Title: Introduction%20to%20Managerial%20Economics
1Introduction to Managerial Economics
2Plan for this week
- Course introduction
- Course scope, goals, and topics
- Preliminaries background concepts
3Who am I?
- Name Pascal Courty
- Nationality French
- PhD in Economics from University of Chicago
- Research pricing policies (industrial
organization), incentive compensation (personnel
economics) - You want to learn more about me
- http//web.uvic.ca/pcourty/
4Course description
- This is a course in applied microeconomics with a
primary focus on the needs of managers - We study firms and markets, how they operate and
how the market mechanism works - The goal is to provide a range of economic tools
and concepts to analyze market outcomes, and then
help understand how to apply them in practice
5Course Content
1. Introduction 2. Demand 3. Elasticity
4. Supply 5. Competitive Mkts 6.
Economic Efficiency 8. Monopoly 9. Pricing
Policy 10. Strategic Thinking 11. Oligopoly
6Course requirements
- Problem sets (top 3 grades out of 5 problem sets)
based on a real world case study and formal
exercises (30) - Midterm exam on November 9th (40)
- Industry project (30)
7What does microeconomics brings to management
education?
- Formal models ( Stylised descriptions)
- Role of assumptions is to abstract from
irrelevant details - Models provide an explicit analysis using a
transparent and logical method - Useful frameworks to discuss management problems
- Language to discuss business situations
- One of the intellectual foundation for management
education
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9Airbus vs Boeing
- Airbus Until 2001, established under French law
as a Groupe dIntérêt Economique - Boeing Listed company
April 2004
Dec. 2004
Dec. 2005
June 2006
Airbus launches A350
Boeing launches 787
2005 sales Airbus 1111 Boeing 1029
Airbus delays A380 shares fall 26
10Airbus vs Boeing
- Why did Airbus corporatize in 2001? What are
benefits from corporatization? - Why did Airbus Chief Commercial Officer John
Leahy remark that A350 would put a hole in
Boeings Christmas stocking? - How should Boeing respond?
11Managerial economics
- Science of directing scarce resources
- resources financial, human, physical
- management of customers, suppliers, competitors,
internal organization - setting business, nonprofit, household
12Old/new economy
- Network effects benefit/cost depends on total
number of other users - Scaleability economies of scale and scope
13Preliminaries
- Scope and methodology
- Timing
- Organization
- Market
- Globalization
14Preliminaries Scope
- Managerial economics based on microeconomics
- micro individual economic behavior
- macro aggregate economic behavior
- Example increase in oil price
- micro effects vehicle users, electric power
generators - macro effects inflation, unemployment
15Preliminaries Methodology
- Economic model concise abstraction of behavior
and outcomes - Marginal vis-à-vis average
- Stock vis-à-vis flow
- Other things equal
16Preliminaries Methodology
- Timing
- static model single point in time
- dynamic model focus on sequence of actions and
payments
17Preliminaries
- Scope and methodology
- Timing
- Organization
- Market
- Globalization
18Timing
- Discount future values to be comparable with
present values - If discount rate 10,
- 1 next year worth 1/1.10 91 cents now
- 1 two years worth about 83 cents now
19Timing
- Net present value sum of discounted values of
inflows and outflows over time - Example
- Month 1 gain of 3 million
- Months 2 and 3 loss of 2 million
- Net present value
20Preliminaries
- Scope and methodology
- Timing
- Organization
- Market
- Globalization
21Organization
- 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)
22Organization
- Horizontal boundaries scale and scope of
activities - Samsung Electronics horizontal boundaries
broader than - LG.Philips LCD specializes in LCD
- Motorola specializes in mobile phones
23Individual behavior
- Bounded rationality individuals have limited
cognitive abilities and cannot fully exercise
self-control - Separate accounting for different categories of
benefits and costs - Lack self-control addictive behavior and
difficulty postponing immediate gratification for
longer-term benefits - More sensitive to losses than to gains
- Decisions may depend on how choices are framed
24Preliminaries
- Scope and methodology
- Timing
- Organization
- Market
- Globalization
25Market
- Definition 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
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27Competitive market
- Benchmark for managerial economics
- Extremely competitive market
- many buyers and many sellers
- no room for managerial strategizing
- Achieves economic efficiency
28Competitive market
- Model
- demand
- supply
- market equilibrium
29Market power
- Definition ability of a buyer or seller to
influence market conditions - Seller with market power must manage
- costs
- pricing
- advertising expenditure
- RD expenditure
- strategy toward competitors
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31Market powerProzac
- August 2001 US Court of Appeals limited Prozac
patent - Lilly market value dropped 36 billion
- Barr market value rose 1.1 billion
- Huge discrepancy in impact why?
32Imperfect market
- Definition where
- one party directly conveys a benefit or cost to
others, or - one party has better information than others
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34Imperfect marketDisneyland Hong Kong
- Disney insisted on rights to adjoining property
before commencing new investment. - Why?
35Preliminaries
- Scope and methodology
- Timing
- Organization
- Market
- Globalization
36Globalization Why?
- Growth of cross-border trade and investment
- falling trade barriers
- falling financial barriers
- falling communications costs
37Globalization Trade system
- World Trade Organization
- Regional free trade areas
- European Union
- North American Free Trade Agreement
- ASEAN
- ASEAN-China, ASEAN-India
38Globalization Communications
- Transport
- air transport liberalization
- containerization of surface transport
- Telecommunications
- de-regulation
- scale economies in bandwidth
39Globalization Outsourcing
tele-radiology
transcription
increasing bandwith
outgoing call center, eg, telemarketing
record-keeping
incoming call center, eg, customer service
40Globalization e-commerce
- Extends geographical reach Google, eBay, Yahoo,
Amazon - Limitations
- payments system
- trade barriers
- shipment costs
41Summary
- Scope and methodology
- Timing
- Organization
- Market
- Globalization