introduction to business administration: economics (managerial economics, part i) lecturer:...
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INTRODUCTION TO BUSINESS ADMINISTRATION: ECONOMICS
(MANAGERIAL ECONOMICS, Part I)
Lecturer: Ekaterina Vladimirovna Sokolova(Public Administration Department)
E-mail: [email protected]
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Course Structure (Economics or Managerial Economics, Part I)
• Topic 1. Basics of economic analysis
• Topic 2. Demand and supply – Topic 2.1. Individual consumer demand – Topic 2.2. Market demand and supply
• Topic 3. Production analysis and cost analysis– Topic 3.1. Production policy– Topic 3.2. Theory of cost
• Topic 4. Market structure analysis– Topic 4.1. Perfect competition and monopoly– Topic 4.2. Monopolistic competition and oligopoly
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Grading Policy MIB (Economics)MIB (Economics)• 70% - mid-term (or final) exam • 30% - individual in-class assignments
MITIM (Managerial Economics) 2 gradesMITIM (Managerial Economics) 2 grades1st : • 70% - mid-term (final for MIB) exam • 30% - individual in-class assignments2nd :• 70% - final exam (Winter session, Managerial Economics,
Part II)• 30% - individual in-class assignments (Managerial
Economics, Part II)Final grade = 1st *1/3 + 2nd * 2/3
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Economics (Managerial Economics, Part I),Final Evaluation (Mid-term or final exam)
35 points
•for written mid-term exam (for MITIM students)
or• final exam (for MIB students)
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Economics (Managerial Economics, Part I), Current Evaluation
• 15 points for 3 in-class assignments (5 points each)
– after the end of the corresponding group of topics
– each assignment includes 5 multiple choice questions • The student can receive 5 points for each group of
topics and these points will be considered in final mark
– respectively the individual assignment can give 15 points
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Economics (Managerial Economics, Part I), Individual In-class Assignments
• Three individual assignments (after the end of the corresponding group of topics)
• Each assignment includes 3 tasks
– The student can receive 3 points for each group of topics and these points will be considered in final mark
• Respectively the individual assignments give 12 points for final mark
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In-class Group Work
• In-class group work will take place at seminars
• Discussion of cases and answering given questions
• Doesn’t give any points for final mark
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Literature• Microeconomics: Optimization, Experiments,
and Behaviour. Burkett, John P. 2006. Oxford Univ. Press., Source: http://site.ebrary.com/
• Microeconomics Demystified. Depken, Craig. 2005. The McGraw-Hill Companies., Source: http://site.ebrary.com/
• Baye M. Managerial Economics and Business Strategy [Text] / M. Baye. – McGraw-Hill, 2006. – 620 p.
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Topic 1. Basics of economic analysis
• Economics – the science of making decisions in the presence of scarce resources
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Managerial Economics vs. Microeconomics: Common and Different
Microeconomics Managerial Economics
How should the prices be set?
In which way were the prices set?
Computer Manufacturer (e.g.: IBM)
Similar concepts
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Opportunity Cost
• Def #1: the cost of the explicit and implicit resources that are forgone when a decision is made
• Def #2: the value of the other products that the resources used in its production could have produced instead
• The opportunity cost of using a resource includes both the explicit (or accounting) cost of the resource and the implicit cost of giving up the next-best alternative use of the resource
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Economic vs. Accounting Profits
• Def : Accounting profit – the total amount of money taken in from sales (total revenue, or prices times quantity sold) minus the money cost of producing goods or services
• Def : Economic profit – the difference between total revenue (TR) and total opportunity cost (TC)
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Reasons for the Existence of Profit
• Innovation
• Risk
• Monopoly power
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The Five Forces Framework and Industry Profitability
• Entry
• Power of input suppliers
• Industry (market) rivalry
• Substitutes and complements.
• Power of buyers
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Incentives
• Def: Incentives – affect how resources are used and how hard employees work
– E.g.: “A manager should be doing a good job” – mistake
• But!: the effect of a per hour salary for workers to increase output
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Markets
• Consumer-producer rivalry
• Consumer-consumer rivalry
• Producer-producer rivalry
• Government and the market
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Managerial Interests and Sales Maximization
• Separation of ownership from control in large corporations
• Sales represent a measure of management’s success, especially since many observers focus attention on a firm’s share of the market as an indicator of its performance
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Economic Optimization Process
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Economic Optimization Process
• Choices involve benefits and costs
• Optimal decision – choice alternative that produces a result most consistent with managerial objectives
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Profit Maximization
• Maximizing profit means maximizing the value of the firm, which is the present value of current and future profits
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The Role of Constraints
Value of firm Input, legal, and other constraints
Limited by
n
tttt
i
TCTR
1 1
equals
The value of i depends on:
Values of TRt depend on:
Values of TCt depend on:
1. Riskiness of firm
2. Conditions in capital market
1. Demand and forecasting
2. Pricing
3. New product developing
1. Production techniques
2. Cost functions
3. Process development
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Expressing Economic Relations
• spreadsheet – table of electronically stored data• graph – visual representation of data• equation – analytical expression of functional
relationship
• dependent variable – Y variable determined by X values
• independent variable – X variable determined separately from the Y variable
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Total, Average, and Marginal Relations (1)
• Marginal – change in the dependent variable caused by a 1-unit change in an independent variable
– Marginal revenue
– Marginal cost
– Marginal profit
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Total, Average, and Marginal Relations (2)
Units of output, Q
Total profits, Marginal profits,
Average profits,
0 0 0 -
1 19 19 19
2 52 33 26
3 93 41 31
4 136 43 34
5 175 39 35
6 210 35 35
7 217 7 31
8 208 -9 26
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Graphing Total, Marginal, and Average Relations
• Marginal profit is the slope of the total profit curve
• Total profit is maximized when the marginal profit equals zero
• Average profit rises (falls) when marginal profit is greater (less) than average profit
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Marginal Analysis in Decision Making
• Finding maximums or minimums
• Distinguishing maximums from minimums
• Maximizing the difference between two functions
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Multivariate Optimization
• The marginal effect of each independent variable on the dependent variable– holding constant the effect of all other independent variables
• Partial derivatives– The unchanged variables are treated as constants in the
differentiation process
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Incremental Concept in Economic Analysis • Marginal relations measure only the effect associated
with unitary changes in variables
• The incremental concept is often used as the practical equivalent of marginal analysis
• Def: Incremental change is the total change resulting from a decision– E.g.: Incremental profit is the profit gain or loss associated
with a given decision