LECTURE ONE: INTRODUCTIONIMBA NCCU

Managerial Economics

Lecturer: Jack Wu

DEFINING MANAGERIAL ECONOMICS

Managerial economics: Science of directing scarce resources to manage more effectively

resources – financial, human, physical management of customers, suppliers,

competitors, internal organization organizations – business, nonprofit,

household

SCOPE OF MANAGERIAL ECONOMICS

Managerial econ is based on microeconomics.

Microeconomics Microeconomics is the study of how individual

households and firms make decisions and how they interact with one another in markets.

Macroeconomics Macroeconomics is the study of the economy as

a whole.

EXAMPLE: INCREASE IN OIL PRICE

Micro effect: vehicle users, electronic power generators

Macro effect: inflation, unemployment

NEW ECONOMY: INTERNET

Managerial Economics also applies to the new economy.

Example: In pricing, Airlines use online auctions to segment their market between business and leisure travelers.

OLD/NEW ECONOMY

Differences between “New” and “Old” economy:

(1) role of network effects in demand **network effects – benefit/cost depends on

total number of other users example: Internet (2) importance of economies of scale and

scope example: Information in Yahoo is scalable

METHODOLOGY

economic model – concise description of behavior and outcomes

marginal vis-à-vis average stock vis-à-vis flow other things equal (Ceteris Paribus) Timing

static model – single point in time dynamic model – focus on sequence of actions

and payments

ORGANIZATION

Vertical boundaries – closer to or further from end user

Samsung Electronics – vertical boundaries longer than Intel – specializes in semiconductors (upstream) Motorola – specializes in mobile phones

(downstream)

ORGANIZATION

Horizontal boundaries – scale and scope of activities

Samsung Electronics – horizontal boundaries broader than LG.Philips LCD – specializes in LCD Motorola – specializes in mobile phones

MARKET

Market: Buyers and sellers communicate with one another for voluntary exchange

market need not be physical industry -- businesses engaged in the

production or delivery of the same or similar items

MARKET: CONTINUED

Competitive Markets Market Power Imperfect Markets

COMPETITIVE MARKET

Benchmark for managerial economics Extremely competitive market

many buyers and many sellers no room for managerial strategizing

Achieves economic efficiency

COMPETITIVE MARKET

Model: demand supply market equilibrium

MARKET POWER

Definition – ability of a buyer or seller to influence market conditions

Seller with market power must manage costs pricing advertising expenditure R&D expenditure strategy toward competitors

IMPERFECT MARKET

Definition: where one party directly conveys a benefit or cost to

others (Externality), or one party has better information than others

(Asymmetric Information)