intro to m.e 2013

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Introduction to

Managerial Economics

BY

Qazi Subhan

M. Phil (Eco), QAU, Pak

LLM (IPR), Italy

Qazi Subhan Bahria University Department of Management Sciences Spring 2013

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Introduction Slide 2

Structure of the course (Up to Midterm)

Weeks 5Demand Estimation

ManagerialEconomics

Weeks 3Concept of Demand and supplyand their importance in M. Eco

Weeks 1Introduction to managerialeconomic

Week 7Theory of Cost andits linkage with M.Eco.

Week 8Estimation of productionand cost functions

Week 9

MID Term ExamWeeks 2Goals of firm


Weeks 4

Elasticity of Demand and supplyand its relevance to M. Eco

Weeks 6Theory of Production andMathematical Treatment

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Structure of the course (After Midterm)

Weeks 14Concepts of Monopolistic

Competition

ManagerialEconomics

Weeks 12Concept of Oligopoly

Weeks 10Introduction to marketstructure

Week 16The role ofgovernment inmarket economy

Week 17Presentations on Final projects

Week 18Presentations on Finalprojects

Week 19

, Final Exam

Weeks 11Concept of Monopoly


Weeks 13Practical Application ofOligopoly Models

Weeks 15Price Discrimination

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Brief Contents

Introduction to Managerial Economics

Economic Goals of Firm

Optimization of the core managerial Objectives

Concept of Supply and Demand and its application in

Managerial Decision Making Elasticities of Demand and Supply and its application

in Managerial Economics

Demand Estimation

Theory of Production

Theory of Cost

Estimation of Cost and Production Functions


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Brief Contents

Market Structure

Perfect Competition

Monopoly

OligopolyCollusive Oligopoly

Non Collusive Oligopoly

Monopolistic CompetitionPrice Discrimination

Role of Government in Market Economy


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What is Economics

According to Adam Smith Economics is a Science of Wealth Four dimensions of Definition;

Production of Wealth

Consumption of Wealth

Exchange of Wealth

Distribution of Wealth


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According to Alfred Marshall

A well known Neo-Classical Economisthas defined Economics as BehavioralScience

Economics is the study of mankind in anordinary business oflife.

Alfred Marshall has examined the

individual behavior, ordinary business oflife and use of the material requite of wellbeings.


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According to Prof. Robbins

Economics is a social sciencewhich studies the human behavioras a relationship between multiple

ends and scarce resources whichhave an alternative uses.


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Economics

TheoreticalEconomics

AppliedEconomics

NormativeEconomics

PositiveEconomics

Micro Eco Macro EcoMathematicalEconomics

CLASSIFICATION

OF ECONOMICS


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Manager

A person who directs resources to achieve

a stated goal.

Economics

The science of making decisions in thepresence of scarce resources.


The study of how to direct scarceresources in the way that most efficiently

achieves managerial goals.


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Managerial economics refers to theapplication of Economic theory and tools ofanalysis of decision science to examine how anorganization can achieve its objectives mostefficiently.

Economic Theory consists of the knowledge ofMicro and Macro economics

Decision science represents the techniques ofMathematics, Statistics and Econometrics


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Economic theory and methodology lay

down rules for improving business Activity

and public policy decisions.

Managerial economics helps managers to

recognize how economic forces affect

organizations and describes the economic

consequences of managerial behavior.


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Managerial Economics also links economicconcepts and quantitative methods to

develop vital tools for managerial decision

making.Managerial Economics identifies ways to

achieve goals efficiently.

Managerial economics can be used to

specify pricing and production strategies


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Managerial economics provides productionand marketing rules to help maximizeprofits

Once management has set relevant goals,managerial economics can be used toefficiently attain those objectives.

Managerial economics can be used todeduce the underlying logic of company,

consumer and government decisions.


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Main Questions of M.E

How do markets work?

How do customers value the products?

What are the relevant production and costmeasures for decision making?

How does competition affect businessdecisions in different market structures?

What prices should be set?


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What would be the impact of changes ininterest rates on costs of production?

How important to managerial and

marketing decisions are changes in:foreign exchange rates, technology,incomes, government regulations,sources of energy and the balance of

payments?


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Role of Economics in Managerial Decisions

What to Produce

How to Produce

For whom to Produce

Product decision

Hiring, staffing,

procurement decision

Market segmentationDecisions

There are three ways to answer this question

Market Process ( Market Forces)

Command Process ( State Involvement)

Traditional Process (use of customs and traditions)


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Goals of Firm

Economic Goals

Production Max

Profit Maximization Cost Minimization

Market Expansion

Non Economic Goals

Good work environment

Provide good services to

customers


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Objective and Value of Firm

Theory of firm was

based on the

assumption that the

objective of the firm is

to maximize the valueof firms which can be

presented as Net

Present Value (NPV).

Cr

R

r

R

r

RNPV

3

3

2

2

1

1

)1()1()1(

NPV is the present value of

all expected future profits ofthe firm which can be

presented in the following

formula in which R is

estimated net cash flow from

the project, r is discount rateand C stands for initial cost of

the project. For instance

C=500, discount rate is 12%

and expected Cash Flow (R)

R=200, then NPV for 5 years

would be 220.9.

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Steps to Managerial Decision Making

Define the Problem Determine the objectives

Explore the Alternative

Predicting the consequences

Make a Choice

Implementing the decision


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Some Economic Concepts Concept of factors of production

Marginal Analysis

Optimization Techniques

Theories of Profit Risk Bearing theories of profit ( More risk, more profit)

Frictional Theory of profit ( Deviation from Long run equilibrium

Monopoly theory of profit

Innovation theory of profit

Managerial Efficiency Theory of Profit


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Factors of Production

FOP

Land

Labor Capital

Organization

Prices of FOP

Rent

Wage Interest

profit


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Marginal Analysis

In the theory of consumer behavior

Concept of MU and Price

In theory of firmMarginal Revenue and Marginal Cost


M i l A l i d O ti i ti

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Marginal Analysis and Optimization(Maximization and Minimization) Techniques

With the help of

Marginal Analysis,

optimization objective

can be achieved

There are four

parameters in the whole

economics which are

maximized and one is

minimized.

MaximizedParameters

Utility

Revenue

Production

Profit

MinimizedParameter

Cost


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Optimization techniques

If any function either it is total

revenue, profit or total Cost is given

and the objective is to know at which

level of output it is maximized orminimized then there are two

conditions


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Optimization Techniques for TR Max

min0/

max0/

0/

22

22

forqdTRd

forqdTRd

dqdTR


Optimization Techniques for profit ()

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Optimization Techniques for profit ()Max

min0/

max0/

0/

22

22

forqdd

forqdd

dqd


Optimization Techniques for Cost

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Optimization Techniques for CostMinimization

min0/

max0/

0/

22

22

forqdTCd

forqdTCd

dqdTC


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Lagrange Multiplier

rKwLClkL

FunctionConstraunctionobjectivefL

,

int


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Practice Questions

Suppose a firm has

an inverse demand

function and its cost

equation then findequilibrium output,

Price, profit and total

revenue.

260420

5.120

QQTC

QP

21045135

75.200

QQTC

QP


225.20600

8720QQTC

QTR

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Sample Question

Suppose

QTC

QP

100120

8.0340

QTCQP

3810048.0140

QTC

QP

5030

3.040

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Possibilities to ask the questions

TC

TR

AC

TR

TC

AR

AC

AR

AC

Q

TC

P

intro to m.e 2013

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