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Managerial Economics: EconomicTools for Todays Decision Makers 5/eBy Paul Keat and Philip Young

ChapterIntroduction

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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young

Introduction

Economics and Managerial Decision

Making

The Economics of a Business

Review of Economic Terms

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Learning Objectives

Define managerial economics

Relationship to microeconomics and related fields

Cite important types of decisions regardingallocation of scarce resources

Provide examples of how changes affectcompanys ability to earn an acceptable return

Cite and compare the three basic economicquestions from the standpoint of a country and acompany

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Economics and Managerial

Decision Making

Economicsis the study of the

behavior of human beings in

producing, distributing and consuming

material goods and services in a world

of scarce resources. (McConnell,

1993)

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Decision Making

Managementis the discipline of

organizing and allocating a firms

scarce resources to achieve its desired

objectives. Involves the ability to

organize and administer various tasks

in pursuit of certain objectives.

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Decision Making

Managerial economicsis the use of

economic analysis to make business

decisions involving the best use

(allocation) of an organizations scarce

resources.

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Decision Making

Relationship to other business disciplines

Marketing: Demand, Price Elasticity

Finance: Capital Budgeting, Break-Even Analysis,Opportunity Cost, Economic Value Added

Management Science: Linear Programming,Regression Analysis, Forecasting

Strategy: Types of Competition, Structure-Conduct-

Performance Analysis Managerial Accounting: Relevant Cost, Break-Even

Analysis, Incremental Cost Analysis, Opportunity Cost

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Decision Making

Questions that managers must answer: What are the economic conditions in a

particular market? Market Structure?

Supply and Demand Conditions?

Technology?

Government Regulations?

International Dimensions? Future Conditions?

Macroeconomic Factors?

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Decision Making

Questions that managers must answer:

Should our firm be in this business?

If so, what price and output levels

achieve our goals?

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Decision Making


How can we maintain a competitive advantage

over our competitors? Cost-leader?

Product Differentiation?

Market Niche?

Outsourcing, alliances, mergers, acquisitions?

International Dimensions?

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Decision Making


What are the risks involved?

Riskis the chance or possibility that

actual future outcomes will differ from

those expected today.

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Decision Making

Types of risk

Changes in demand and supply conditions

Technological changes and the effect ofcompetition

Changes in interest rates and inflation rates

Exchange rates for companies engaged ininternational trade

Political risk for companies with foreignoperations

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Economics of a business refers to the keyfactors that affect the ability of a firm to

earn an acceptable rate of return on itsowners investment.

The most important of these factors are

competition

technology

customers

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Four Stage Model of Change

Stage I

The good old days

Market Dominance

High Profit Margins

Cost Plus Pricing Changes in Technology, Competition,

Customers forced into Stage II

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Stage II

Cost management

Cost Cutting

Downsizing

Restructuring

Reengineering to deal with changes

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Stage III

Revenue Management

Cost cutting has limited benefit

Focus on top-line growth

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Stage IV

Revenue Plus

Grow revenues profitably

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Microeconomicsis the study of individualconsumers and producers in specific

markets. Supply and demand

Pricing of output

Production processes

Cost structure

Distribution of income and output

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Macroeconomicsis the study of the

aggregate economy.

National Income Analysis (GDP)

Unemployment

Inflation

Fiscal and Monetary policy

Trade and Financial relationships among

nations

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Scarcityis the condition in which

resources are not available to satisfy all

the needs and wants of a specified

group of people.

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Resources are factors of production or

inputs.

Examples:

Land

Labor

Capital

Entrepreneurship

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Opportunity costis the amount or

subjective value that must be sacrificed

in choosing one activity over the next

best alternative.

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Because of scarcity, an allocation decisionmust be made. The allocation decision is

comprised of three separate choices: Whatand how many goods and services should

be produced?

Howshould these goods and services be

produced? For whomshould these goods and services be

produced?

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Economic Decisions for the Firm

What: The product decisionbegin or

stop providing goods and/or services. How: The hiring, staffing, procurement,

and capital budgeting decisions.

For whom: The market segmentationdecisiontargeting the customers mostlikely to purchase.

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Three processesto answer what, how,and for whom

Market Process: use of supply, demand,and material incentives

Command Process: use of government

or central authority, usually indirect Traditional Process: use of customs and

traditions

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Entrepreneurshipis the willingness

to take certain risks in the pursuit of

goals.

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