Introduction%20to%20Managerial%20Economics

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Introduction to Managerial Economics
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Plan for this week

• Course introduction
• Course scope, goals, and topics
• Preliminaries background concepts

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Who 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/

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Course 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

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Course 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
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Course 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)

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What 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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Airbus 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
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Airbus 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?

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Managerial economics

• Science of directing scarce resources
• resources financial, human, physical
• management of customers, suppliers, competitors,
  internal organization
• setting business, nonprofit, household

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Old/new economy

• Network effects benefit/cost depends on total
  number of other users
• Scaleability economies of scale and scope

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Preliminaries

• Scope and methodology
• Timing
• Organization
• Market
• Globalization

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Preliminaries 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

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Preliminaries Methodology

• Economic model concise abstraction of behavior
  and outcomes
• Marginal vis-à-vis average
• Stock vis-à-vis flow
• Other things equal

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Preliminaries Methodology

• Timing
• static model single point in time
• dynamic model focus on sequence of actions and
  payments

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Preliminaries

• Scope and methodology
• Timing
• Organization
• Market
• Globalization

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Timing

• 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

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Timing

• 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

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Preliminaries

• Scope and methodology
• Timing
• Organization
• Market
• Globalization

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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)

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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

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Individual 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

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Preliminaries

• Scope and methodology
• Timing
• Organization
• Market
• Globalization

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Market

• 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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Competitive market

• Benchmark for managerial economics
• Extremely competitive market
• many buyers and many sellers
• no room for managerial strategizing
• Achieves economic efficiency

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Competitive market

• Model
• demand
• supply
• market equilibrium

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Market 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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Market 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?

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Imperfect 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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Imperfect marketDisneyland Hong Kong

• Disney insisted on rights to adjoining property
  before commencing new investment.
• Why?

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Preliminaries

• Scope and methodology
• Timing
• Organization
• Market
• Globalization

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Globalization Why?

• Growth of cross-border trade and investment
• falling trade barriers
• falling financial barriers
• falling communications costs

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Globalization Trade system

• World Trade Organization
• Regional free trade areas
• European Union
• North American Free Trade Agreement
• ASEAN
• ASEAN-China, ASEAN-India

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Globalization Communications

• Transport
• air transport liberalization
• containerization of surface transport
• Telecommunications
• de-regulation
• scale economies in bandwidth

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Globalization Outsourcing
tele-radiology
transcription
increasing bandwith
outgoing call center, eg, telemarketing
record-keeping
incoming call center, eg, customer service
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Globalization e-commerce

• Extends geographical reach Google, eBay, Yahoo,
  Amazon
• Limitations
• payments system
• trade barriers
• shipment costs

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Summary

• Scope and methodology
• Timing
• Organization
• Market
• Globalization