ecw2731 managerial economics. ecw2731 week 1-2 subject adviser dr gennadi kazakevitch berwick...
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ECW2731
Managerial Economics
ECW2731Week 1-2
Subject Adviser
Dr Gennadi KAZAKEVITCH
Berwick campus, Room 129.Phone: (03) 9904 7135.Fax: (03)9907 4100 Office contact hours:
Monday5-6 PM and Wednesday 4-5 PM.
E-mail: [email protected]
http://www-personal.buseco.monash.edu.au/~gennadik/gkazwww.htm
ECW2731Week 1-2
Lecture 1
Lecture 1
Subject Information
Introduction to Managerial Economics
ECW2731Week 1-2
Subject Information
• Aims, Questions
• Assessment
• Assignment• Examination
• Reading
• Structure
ECW2731Week 1-2 Aims
This unit reviews the contemporary economic principles in the context most relevant to business
people:
– Market processes,
– demand patterns, cost structures,
– market conditions
– pricing policies, and
– the impact of regulation on business decisions
Cases and problems illustrate how economic concepts can be applied to specific industries to the problems of formulating rational managerial decisions, corporate and marketing strategies.
ECW2731Week 1-2
Questions• How do markets work?
• How do customers value products?
• What are the relevant production and cost measures for decision making?
• How does competition affect business decisions in different market structures?
• What prices should be set?
• What would be the impact of changes in interest rates on costs, accounting, or capital budgeting?
• How important to managerial and marketing decisions are changes, in foreign exchange rates, in technology, in incomes, in government regulations, in sources of energy, in the balance of payments?
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ECW2731Week 1-2
Assessment
Assignment 4000 words - 40%.Two-hour written examination - 60 %
To pass the unit you must:
(a) complete all the required work, and(b) obtain an overall grade of at lease 50% of the total marks, and(c) obtain at least a 50% grade for the examination.
ECW2731Week 1-2 Assignment
Due date: 5 p.m., 20 April 2006Automatically extended until 4:45 PM
Monday, 24 April 2006
We will talk about the assignment later on
ECW2731Week 1-2
Examination
Two hours, Section A 4 concise essay style questions on theoretical issues of and (or) analytical
technique - 60%.
You will be informed about narrow topics in the end of semester.
Section B Research Question
You will be informed about narrow topics in the middle of semester.
ECW2731Week 1-2
Reading
• E. Mansfield, Managerial Economics, Sixth Edition, 2006
• Any other text in Managerial Economics
• Library search for the research question
• Media
ECW2731Week 1-2
Weeks 7-8Competition, market structures and business decisions
Weeks 7-8Competition, market structures and business decisions
Structure
ManagerialEconomics
ManagerialEconomics
Weeks 5 - 6Production and Costs, technological changes and industrial innovations
Weeks 5 - 6Production and Costs, technological changes and industrial innovations
Weeks 1-2Introduction. The nature of managerial economic decision making
Weeks 1-2Introduction. The nature of managerial economic decision making
Week 9Pricing strategies and practices
Week 9Pricing strategies and practices
Week 10Business and Government.
Week 10Business and Government.
Week 11Capital budgeting
Week 11Capital budgeting
Week. 12
Research question
Business and current economic situation.
Week. 12
Research question
Business and current economic situation.
Weeks 3-4Demand analysis and estimation
Weeks 3-4Demand analysis and estimation
ECW2731Week 1-2
Introduction. The nature of managerial economic decision making
Introduction. The nature of managerial economic decision making
Economic optimisation
Economic optimisation
The value of firm The value of firm
Economic constraints Economic constraints
The basic economic variables
The basic economic variables
DemandDemand
SupplySupply
CostsCosts
RevenueRevenue
ProfitProfit
The role of managerial economics in
managerial decision making
The role of managerial economics in
managerial decision making
Managerial economic as an economics
discipline
Managerial economic as an economics
discipline
ECW2731Week 1-2 Demand analysis and estimationDemand analysis and estimation
Price, cross-price, and income elasticity of demand
Price, cross-price, and income elasticity of demand
Normal versus inferior goodNormal versus inferior good
Implication: optimal pricing policyImplication: optimal pricing policy
Implication: optimal level of advertising
Implication: optimal level of advertising
Market demandMarket demand
Market supplyMarket supply
Market equilibriumMarket equilibrium
ECW2731Week 1-2 Production and CostsProduction and Costs
Production functionsProduction functions
Factors of productionFactors of production
Total, marginal and average product, revenue and costs
Total, marginal and average product, revenue and costs
Return to factors versus return to scale
Return to factors versus return to scale
Firm and plant sizeFirm and plant size
Economies and diseconomies of scale
Economies and diseconomies of scale
Optimal level of single input and optimal combination of multiple
inputs
Optimal level of single input and optimal combination of multiple
inputs
Fixed and variable costsFixed and variable costs
Explicit and implicit costsExplicit and implicit costs
Short run versus long run in cost analysis
Short run versus long run in cost analysis
ECW2731Week 1-2 Competition, market structures and
business decisions
Competition, market structures and business decisions
How does competition affect business decisions in different
market structures?
How does competition affect business decisions in different
market structures?
Perfect competition; monopoly; oligopoly; monopolistic
competition, Monopoly/monopsony confrontation
Perfect competition; monopoly; oligopoly; monopolistic
competition, Monopoly/monopsony confrontation
Competitive strategies. Competitive strategies.
Measurement of market structures Measurement of market structures
Market strategies in different market structures.
Market strategies in different market structures.
Non-price competition.Non-price competition.
Multinational companies. Vertical and horizontal coordination.
Multinational companies. Vertical and horizontal coordination.
ECW2731Week 1-2 Pricing strategies and practicesPricing strategies and practices
What prices should be set?What prices should be set?
Mark-up pricingMark-up pricing
Competitive strategies. Competitive strategies.
Price discrimination. Price discrimination.
Bundle pricing Bundle pricing
Multiple and joint product pricing. Multiple and joint product pricing.
Transfer pricing Transfer pricing
ECW2731Week 1-2 Business and GovernmentBusiness and Government
The impact of regulation, deregulation and taxation policy on decision making, competitiveness
and efficiency.
The impact of regulation, deregulation and taxation policy on decision making, competitiveness
and efficiency.
Reasons for regulation. Regulatory response to incentive and
structural failures.
Reasons for regulation. Regulatory response to incentive and
structural failures.
Taxes and subsidiesTaxes and subsidies
Anti-Trust Policies. Anti-Trust Policies.
Problems with regulationProblems with regulation
ECW2731Week 1-2 Capital budgetingCapital budgeting
Decision rules Decision rules
Capital budgeting processCapital budgeting process
Cash flow estimationCash flow estimation
Alternative projectsAlternative projects
Optimal capital budgetingOptimal capital budgeting
Cost of capital.Cost of capital.
ECW2731Week 1-2 Business and current economic
situationResearch topic
Business and current economic situation
Research topic
How important, to managerial and marketing decisions, are changes
in foreign exchange rates, in interest rates, in incomes, in the balance of payments, liberalisation of trade,
etc
How important, to managerial and marketing decisions, are changes
in foreign exchange rates, in interest rates, in incomes, in the balance of payments, liberalisation of trade,
etc
What would be the impact of high/low interest rates on costs or
capital budgeting?
What would be the impact of high/low interest rates on costs or
capital budgeting?
ECW2731Week 1-2
Topic 1.Introduction: The nature of
managerial economic decision making
ECW2731Week 1-2
Weeks 7-8Competition, market structures and business decisions
Weeks 7-8Competition, market structures and business decisions
ManagerialEconomics
ManagerialEconomics
Weeks 5 - 6Production and Costs, technological changes and industrial innovations
Weeks 5 - 6Production and Costs, technological changes and industrial innovations
Weeks 1-2Introduction. The nature of managerial economic decision making
Weeks 1-2Introduction. The nature of managerial economic decision making
Week 9Pricing strategies and practices
Week 9Pricing strategies and practices
Week 10Business and Government.
Week 10Business and Government.
Week 11Capital budgeting
Week 11Capital budgeting
Week. 12
Research question
Business and current economic situation.
Week. 12
Research question
Business and current economic situation.
Weeks 3-4Demand analysis and estimation
Weeks 3-4Demand analysis and estimation
ECW2731Week 1-2
Introduction. The nature of managerial economic decision making
Introduction. The nature of managerial economic decision making
Economic optimisation
Economic optimisation
The value of firm The value of firm
Economic constraints Economic constraints
The basic economic variables
The basic economic variables
DemandDemand
SupplySupply
CostsCosts
RevenueRevenue
ProfitProfit
The role of managerial economics in
managerial decision making
The role of managerial economics in
managerial decision making
Managerial economic as an economics
discipline
Managerial economic as an economics
discipline
ECW2731Week 1-2
Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making
Learning objectives Learning objectives
This topic is deals with the nature and the scope of Managerial Economics as a whole.
The place of Managerial economics in the Economics discipline.
How do managers make their decisions?
The elements of the economic theory of firm that we need to understand nature of managerial economic decision making are:
Economic optimisation;
The value of firm;
Economic constraints;
The basic economic variables, including demand supply, costs, revenue and profit.
ECW2731Week 1-2
Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making
Reading Reading
Mansfield, Chapter 1.
ECW2731Week 1-2
Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making
Managerial economic as an economics discipline Managerial economic as an economics discipline
Macroeconomics
Economics
Microeconomics
International Economics
Regional Economics
Money, finance, banking “Sector” economics
Labor economics
Economics of IT and EC
Managerial economics
Economic Development
ECW2731Week 1-2
Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making
The role of managerial economics in managerial decision making The role of managerial economics in managerial decision making
Managerial decision problems
Product price and output
Make or buy
Production technique
Internet strategy
Advertising media and intensity
Investment and financing
Managerial decision problems
Product price and output
Make or buy
Production technique
Internet strategy
Advertising media and intensity
Investment and financing
Economic concepts
Theory of consumer behaviour
Theory of firm
Theory of market structures and pricing
Economic concepts
Theory of consumer behaviour
Theory of firm
Theory of market structures and pricing
Decision making tools
Numerical analysis
Statistical analysis
Forecasting
Game theory
Optimisation
Decision making tools
Numerical analysis
Statistical analysis
Forecasting
Game theory
Optimisation
Managerial Economics
Use of economics concepts and decision making tools to solve managerial decision problems
Managerial Economics
Use of economics concepts and decision making tools to solve managerial decision problems
Optimal solutions Optimal solutions
ECW2731Week 1-2
Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making
The Process of decision-making
Identify objectives
Define the problem
Identify possible solutions
Select the best possible solution
Implement the decision
The role of managerial economics in managerial decision making The role of managerial economics in managerial decision making
ECW2731Week 1-2
Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making
Theory of the firm
A theory indicating how a firm behaves and what its goals are
The role of managerial economics in managerial decision making The role of managerial economics in managerial decision making
ECW2731Week 1-2
Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making
Economic optimisation
Economic optimisation
Functional relationshipsQ = f (P) for example Q = 200 - 5P
CHERRY CORPORATION
DAILY PER UNITSALES PRICE
150 10100 2050 300 40
ECW2731Week 1-2
Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making
Economic optimisation
Economic optimisation
Marginal value
The marginal value of a dependent variable is the change in this dependent variable associated with a 1-unit change in a particular independent variable
ECW2731Week 1-2
Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making
Economic optimisation
Economic optimisation
CENTRAL POINT
The dependent variable is maximized when its marginal value shifts from positive to negative
ECW2731Week 1-2
Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making
Economic optimisation
Economic optimisation
Relationship between output and profit -- Roland Corporation
OUTPUT TOTAL MARGINAL AVERAGE PER DAY PROFIT PROFIT PROFIT
0 01 100 100 100.02 250 150 125.03 600 350 200.04 1000 400 250.05 1350 350 270.06 1500 150 250.07 1550 50 221.48 1500 -50 187.59 1400 -100 155.6
10 1200 -200 120.0
ECW2731Week 1-2
Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making
Economic optimisation
Economic optimisationTotal, marginal, and average profit --
Roland Corporation
-500
0
500
1000
1500
2000
0 5 10 15
OUTPUT PER DAY
PRO
FIT
TOTAL PROFIT
MARGINALPROFIT
AVERAGE PROFIT
ECW2731Week 1-2
Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making
Economic optimisation
Economic optimisation
Choose alternative that produces a result the most
consistent
with managerial objective
Choose alternative that produces a result the most
consistent
with managerial objective
What is the primary managerial objective?
It depends upon the ownership structure
Profit maximisation?
Sales/revenue maximisation?
The value of firm maximisation?
Profit per employee maximisation?
ECW2731Week 1-2
Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making
The value of firm The value of firm
1 1
cos
(1 ) (1 )
N Nt tt t
t t
Profit Total revenue Total tValue
i i
N – firm’s life timeI - discount rate
- current value of the profit earned in t years time
N – firm’s life timeI - discount rate
- current value of the profit earned in t years time
(1 )tt
Profit
i
The present value of the firm’s
expected future cash flows
ECW2731Week 1-2
Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making
The value of firm The value of firm
ECW2731Week 1-2
Introduction. The nature of managerial economic decision makingIntroduction. The nature of managerial economic decision making
Economic constraints Economic constraints
Limited resourses
Labour CapitalFinance
Raw materialsEnvironment
Limited resourses
Labour CapitalFinance
Raw materialsEnvironment
Limited capacity of market
Demand
Limited capacity of market
Demand
Choice/Opportunity cost Choice/Opportunity cost