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ECNE610 - MANAGERIAL ECONOMICS

Lecture 1. Introduction and Overview of Managerial Economics

• Introduction (Me and You)-15 minutes (5.30pm-5.45pm)• Overview of the Course – 20 minutes (5.45pm-6.05pm)

– Objectives– Learning methods– Assessment – Course materials– Recommendations

• Break (Salatul Magrib & Refreshment) - 20 minutes• Attendance re-checking - 5 minutes• Basic Terms and Concepts of Economics– 105 Minutes

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LESSON PLANLESSON PLAN

• Me:– Personal– Education– Professional

• Now you:– Background (personal , professional)– Career goals– What do you want from this course?

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INTRODUCTIONINTRODUCTION

Graduate certificate in Learning and Teaching (Higher Education) Swinburne University of Technology, Melbourne,

Australia Ph.D in Economics- 2003

National University of Malaysia Master in Economics- 1999 (by research)

National University of Malaysia M. S.S in Economics- 1996

Chittagong University, Bangladesh B.S.S in Economics (Hons.)

Chittagong University, Bangladesh.

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My BackgroundMy Background- Education- Education

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My BackgroundMy Background- Work- Work Lecturer, Faculty of Business and Enterprise,

Swinburne University of Technology, Australia (June 2010 to January 2014).

Research Officer, College of Business, RMIT University, Melbourne, Australia (January 2008 to June 2010).

Lecturer, Faculty of Business Administration, Universiti Tun Abdul Razak, Kuala Lumpur, Malaysia (January 2004 to December 2007).

Research Assistant, National University of Malaysia and International Islamic University of Malaysia.

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Course Overview-Course Overview-ObjectivesObjectives Learn about economic principles and theories, and

how these principles and theories are applied in managing organizational resources.

Understand the changing economic environment in the new and global economy.

Comprehend the changing role of government in managing economic growth and stability in the new and global economy.

Appreciate the structure of markets corresponding to the emerging role of information and knowledge in the new economy.

How to apply managerial economics in action. Develop analytical and problem solving skills.

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Course Overview-Course Overview-Learning Methods Learning Methods

• Lectures (interactive)– Group work– Group discussion Case(s)– Relevant video(s)• Text Book – Paul G. Keat and Philip K.Y.Young, Managerial Economics- Economic tools for today decision makers, 6th edition, available at Book Store

•Other Referenceshttp://www.kau.edu.sa/DRS-0061123.aspx

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Course Overview-Course Overview-AssessmentAssessment

Individual and Group assessments

Class participation, group discussion, and presentation.

Individual 25% Ongoing

Mid-term exam Individual 20% 3rd April 2014

Final exam Individual 40% 15th May 2014

Project paper Group 15% 20th May 2014

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Lesson ObjectivesLesson Objectives To learn aboutThe key tools and terms of economics that is essential to know to understand economics clearly.

Explain the two big questions of economics.

Explain the key ideas that define the economic way of thinking.

Economics and managerial decision making.

Economics of a business.

Explain how economists go about their work as social scientists and policy advisers.

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Key Tools & Terms of EconomicsKey Tools & Terms of Economics

ECONOMICS It is the social science concern. It is a study of how people use their scarce resources to satisfy their unlimited wants.

ORThe study of the behavior of human beings in producing, distributing and consuming material goods and services in a world of scarce resources.

It is categorized mainly into two parts such as Macroeconomics and Microeconomics

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Key Tools & Terms of EconomicsKey Tools & Terms of Economics

MICROECONOMICS•Microeconomics is the study that deals with an individual industry, firm or household. For example, talk about the price of Al Baik. It means it talk about individual decision maker in specific markets, especially:

osupply and demandopricing of outputoproduction processocost structureodistribution of income.

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Key Tools & Terms of EconomicsKey Tools & Terms of Economics

MACROECONOMICS:

It is a study that examine the economy as a whole. It means that it is concerned with the overall performance of the economy. Such as it does not discuss about the price of Al Baik but about the average price of all goods and services produced in the economy. Especially talk about:

onational output (GDP)ounemploymentoinflationofiscal and monetary policiesotrade and finance among nations

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Key Tools & Terms of Key Tools & Terms of EconomicsEconomics

MANAGERIAL ECONOMICSThe use of economic analysis to make business decisions involving the best use (allocation) of an organization’s scarce resources.ECONOMIC PROBLEMBasic economic problem is wants are virtually unlimited while the resources available to satisfy these wants are scarce.

SCARCITYLack of enough resources to satisfy all the needs and wants of a specified group of people. Since resources are scarce, it follows that the goods and services we produce must also be limited.

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Key Tools & Terms of Key Tools & Terms of EconomicsEconomics

CHOICEDue to scarcity, we can’t have all that we want. We must decide what we will have, and what we must forgo. That is why we make choices.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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Key Tools & Terms of Key Tools & Terms of EconomicsEconomics

TWO BIG ECONOMIC QUESTIONS

Q1. How do choices end up determining allocation decisions in scarcity? i.e how to make three choices below?:

What should be produced?How should it be produced?

For whom should be produced?

Q2. When do choices made in the pursuit of self-interest ?

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Key Tools & Terms of Key Tools & Terms of EconomicsEconomics

What?The things that satisfy human wants that means Goods and services needs to produce.–In 2011, Agriculture accounts for 2% of total Saudi Arabian production, Industry goods for 69.1%, and Services for 28.9% (Source:  Central Intelligence Agency (CIA) World Factbook 2012).

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Key Tools & Terms of Key Tools & Terms of EconomicsEconomics

How?Goods and services are produced by using productive resources that economists call factors of production.Factors of production are grouped into four categories:

Land Labor Capital Entrepreneurial Ability

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Key Tools & Terms of Key Tools & Terms of EconomicsEconomics

LAND

It does not refer only a plots of ground but also includes all other natural resources such as crude oil, water, air, and minerals etc.

LABOR

It is not simply the number of human bodies but it refers to the work time and work effort that people devote to producing goods and services. It categorized into two parts– physical and mental (9.56 millions out of 26.53 millions in 2010 where about 80% of the labor force is non-national - Source: CIA World Factbook 2012).

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Key Tools & Terms of Key Tools & Terms of EconomicsEconomics

CAPITAL In economics the term capital refers to final goods produced for use in further production. It also categorized into two parts. These are:

– Physical capital: factories, machines, tools, buildings, airports, highways and other manufactured items employed to produce goods and services.

– Human capital: consists of the knowledge and skill people acquire to enhance their labor productivity.

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Key Tools & Terms of Key Tools & Terms of EconomicsEconomics

ENTREPRENEURIAL ABILITY

– Special kind of human skill

– Talent required to dream up a new product or find a better way to produce an existing one.

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Key Tools & Terms of Key Tools & Terms of EconomicsEconomics

PAYMENTS FOR RESOURCESWages payment for use of labor

Interest payment for the use of capital

Rent payment for use of land

Profit reward for entrepreneur’s effort

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Key Tools & Terms of Key Tools & Terms of EconomicsEconomics

FOR WHOM?Who gets the goods and services depends on the incomes that people earn i.e. the customers most likely to purchase.

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Key Tools & Terms of Key Tools & Terms of EconomicsEconomics

When is the Pursuit of Self-Interest?Economics assumes that human behavior reflects “rational self-interest”. It means that people always try to make the best choices they can, given the available information. Moreover, Individuals try to maximize the expected benefit achieved with a given cost or minimize the expected cost of achieving a given benefit. Peoples allocate their time, energy, and money to maximize it.

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Key Tools & Terms of Key Tools & Terms of EconomicsEconomics

GOODS AND SERVICESGoods

- Tangible items- Require scarce resources- Satisfy human wants

Services- Intangible items- Require scarce resources- Satisfy human wants

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Economics and Managerial Economics and Managerial Decision MakingDecision Making

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

market in which we are or could be competing?omarket structure?osupply and demand?otechnology?ogovernment regulations?o international dimensions?o future conditions?omacroeconomic factors?

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Economics and Managerial Economics and Managerial Decision MakingDecision Making

Questions that managers must answer:

Should our firm be in this business?• if so, what price and output levels should we set in order to maximize our economic profit or minimize our losses in the short run?

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Economics and Managerial Economics and Managerial Decision MakingDecision Making

Questions that managers must answer:

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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Economics and Managerial Economics and Managerial Decision MakingDecision Making

Questions that managers must answer:What are the risks involved?o Change in demand/supply conditions.o Technological changes and the effect of

competition.o Change in interest rates and inflation rates.o Exchange rates changes for companies in

international trade.o Political risk for firms with foreign operations.

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Economics of a BusinessEconomics 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 BusinessEconomics of a Business• The four-stage model

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

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

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Economics of a BusinessEconomics of a Business• The four-stage model

–Stage II (crisis)• cost management• downsizing• restructuring• Reengineering

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Economics of a BusinessEconomics of a Business• The four-stage model

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

… focus on ‘top-line’ growth ..

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Economics of a BusinessEconomics of a Business• The four-stage model

–Stage IV (recovery)• revenue plus

… revenue grows profitably

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Ten Principles of Economics.Ten Principles of Economics.

• PRINCIPLE #1 : People Face Trade Offs • PRINCIPLE #2: The Cost of Something Is What You Give Up to Get It• PRINCIPLE #3: Rational People Think at the Margin• PRINCIPLE #4: People Respond to Incentives• PRINCIPLE #5: Trade Can Make Everyone Better Off • PRINCIPLE #6: Markets Are Usually a Good Way to Organize Economic Activity • PRINCIPLE #7: Government Can Sometimes Improve Market Outcomes • PRINCIPLE #8: A Country's Standard of Living Depends on its Ability to Produce Goods and

Services • PRINCIPLE #9: Prices Rise When the Government Prints Too Much Money • PRINCIPLE #10 and Ending: Society Face a Short-Run Tradeoff Between Inflation and

Unemployment .

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Now it’s over for Now it’s over for today. Do you have today. Do you have any question?any question?