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.
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 welldefined 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 Speed of Adjustment Sunk Costs Economies of Scale Entry Power of Input Suppliers Network Effects Reputation Switching Costs Government Restraints Power of Buyers Supplier Concentration Price/Productivity of Alternative Inputs Relationship-Specific Investments Supplier Switching Costs Government Restraints Sustainable Industry Profits Industry Rivalry Concentration Price, Quantity, Quality, or Service Competition Degree of Differentiation Switching Costs Timing of Decisions Information Government Restraints Buyer Concentration Price/Value of Substitute Products or Services Relationship-Specific Investments Customer Switching Costs Government Restraints Substitutes & Complements Price/Value of Surrogate Products or Services Price/Value of Complementary Products or Services Network Effects 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 Consumer-Consumer Rivalry Scarcity of goods reduces consumers’ negotiating power as they compete for the right to those goods Producer-Producer Rivalry Consumers attempt to locate low prices, while producers attempt to charge high prices 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 ... 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...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... Basic Managerial Question: How much of the control variable should be used to maximize net benefits? 1-1 0 Net Benefits Net Benefits = Total Benefits - Total Costs Profits = Revenue - Costs 1-1 1