Managerial economics chapter 1

Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall.

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Chapter 1

Introduction


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Overview

Economics and managerial decision making

Economics of a business

Review of economic terms


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Learning objectives define managerial economics

cite important types of resource allocation decisions

illustrate how economic changes affect a illustrate how economic changes affect a firm’s ability to earn an acceptable returnfirm’s ability to earn an acceptable return

apply to an individual firm the three basic apply to an individual firm the three basic questions faced by a countryquestions faced by a country


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Economics

The study of the behavior of humanbeings in producing, distributing andconsuming material goods andservices in a world of scarceresources


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Management

The science of organizing and allocating afirm’s scarce resources to achieve itsdesired objectives


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Managerial economics

The use of economic analysis to makebusiness decisions involving the best use(allocation) of an organization’s scarceresources


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Economics and managerial decision making Relationship to other business disciplines

Marketing: demand, price elasticity

Finance: capital budgeting, breakevenanalysis, opportunity cost, value added

Management science: linearprogramming, regression analysis,forecasting


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Economics and managerial decision making Relationship to other business disciplines

Strategy: types of competition,structure-conduct-performanceanalysis

Managerial accounting: relevantcost, breakeven analysis, incrementalcost analysis, opportunity cost


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Economics and managerial decision making Questions that managers must answer:

What are the economic conditions in our particular market?

market structure? supply and demand? technology?


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What are the economic conditions in our particular market?

government regulations? international dimensions? future conditions? macroeconomic factors?


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Should our firm be in this business? if so, at what price? and at what output level?


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How can we maintain a competitive advantage over other firms?

cost-leader? product differentiation? market niche? outsourcing, alliances, mergers? international perspective?


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What are the risks involved? shifts in demand/supply conditions? technological changes? the effect of competition? changing interest rates and inflation

rates?


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What are the risks involved? exchange rates (for companies in

international trade)? political risk (for firms with foreign

operations)?

Risk is the chance that actual future outcomes will differ from those expected


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Economics of a business The economics of a business refers to

the key factors that affect the firm’s ability to earn an acceptable rate of return on its owners’ investment

The most important of these factors are competition technology customers


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Economics of a business Change: the four-stage model

Stage I (the ‘good old days’) market dominance high profit margin cost plus pricing

… changes in technology, competition, customers force firm into Stage II ..


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Stage II (crisis) cost management downsizing restructuring

… ‘re-engineering’ to deal with changes and move firm into Stage III ..


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Stage III (reform) revenue management cost cutting has limited benefit

… focus on ‘top-line’ growth ..


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Stage IV (recovery) revenue plus

… revenue grows profitably


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Economics of a business Example: Avon

well established company, in stage I until late 1970s found itself in Stage II during 1980s since mid 1990s, entered stage III expanded into emerging markets and updated its image


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Economics of a business Example: Sears, Kmart

Wal-Mart effect Sears pushed down to number three in late 1980s … repositioned itself as a clothing store Kmart filed for bankruptcy in 2002 … plan to acquire Sears


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Economics of a business Example: Kodak

struggled to transition from chemical-based film to digital imaging responded by developing strong cash flows in new product range


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Review of economic terms Microeconomics is the study of individual

consumers and producers in specific markets, especially:

supply and demand pricing of output production process cost structure distribution of income


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Review of economic terms Macroeconomics is the study of the

aggregate economy, especially: national output (GDP) unemployment inflation fiscal and monetary policies trade and finance among nations


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Review of economic terms Resources are inputs (factors) of

production, notably: land labor capital entrepreneurship


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Review of economic terms Scarcity is the condition in which

resources are not available to satisfy all the needs and wants of a specified group of people

Opportunity cost is the amount (or subjective value) that must be sacrificed in choosing one activity over the next best alternative


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Review of economic terms Allocation decisions must be made

because of scarcity. Three choices:

What should be produced?

How should it be produced?

For whom should be produced?


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Review of economic terms Economic decisions of the Firm

What - begin or stop providing goods/services (production)How - hiring, staffing, capital budgeting (resourcing)For whom – target the customers most likely to purchase (marketing)


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Review of economic terms

Entrepreneurship is the willingness to take certain risks in the pursuit of goals

Management is the ability to organize resources and administer tasks to achieve objectives


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Global application

Example: Western Union

began over 100 years ago huge changes in technology to survive, the company branched out


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Global application

Example: VNU

Dutch publishing company transformed itself into a global provider of marketing and media information

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Managerial economics chapter 1