ECW2731

Managerial Economics

ECW2731Week 1-2

Subject Adviser

Dr Gennadi KAZAKEVITCH

Berwick campus, Room 129.Phone: (03) 9904 7135.Fax: (03)9907 4100 Office contact hours:

Monday5-6 PM and Wednesday 4-5 PM.

E-mail: Gennadi.Kazakevitch@monash.edu.au

http://www-personal.buseco.monash.edu.au/~gennadik/gkazwww.htm

ECW2731Week 1-2

Lecture 1

Lecture 1

Subject Information

Introduction to Managerial Economics

ECW2731Week 1-2

Subject Information

• Aims, Questions

• Assessment

• Assignment• Examination

• Reading

• Structure

ECW2731Week 1-2 Aims

This unit reviews the contemporary economic principles in the context most relevant to business

people:

– Market processes,

– demand patterns, cost structures,

– market conditions

– pricing policies, and

– the impact of regulation on business decisions

Cases and problems illustrate how economic concepts can be applied to specific industries to the problems of formulating rational managerial decisions, corporate and marketing strategies.

ECW2731Week 1-2

Questions• How do markets work?

• How do customers value products?

• What are the relevant production and cost measures for decision making?

• How does competition affect business decisions in different market structures?

• What prices should be set?

• What would be the impact of changes in interest rates on costs, accounting, or capital budgeting?

• How important to managerial and marketing decisions are changes, in foreign exchange rates, in technology, in incomes, in government regulations, in sources of energy, in the balance of payments?

??????????

ECW2731Week 1-2

Assessment

Assignment 4000 words - 40%.Two-hour written examination - 60 %

To pass the unit you must:

(a) complete all the required work, and(b) obtain an overall grade of at lease 50% of the total marks, and(c) obtain at least a 50% grade for the examination.

ECW2731Week 1-2 Assignment

Due date: 5 p.m., 20 April 2006Automatically extended until 4:45 PM

Monday, 24 April 2006

We will talk about the assignment later on

ECW2731Week 1-2

Examination

Two hours, Section A 4 concise essay style questions on theoretical issues of and (or) analytical

technique - 60%.

You will be informed about narrow topics in the end of semester.

Section B Research Question

You will be informed about narrow topics in the middle of semester.

ECW2731Week 1-2

Reading

• E. Mansfield, Managerial Economics, Sixth Edition, 2006

• Any other text in Managerial Economics

• Library search for the research question

• Media

ECW2731Week 1-2

Weeks 7-8Competition, market structures and business decisions

Weeks 7-8Competition, market structures and business decisions

Structure

ManagerialEconomics

ManagerialEconomics

Weeks 5 - 6Production and Costs, technological changes and industrial innovations

Weeks 5 - 6Production and Costs, technological changes and industrial innovations

Weeks 1-2Introduction. The nature of managerial economic decision making

Weeks 1-2Introduction. The nature of managerial economic decision making

Week 9Pricing strategies and practices

Week 9Pricing strategies and practices

Week 10Business and Government.

Week 10Business and Government.

Week 11Capital budgeting

Week 11Capital budgeting

Week. 12

Research question

Business and current economic situation.

Week. 12

Research question

Business and current economic situation.

Weeks 3-4Demand analysis and estimation

Weeks 3-4Demand analysis and estimation

ECW2731Week 1-2

Introduction. The nature of managerial economic decision making

Introduction. The nature of managerial economic decision making

Economic optimisation

Economic optimisation

The value of firm The value of firm

Economic constraints Economic constraints

The basic economic variables

The basic economic variables

DemandDemand

SupplySupply

CostsCosts

RevenueRevenue

ProfitProfit

The role of managerial economics in

managerial decision making

The role of managerial economics in

managerial decision making

Managerial economic as an economics

discipline

Managerial economic as an economics

discipline

ECW2731Week 1-2 Demand analysis and estimationDemand analysis and estimation

Price, cross-price, and income elasticity of demand

Price, cross-price, and income elasticity of demand

Normal versus inferior goodNormal versus inferior good

Implication: optimal pricing policyImplication: optimal pricing policy

Implication: optimal level of advertising

Implication: optimal level of advertising

Market demandMarket demand

Market supplyMarket supply

Market equilibriumMarket equilibrium

ECW2731Week 1-2 Production and CostsProduction and Costs

Production functionsProduction functions

Factors of productionFactors of production

Total, marginal and average product, revenue and costs

Total, marginal and average product, revenue and costs

Return to factors versus return to scale

Return to factors versus return to scale

Firm and plant sizeFirm and plant size

Economies and diseconomies of scale

Economies and diseconomies of scale

Optimal level of single input and optimal combination of multiple

inputs

Optimal level of single input and optimal combination of multiple

inputs

Fixed and variable costsFixed and variable costs

Explicit and implicit costsExplicit and implicit costs

Short run versus long run in cost analysis

Short run versus long run in cost analysis

ECW2731Week 1-2 Competition, market structures and

business decisions

Competition, market structures and business decisions

How does competition affect business decisions in different

market structures?

How does competition affect business decisions in different

market structures?

Perfect competition; monopoly; oligopoly; monopolistic

competition, Monopoly/monopsony confrontation

Perfect competition; monopoly; oligopoly; monopolistic

competition, Monopoly/monopsony confrontation

Competitive strategies. Competitive strategies.

Measurement of market structures Measurement of market structures

Market strategies in different market structures.

Market strategies in different market structures.

Non-price competition.Non-price competition.

Multinational companies. Vertical and horizontal coordination.

Multinational companies. Vertical and horizontal coordination.

ECW2731Week 1-2 Pricing strategies and practicesPricing strategies and practices

What prices should be set?What prices should be set?

Mark-up pricingMark-up pricing

Competitive strategies. Competitive strategies.

Price discrimination. Price discrimination.

Bundle pricing Bundle pricing

Multiple and joint product pricing. Multiple and joint product pricing.

Transfer pricing Transfer pricing

ECW2731Week 1-2 Business and GovernmentBusiness and Government

The impact of regulation, deregulation and taxation policy on decision making, competitiveness

and efficiency.

The impact of regulation, deregulation and taxation policy on decision making, competitiveness

and efficiency.

Reasons for regulation. Regulatory response to incentive and

structural failures.

Reasons for regulation. Regulatory response to incentive and

structural failures.

Taxes and subsidiesTaxes and subsidies

Anti-Trust Policies. Anti-Trust Policies.

Problems with regulationProblems with regulation

ECW2731Week 1-2 Capital budgetingCapital budgeting

Decision rules Decision rules

Capital budgeting processCapital budgeting process

Cash flow estimationCash flow estimation

Alternative projectsAlternative projects

Optimal capital budgetingOptimal capital budgeting

Cost of capital.Cost of capital.

ECW2731Week 1-2 Business and current economic

situationResearch topic

Business and current economic situation

Research topic

How important, to managerial and marketing decisions, are changes

in foreign exchange rates, in interest rates, in incomes, in the balance of payments, liberalisation of trade,

etc

How important, to managerial and marketing decisions, are changes

in foreign exchange rates, in interest rates, in incomes, in the balance of payments, liberalisation of trade,

etc

What would be the impact of high/low interest rates on costs or

capital budgeting?

What would be the impact of high/low interest rates on costs or

capital budgeting?

ECW2731Week 1-2

Topic 1.Introduction: The nature of

managerial economic decision making

ECW2731Week 1-2

Weeks 7-8Competition, market structures and business decisions

Weeks 7-8Competition, market structures and business decisions

ManagerialEconomics

ManagerialEconomics

Weeks 5 - 6Production and Costs, technological changes and industrial innovations

Weeks 5 - 6Production and Costs, technological changes and industrial innovations

Weeks 1-2Introduction. The nature of managerial economic decision making

Weeks 1-2Introduction. The nature of managerial economic decision making

Week 9Pricing strategies and practices

Week 9Pricing strategies and practices

Week 10Business and Government.

Week 10Business and Government.

Week 11Capital budgeting

Week 11Capital budgeting

Week. 12

Research question

Business and current economic situation.

Week. 12

Research question

Business and current economic situation.

Weeks 3-4Demand analysis and estimation

Weeks 3-4Demand analysis and estimation

ECW2731Week 1-2

Introduction. The nature of managerial economic decision making

Introduction. The nature of managerial economic decision making

Economic optimisation

Economic optimisation

The value of firm The value of firm

Economic constraints Economic constraints

The basic economic variables

The basic economic variables

DemandDemand

SupplySupply

CostsCosts

RevenueRevenue

ProfitProfit

The role of managerial economics in

managerial decision making

The role of managerial economics in

managerial decision making

Managerial economic as an economics

discipline

Managerial economic as an economics

discipline

ECW2731Week 1-2

Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making

Learning objectives Learning objectives

This topic is deals with the nature and the scope of Managerial Economics as a whole.

The place of Managerial economics in the Economics discipline.

How do managers make their decisions?

The elements of the economic theory of firm that we need to understand nature of managerial economic decision making are:

Economic optimisation;

The value of firm;

Economic constraints;

The basic economic variables, including demand supply, costs, revenue and profit.

ECW2731Week 1-2

Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making

Reading Reading

Mansfield, Chapter 1.

ECW2731Week 1-2

Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making

Managerial economic as an economics discipline Managerial economic as an economics discipline

Macroeconomics

Economics

Microeconomics

International Economics

Regional Economics

Money, finance, banking “Sector” economics

Labor economics

Economics of IT and EC

Managerial economics

Economic Development

ECW2731Week 1-2

Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making

The role of managerial economics in managerial decision making The role of managerial economics in managerial decision making

Managerial decision problems

Product price and output

Make or buy

Production technique

Internet strategy

Advertising media and intensity

Investment and financing

Managerial decision problems

Product price and output

Make or buy

Production technique

Internet strategy

Advertising media and intensity

Investment and financing

Economic concepts

Theory of consumer behaviour

Theory of firm

Theory of market structures and pricing

Economic concepts

Theory of consumer behaviour

Theory of firm

Theory of market structures and pricing

Decision making tools

Numerical analysis

Statistical analysis

Forecasting

Game theory

Optimisation

Decision making tools

Numerical analysis

Statistical analysis

Forecasting

Game theory

Optimisation

Managerial Economics

Use of economics concepts and decision making tools to solve managerial decision problems

Managerial Economics

Use of economics concepts and decision making tools to solve managerial decision problems

Optimal solutions Optimal solutions

ECW2731Week 1-2

Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making

The Process of decision-making

Identify objectives

Define the problem

Identify possible solutions

Select the best possible solution

Implement the decision

The role of managerial economics in managerial decision making The role of managerial economics in managerial decision making

ECW2731Week 1-2

Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making

Theory of the firm

A theory indicating how a firm behaves and what its goals are

The role of managerial economics in managerial decision making The role of managerial economics in managerial decision making

ECW2731Week 1-2

Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making

Economic optimisation

Economic optimisation

Functional relationshipsQ = f (P) for example Q = 200 - 5P

CHERRY CORPORATION

DAILY PER UNITSALES PRICE

150 10100 2050 300 40

ECW2731Week 1-2

Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making

Economic optimisation

Economic optimisation

Marginal value

The marginal value of a dependent variable is the change in this dependent variable associated with a 1-unit change in a particular independent variable

ECW2731Week 1-2

Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making

Economic optimisation

Economic optimisation

CENTRAL POINT

The dependent variable is maximized when its marginal value shifts from positive to negative

ECW2731Week 1-2

Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making

Economic optimisation

Economic optimisation

Relationship between output and profit -- Roland Corporation

OUTPUT TOTAL MARGINAL AVERAGE PER DAY PROFIT PROFIT PROFIT

0 01 100 100 100.02 250 150 125.03 600 350 200.04 1000 400 250.05 1350 350 270.06 1500 150 250.07 1550 50 221.48 1500 -50 187.59 1400 -100 155.6

10 1200 -200 120.0

ECW2731Week 1-2

Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making

Economic optimisation

Economic optimisationTotal, marginal, and average profit --

Roland Corporation

-500

0

500

1000

1500

2000

0 5 10 15

OUTPUT PER DAY

PRO

FIT

TOTAL PROFIT

MARGINALPROFIT

AVERAGE PROFIT

ECW2731Week 1-2

Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making

Economic optimisation

Economic optimisation

Choose alternative that produces a result the most

consistent

with managerial objective

Choose alternative that produces a result the most

consistent

with managerial objective

What is the primary managerial objective?

It depends upon the ownership structure

Profit maximisation?

Sales/revenue maximisation?

The value of firm maximisation?

Profit per employee maximisation?

ECW2731Week 1-2

Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making

The value of firm The value of firm

1 1

cos

(1 ) (1 )

N Nt tt t

t t

Profit Total revenue Total tValue

i i

N – firm’s life timeI - discount rate

- current value of the profit earned in t years time

N – firm’s life timeI - discount rate

- current value of the profit earned in t years time

(1 )tt

Profit

i

The present value of the firm’s

expected future cash flows

ECW2731Week 1-2

Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making

The value of firm The value of firm

ECW2731Week 1-2

Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making

Economic constraints Economic constraints

Limited resourses

Labour CapitalFinance

Raw materialsEnvironment

Limited resourses

Labour CapitalFinance

Raw materialsEnvironment

Limited capacity of market

Demand

Limited capacity of market

Demand

Choice/Opportunity cost Choice/Opportunity cost