Managerial Economics

Professor Changqi Wu

Introduction Slide 2

Oil Reserves

Introduction Slide 3

Oil Crisis?

The proven crude oil reserves: 1,028,500,000,000 barrels.

International Energy Agency estimates the global crude oil production in 2005 is 84,700,000 barrels a day.

Question 1: How many barrels of crude oil will be produced in the year of

2005?

Question 2: How many years does the crude oil reserve on earth can

last?

Introduction Slide 4

Topics

Introduction to managerial economics

Course organization

Introduction Slide 5

1. Introduction

Methodology of economic analysis

Scope of managerial economics

Major themes

Introduction Slide 6

1.1. Economic Analysis

How to allocate scarce resources to achieve desirable outcome

Economic agents are rationalable to make decisions (choices) to

advance their own interests

responsive to incentives

Assumption or reality?

Introduction Slide 7

Microeconomics is...

To study the behavior of individual economic agents

Examplespricing mobile phone services

investment decision of internet startups

decision to falling asleep

Introduction Slide 8

Why Going to Sleep?

Introduction Slide 9

Macroeconomics is ...

To study the structure and fluctuation of an economy and government policies that influence the performance of the economy

Macroeconomic issuesWhy do some nations grow faster than others?

Should China revalue its currency?

Does government’s stimulate package help economic growth?

Introduction Slide 10

Economic Growth in the Long RunGDP Per Capita in biilions of 1990 international dollarsYear 0 1000 1500 1820 1995

World $425 $420 $545 $675 $5,188

The West $439 $406 $624 $1,149 $19,990

West Europe 450 400 670 1,269 17,456

North America 400 400 400 1,233 22,933

Japan 400 425 525 675 19,720

The Rest $423 $424 $532 $594 $2,971

Other Europe 400 400 597 803 5,147

Latin America 400 415 415 671 5,031

China 450 450 600 600 2,653

Other Asia 425 425 525 560 2,768

Africa 400 400 400 400 1,221

Source: Angus Maddison, Chinese Economic Performance in the Long-Run, 1998.

Introduction Slide 11

Predicting the Future Economic Power

Levels of World Performance and Potential, 217 Countries, 1995 and 2015(population: millions at mid-year; per capita GDP in 1990 international $; GDP in billion 1990 int. dollars)

per capita GDP Population GDP per capita GDP Population GDPChina 2,653 1,204.9 3,196 6,398 1,470.2 9,406

7 Dynamic Asia 6,236 350.1 2,183 12,408 444.4 5,514

India 1,568 916.5 1,437 3,120 1,210.3 3,776

31 Other Asia 1,445 543.7 786 2,147 776.8 1,668

Japan 19,720 125.6 2,476 25,533 130.7 3,337

United States 23,377 263.1 6,150 30,268 308.5 9,338

32 Advanced Capitalist 16,810 436.6 7,339 22,199 463.6 10,291

44 Latin America 5,031 489.0 2,460 6,776 645.7 4,375

15 Former USSR 3,590 290.9 1,044 5,882 296.7 1,745

12 Eastern Europe 5,145 116.8 601 9,292 116.8 1,085

16 Middle East 4,138 211.9 877 5,049 333.8 1,686

56 Africa 1,220 715.2 873 1,489 1,172.0 1,745

217 World 5,194 5,664.0 29,421 7,323 7,369.4 53,966

Source: Angus Maddison, Chinese Economic Performance in the Long-Run, 1998.

1995 2015

Introduction Slide 12

1.2. Methodology

Economists use economic models to define relationship between the actions of economic agents and the outcomes.Harvard school versus Chicago school

Analysis of an economic model can reveal relationship between two factors otherwise difficult to see.

Partial analysis assumes all other things remain unchanged

Introduction Slide 13

Economics in Action

Predicting the closing level of Hang Seng Stock IndexHemline index

Investing by the moon

Economic analysis reveals the causal relationship between actions and outcomes.

Introduction Slide 14

Hem-line Index

Introduction Slide 15

The Marketplace

Many buyers and sellers transact their goods and services

All transactions are voluntary

Price reflects both demand and supply conditions

The invisible hand

Introduction Slide 16

The Market Mechanism

Quantity

D

S

The curves intersect atequilibrium, or market-

clearing, price. At P0 thequantity supplied is equalto the quantity demanded

at Q0 .

P0

Q0

Price($ per unit)

Introduction Slide 17

1.3. Managerial Economics

Managerial economics applies the tools of microeconomic analysis to managerial and business issues How to assess the market potential?

Which market to enter?

How to compete in marketplace?

How to motivate employees to do or not to do certain things?

Introduction Slide 18

Major Themes of the Course

Market mechanismDemand and supply analysis

Market structure and imperfect competition

Managing in imperfect markets

Introduction Slide 19

2. Course Organization

Objectives

Classroom protocol

Grading

Textbook

Introduction Slide 20

2.1. Course Objectives

Conceptual knowledge

Skills

Analytical techniques

Introduction Slide 21

Course Objectives: Conceptual Knowledge

be able to understand the key concepts useful in analyzing the factors that shape the outcome of the market competition.

be able to diagnose sources of economies of scale and scope, and to understand how they shape the structure of a market.

be able to assess, how much of the value a business unit creates and how the owners will be able to capture it in the form of economic profitability.

be able to characterize a business unit’s competitive position and to formulate intelligent options for improving that position.

By the time you finish the course, you will ...

Introduction Slide 22

Course Objectives: Skills

identifying managerial issues.

formulating options to deal with those issues.

forming robust and sensible intuitions about what issues are likely to be important in different business situations.

By the time you finish this course, you will have developed skills in ...

Introduction Slide 23

Course Objectives: Analytical Techniques

marginal analysis

estimation and forecasting

value-added analysis

During the course, you will learn several specific analytical techniques including ...

Introduction Slide 24

2.2 Classroom Protocol: Responsibilities and Expectations

The classroom environment should approximate that of a professional meeting. This imposes responsibilities on me and on you

Punctuality

Preparation

Listening

Attendance

Introduction Slide 25

Punctuality

My responsibility: I will always be on time for class and will be ready to begin teaching on time.

My expectation: I expect you to show the same punctuality by being in your seats by the beginning of the class and returning to your seats after break.

Introduction Slide 26

Preparation

My responsibility: I will always be prepared to teach the material I assign for the day and will have spent many hours thoroughly preparing for lectures.

My expectation: I expect that you will prepare seriously for the class and will participate in a serious, constructive way in class discussion.

Introduction Slide 27

Listening

My responsibility: I will listen carefully when you participate, and I will make every effort to call on students who wish to participate.

My expectation: I expect that you will refrain from side conversations during class and turn off your mobile phones which disrupt and distract others who are trying to learn.

Introduction Slide 28

Grading Class Participation

Attendance is compulsory. Absence from class without good reason is subject to punishment.

Points Action

2 Raise right questions and help the class moving. Make comments with supporting evidence and with well-argued logic.

1 Attend but not active in participating class discussion.

0 Not attend class

Introduction Slide 29

Teams

Teams are working units for assignments and case projects

Team size should be limited to 4-5 members

Introduction Slide 30

2.3 Grading

Homework and case studies: 30%

Class attendance and participation: 20%

Final exam: 50%

Introduction Slide 31

Textbook

Ivan Png: Managerial Economics

Other available managerial economics/microeconomics textbooks, for instance: Robert Pindyck and Daniel Rubinfeld: Microeconomics

A package of readings and cases.

Introduction Slide 32

Key Dates

The start of the class: September 3, 2005

The national day, October 1: regular class.

The written test: October 22.