changing its pricing for its new jet??

How much would development and manufacturer cost, and how do these costs depend on sales volume?

Did Airbus respond correctly to Boeing’s Dreamliner?

MANAGERIAL ECONOMICS

Managerial economics: Science of directing scarce resources to manage more effectively

resources – financial, human, physical management of customers, suppliers,

competitors, internal organization organizations – business, nonprofit,

household

APPLICATION OF MANAGERIAL ECONOMICS

Boeing has limited resources. Boeing managers seek to maximize the

financial return from these limited resources. They should apply managerial economics to

develop pricing and R&D strategies, design their organizations, and so on.

The same is true of Airbus.

NEW ECONOMY: INTERNET

Managerial Economics also applies to the new economy.

Example: In pricing, Airlines use online auctions to segment their market between business and leisure travelers.

Example: In competitive strategy, Google competes fiercely with Yahoo.

OLD/NEW ECONOMY

Differences between “New” and “Old” economy:

_ role of network effects in demand **network effects – benefit/cost depends on

total number of other users example: Internt _ importance of economies of scale and scope example: Information in Yahoo is scalable

SCOPE OF MANAGERIAL ECONOMICS

Managerial econ is based on microeconomics.

Microeconomics Microeconomics is the study of how individual

households and firms make decisions and how they interact with one another in markets.

Macroeconomics Macroeconomics is the study of the economy as

a whole.

EXAMPLE: INCREASE IN OIL PRICE

Micro effect: vehicle users, electronic power generators

Macro effect: inflation, unemployment

METHODOLOGY

economic model – concise description of behavior and outcomes

marginal vis-à-vis average stock vis-à-vis flow other things equal

METHODOLOGY

Timing static model – single point in time dynamic model – focus on sequence of actions

and payments

TIMING

Discount future values to be comparable with present values

If discount rate = 10%, $1 next year worth 1/1.10 = 91 cents now $1 two years worth about 83 cents now

TIMING

Net present value: sum of discounted values of inflows and outflows over time

Example: Month 1: gain of $3 million Months 2 and 3: loss of $2 million Net present value:

million 94.0$]01.1[

2$

]01.1[

2$3$

2

ORGANIZATION

Vertical boundaries – closer to or further from end user

Samsung Electronics – vertical boundaries longer than Intel – specializes in semiconductors (upstream) Motorola – specializes in mobile phones

(downstream)

ORGANIZATION

Horizontal boundaries – scale and scope of activities

Samsung Electronics – horizontal boundaries broader than LG.Philips LCD – specializes in LCD Motorola – specializes in mobile phones

ANOTHER EXAMPLE OF VERTICAL BOUNDARIES: INTERNET

vertical chain: provision of content, internet access, telephone or cable service

Case: America Online merged with Time Warner => become a provider of entire vertical chain

Case: Google provides internet content, but neither telephone or cable service

ANOTHER EXAMPLE OF HORIZONTAL BOUNDARIES: SALE OF PERSONAL COMPUTER Scale: the rate of production Scope: the range of different items produced In terms of scale: HP and Lenovo have wider

horizontal boundaries than small businesses producing generic machines.

In terms of scope: HP has wider horizontal boundaries than Lenovo

MARKET

Market: Buyers and sellers communicate with one another for voluntary exchange

market need not be physical industry -- businesses engaged in the

production or delivery of the same or similar items

MARKET: CONTINUED

Competitive Markets Market Power Imperfect Markets

COMPETITIVE MARKET

Benchmark for managerial economics Extremely competitive market

many buyers and many sellers no room for managerial strategizing

Achieves economic efficiency

COMPETITIVE MARKET

Model: demand supply market equilibrium

MARKET POWER

Definition – ability of a buyer or seller to influence market conditions

Seller with market power must manage costs pricing advertising expenditure R&D expenditure strategy toward competitors

IMPERFECT MARKET

Definition: where one party directly conveys a benefit or cost to

others, or one party has better information than others

GLOBALIZATION: WHY?

Growth of cross-border trade and investment falling trade barriers falling financial barriers falling communications

costs

GLOBALIZATION: TRADE SYSTEM

World Trade Organization Regional free trade areas

European Union North American Free Trade Agreement ASEAN ASEAN-China, ASEAN-India

GLOBALIZATION: OUTSOURCING

Outsourcing: the purchase of services or suppliers from external sources.

U.S. financial services business outsource customer service to contractors in the Philippines and India

GLOBALIZATION: E-COMMERCE

Extends geographical reach –Google, eBay, Yahoo, Amazon

Limitations payments system trade barriers shipment costs