Lecture Managerial economics - Chapter 1: The Fundamentals of managerial economics

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Lecture Managerial economics - Chapter 9 introduction the Fundamentals of managerial economics. This chapter provides many useful insights into every facet of the business and nonbusiness world. Inviting you to refer.

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Nội dung Text: Lecture Managerial economics - Chapter 1: The Fundamentals of managerial economics

Managerial Economics Chapter 1: The Fundamentals of Managerial Economics 1-1
Introduction  Why should I Study economics?  Managerial Economics provides many useful insights into every facet of the business and nonbusiness world. 1-2
Managerial Economics  Manager  A person who directs resources and design incentive schemes to achieve a stated goal. (A manager plays many other roles, such as leadership, identifying problems and solving problems…but these are not the focus of this course.)  Economics  The science of making decisions in the presence of scarce resources.  Managerial Economics  The study of how a manager may achieve a stated goal within a given set of resource constraints. 1-3
Identify Goals and Constraints  Sound decision making involves having well- defined goals: e.g. what to maximize or minimize  Leads to making the “right” decisions.  In striving to achieve a goal, we often face constraints.  Constraints are a result of scarcity. 1-4
Opportunity Cost  Accounting Costs  The explicit costs of the resources needed to produce goods or services.  Reported on the firm’s income statement.  Opportunity Cost  The cost of the explicit and implicit resources that are foregone when a decision is made.  Economic Profits  Total revenue minus total opportunity cost. 1-5
Profits as a Signal  Profits signal to resource holders where resources are most highly valued by society.  Resources will flow into industries that are most highly valued by society. 1-6
The Five Forces Framework Entry Costs Entry Network Effects Speed of Adjustment Reputation Sunk Costs Switching Costs Economies of Scale Government Restraints Power of Power of Input Suppliers Buyers Supplier Concentration Buyer Concentration Price/Productivity of Sustainable Price/Value of Substitute Alternative Inputs Products or Services Relationship-Specific Industry Relationship-Specific Investments Profits Investments Supplier Switching Costs Customer Switching Costs Government Restraints Government Restraints Industry Rivalry Substitutes & Complements Concentration Price/Value of Surrogate Products Network Effects Switching Costs Price, Quantity, Quality, or Timing of Decisions or Services Government Service Competition Price/Value of Complementary Restraints Information Degree of Differentiation Products or Services Government Restraints 1-7
Understanding Firms’ Incentives  Incentives play an important role within the firm.  Incentives determine:  How resources are utilized.  How hard individuals work.  Managers must understand the role incentives play in the organization.  Constructing proper incentives will enhance productivity and profitability. 1-8
Market Interactions  Consumer-Producer Rivalry  Consumers attempt to locate low prices, while producers attempt to charge high prices.  Consumer-Consumer Rivalry  Scarcity of goods reduces consumers’ negotiating power as they compete for the right to those goods.  Producer-Producer Rivalry  Scarcity of consumers causes producers to compete with one another for the right to service customers.  The Role of Government  Disciplines the market process. 1-9
Marginal (Incremental) Analysis  Control/choice Variable Examples: – Output – Price – Product Quality – Advertising – R&D  Basic Managerial Question: How much of the control variable should be used to maximize net benefits? 1-10
Net Benefits  Net Benefits = Total Benefits - Total Costs  Profits = Revenue - Costs 1-11
Marginal Benefit (MB)  Change in total benefits arising from a change in the control variable, Q: B MB  Q  Slope (calculus: derivative) of the total benefit curve. 1-12
Marginal Principle  To maximize net benefits, the managerial control variable should be increased up to the point where MB = MC.  MB > MC means the next unit of the control variable increases benefits more than it increases costs.  MB < MC means the next unit of the control variable increases costs more than it increased benefits. 1-13
Conclusion  Make sure you include all costs and benefits when making decisions (opportunity cost).  When decisions span time, make sure you are comparing apples to apples (PV analysis).  Optimal economic decisions are made at the margin (marginal analysis). 1-14