MANECO • Module 1 - Topic 1: Introduction to Managerial Economics The Roles of a Manager • Manager - A person who directs resources to achieve a defined goal - A manager directs resources and the behavior of individuals for the purpose of accomplishing some tasks - A person responsible for controlling or administering all or a part of an organization - An individual engaged in management activities such as supervising, sustaining, upholding, and assuming responsibility for the work of others in his or her work group. Scarcity - Is a condition where there are insufficient resources to satisfy all the needs and wants of a population. Three Fundamental Economic Problems 1. What goods and services to produce 2. How will the goods and services be produced 3. For whom will the goods and services be produced ➢ The problems above arise because of scarcity. ➢ These same problems are what managers need to address using Management in Economics Concept What to Produce - Management of Economic Resources - Henri Fayol’s Six Management Functions 1. Planning - The process of determining the organization’s goals or performance objectives defining the strategic actions that must be done to accomplish them. 2. Organizing - Involves assigning tasks, setting apart or allocating funds and bringing harmonious relationship in the organization. 3. Staffing - The filling in of the different job positions in the organizational structure. 4. Directing - The process where managers instruct, guide and oversee the performance of their workers 5. Controlling - Involves evaluating and correcting the work performance to ensure that they are working toward the same goal 6. Coordinating - Ensures synchronous goals - Ensuring harmonious relationship making sure there is a “unity of action” Economics as the Science of Scarcity - There are limited resources available to supply humans’ unlimited wants The demand increases while available resources decreases The manager has to determine consumers’ needs and wants and the available resources to satisfy these needs and wants The manager has to plan what resources to be used to produce the goods and services How to Produce - - The manager has to organize the resources, plan the methods and processes of production, hire production staff or workers and lead or direct these workers to their specific tasks Controlling is also important to ensure quality output and that each is performed efficiently For whom will it be Produced - A manager has to coordinate with their managers in the firm to be able to distribute the goods and services to the intended consumers Economics as a Concept • Economics - The use of scarce resources to satisfy unlimited wants - Part of the social sciences which analyzes human behavior - Deals with the production, distribution, and consumption of goods and services - Study of the choices made by individuals and societies with regards to the use of scarce resources to satisfy human unlimited wants. Managerial Economics - - - How managers direct scarce resources in the most efficient manner to achieve a managerial goal. Describes the methods to direct resources To maximize household welfare and maximize firm’s profit Apply economics for the improvement of managerial decisions - - Roles of a Managerial Economist • • Managerial Economist - Helps the management by using his analytical skills and highly developed techniques in solving complex issues of successful decision-making and advanced planning. - Also called business economist or economic advisor The role of Managerial Economist - Studies the economic patterns at macrolevel and analyzes its significance to the specific firm - Consistently examine the probabilities of transforming an ever-changing economic environment into profitable business avenues - Assist the business planning process of the firm - Also assists the management in the decisions pertaining to the internal functioning of a firm such as: ✓ Changes in price ✓ Investment plans ✓ Types of Goods or services to be produced ✓ Inputs to be used ✓ Techniques of production to be employed ✓ Expansion or contraction of firm ✓ Allocation of capital ✓ Location of new plants/ factories ✓ Quantity of outputs to be produced ✓ Replacement of plant equipment ✓ Sales forecasting ✓ Inventory forecasting and etc. - Should analyze changes in macroeconomic indicators and their possible effect on the firm’s functioning such as: ✓ National income ✓ Population ✓ Business cycles - - - Involved in advising the management on public relations, foreign exchange, and trade. Guides the firm on the likely impact of changes in monetary and fiscal policy (it is the use of government revenue) on the firm’s functioning Also makes an economic analysis of the firm’s in competition Collect all economic date and examine the crucial information about the environment in which the firm operates The most significant function is to conduct a detailed research on industrial market In order to perform all these roles, a managerial economist has to conduct an elaborate statistical analysis. Must be vigilant and must have the ability to cope up with the pressures Also provides management with economic information such as tax rates, competitor’s price and product, etc. Give valuable advice to government authorities as well At times a managerial economist has to prepare speeches for the top management. Module 1 - Topic 2: The Economics of Effective Management Factors to Consider in the Economics of Effective Management 1. Identify goals and constraints 2. Recognize the nature and importance of profits 3. Understand Incentives 4. Understand Markets 5. Recognize Time Value of Money 6. Use Marginal Analysis Identifying Goals and Constraints - Basically the goal of the firm is to minimize costs and maximize profits hence a manager must always find ways to procure inputs or resources at the lowest possible cost without compromising the quality. - An effective manager should also consider the constraints that could possibly threaten a business examples are: • Increase in competition • Government or International Policies • Introduction to a New Technology - Technology becomes a threat when one cannot keep up with technological - - advancement or if one does not possess the technological know-how Government or International Policies becomes a constraint because some of this policies can create restrictions on the business operations Unfavorable changes in the prices of inputs is also considered a constraint - Understanding Markets - Recognizing the Nature and Importance of Profits - - - - - An effective Manager has to effectively distinguish Accounting and Economic Profits. Accounting Profit – used as a basis in making business decisions; what appears in the accounting or income statement Economic Profit = Total Revenue – Total Explicit Cost (Expense); High Accounting Profit means the business is doing well Total Opportunity Cost of Production – should also be considered; implicit cost; Implicit cost – is what the owners could have earned have they used their own and resources and invested them in their next best alternative. Recognize Time Value of Money - Vast Economic Profit - Recognizing the Nature and Importance of Profit - - - - Profit serves as a signal to producers and resource owners to use the scarce resources in the production of goods and services which are highly valued by the society. It means that the society place high value on the goods and services for them to demand such at the given market prices, hence the profits earned from the consumers demand dictate will whether the firm will continue investing its resources in the business.Understanding Incentives Changes in profits provide an incentives to stakeholders to alter their use of resources. Profits are the main incentives to business owners to providing goods or services This means that if there are changes in profits then this affect business decisions and how the resources will be utilized. Changes in profits earned dictate investment decisions There are three forms of rivalry that arise from the relative power of buyers and sellers: 1. Consumer-Producer Rivalry – Consumers wanting to buy the product at a lower price vs. producers wanting to sell it at a higher price 2. Consumer-Consumer Rivalry – Competition when there are too many buyers wanting to buy the product which causes the prices of the goods to increase 3. Producer-Producer Rivalry – competition among firms selling the same product, could drive the prices down It is also critical to consider the role of the government in the market since government policies also affects the operations of a business. Opportunity Cost (foregone value) = Total Revenue – (Explicit + Implicit Cost) Incentives affects employee’s productivity as a motivation - Consider the opportunity cost of an investment and take into account the time value of money since a “one dollar today is worth more than a one dollar in the future” which is why it is vital to consider the timing before making a decision. The timing of investment decisions is crucial hence managers must have access to relevant information or data from outside and within the company. This means manager has to also be aware of what is happening in the external environment: (economic, political, social and cultural) macroeconomic and microeconomic factos Forestall any negative effects that such macroeconomic indicators might bring to the business. This is where forecasting and analyzing trends, relationships and movements of financial and economic variables become useful for a manager. Use of Marginal Analysis - The economic rule is: Marginal Benefits > Marginal Cost Marginal Benefit is the additional benefit obtained by adding an additional unit of an input. Ex: The additional output produced by an additional worker and the additional revenue earned termed as marginal revenue - from the production of that additional output. Marginal Cost is the additional cost incurred by adding an additional unit of an input, let’s say a worker, therefore, the additional cost will be measured by the wage rate of that worker. - - Optimal Managerial Decision - - - Is when the marginal benefit equals the marginal cost making the marginal net benefit equal to zero. When the marginal net benefit is ZERO then there is an equal value between marginal benefit and marginal cost This is the optimal level of output or the maximum number of output possible to produce such that if you exceeded to this value you will no longer gain any benefit Example: (insert picture below) • - All the factors that you consider when buying a product or availing a service are actually the determinants of demand or what we also call as factors of demand and they somehow dictate what, why, when and how many of the products you will buy for a given period of time. Review of Basic Concepts • Quantity demand refers to a specific amount or quantity of a good or service that consumers are willing and able to purchase during a given period of time. - Identification of customer’s willingness to purchase is crucial because it will determine whether it is feasible to offer the product or service and whether there is a market for it. • Demand - Refers to the function that illustrates the relationship between price and quantity demand whereas quantity demand refers to a specific amount at a given market price. • Law of Demand - It states that there is an inverse relationship between price and quantity demand - As the price of the goods increases the quantity falls and vice versa, ceteris paribus (other things or factors held constant) • Demand Function - Change in Quantity Demand A movement along a given demand curve that occurs when the price of the good changes, all else is constant Example: (insert picture here) • Change in Demand - A shift in demand, either leftward or rightward, that occurs only when one of the determinants of demand changes. Example: (insert picture below) Module 2 - Topic 1: The Demand Concept - Illustrates the relationship between price and quantity demanded holding other factors constant In a form of a table, a graph, or an equation A table, a graph, or an equation that shows quantity demanded is related to product price, holding constant the other variables that influence demand (ceteris paribus). • Relationship between Demand and total Revenue - A clear grasp of the demand function is important for it will determine the firm’s total revenue and hence profits. - Total Revenue is computed by multiplying price and quantity demand. - Knowledge about this relationship will also help managers determine the market potential of a certain product or service before offering it to the market. Factors of Demand 1. Income – normal or inferior good 2. Price of related goods – substitute good or complementary good 3. Advertising and consumer taste 4. Population – number of consumers 5. Consumer expectations about future price or income Consumer Income - - Depends on the type of good being considered If the good is normal and then income and demand are positively related such that an increase in income leads to an increase in demand For inferior goods, the relationship between goods and demand are negative which means and increase in income causes a decrease in demand. - Normal Goods decrease in income will cause decrease in demand Inferior Goods decrease in income will cause increase in demand Price of Related Goods - - Substitute Goods (those that can be substituted with the other) means that if there is an increase in the price of a good the substitute good will have an increase in demand. Complementary Goods (those that come together) means that if there is an increase in the price of a good there will be decrease in the demand of that good as well as a decrease on the demand of the other. Advertising and Consumer Taste - - The use of famous brand advertisers and commercials which are appealing to consumers will increase the products demand. Change in preferences also affect demand – when people start preferring another product over the other the first product will have a decrease in demand while the new preferred product will have an increase in demand. possible negative effects of such changes on the other hand if the effects of the changes in demand are positive then the managers can take advantage of such opportunities. Consumer Surplus - - Supplementary Video: Demand Forecasting Methods – Use of Forecast • • • Population – number of Consumers - Increasing population entails an increase in the number of consumers When there is an increase in the population of a specific age group which is a market for a certain product then there will also be an increase on the demand of the product. • Consumer Expectations - - With regards to the future price, when consumers expect an increase in the product price this will cause them to purchase the product which will cause an increase on the demand of the product in the present in order to avoid buying the product at a higher price. On the other hand, when there is an increase on the expected future income it causes an increase in the current demand since the customers tend to spend the money they have now knowing that they will have more money in the future. ➢ Managers should be aware of these factors for them to develop to counteract if not avoid the It is the value consumers get from a good but do not have to pay for. It tells how much extra money consumers will be willing to pay for a given amount of a purchased product It is useful in marketing in identifying the best pricing strategy. • The demand forecast affects and is affected by other departments The ultimate objective is to use the forecast to plan business activities such as: - Promotions - How much people we need - How much money we need to invest For Marketing: - They use the forecast to determine the gap between sales target and actual demand that way the marketing knows what kind of promotions they need to run to help us hit our sales targets - We need to forecast to be accurate because if the forecast is too optimistic marketing might cut back on running promotions which could mean we missed our targets What level of forecast does marketing needs? - They are mainly interested in the product family level like the cruiser, promotions are directed to whole product families (di ko to gets) In Sales: - The need to plan resources like whether there is a need to hire additional sales person - If demand, is expected to be high, then there is a need to hire more sales people to capture all those opportunities - Forecasting in each location Module 2 - Topic 2: The Supply Concept Review of Basic Concepts • Quantity Supply - • • Refers to the amount of a good or service producers are willing and able to sell at a particular price during a given period of time. Law of Supply - States that there is a direct or positive relationship between the price and quantity supply - As the price of the good increases, the quantity supplied for that good also increases and vice versa, ceteris paribus or other factors held constant. Direct Supply Function - Same with the demand function, the supply function can also be illustrated through a table, a graph or an equation that shows how quantity supplied is related to product price, holding constant the other variables that influence supply (ceteris paribus) (insert picture here) - • • As price increases, quality supply also increases. Change in Quality Supplied (insert picture here) - A movement along a given supply curve that occurs when the price of the good changes and all else is constant. Change in Supply (insert picture here) - A shift in supply, either leftward or rightward, that occurs only when one of the other factors of supply changes. Factors Affecting Supply • • • • • Price of inputs Price of related goods in production – substitute or complementary good Level of technology Producer’s expectations Number of firms in the market Price of Inputs - - - An increase in the price of input leads to higher production cost and a decrease in supply. A decrease in the price of an input leads to lower production cost and an increase in supply Hence, whenever there is an increase in the price of an input, it is important for a manager to learn how to bargain for input prices or look for cheaper alternative suppliers to still maximize the firm’s profit. Price of Related Goods in Production • • Substitutes in Production - When two goods are called a substitute in production, then an increase in the price of one good cause producers to increase production of the higher priced good and decreased production of the other good. - Example: An increase in the price of a substitute good will increase the supply of that good while causing a decrease on the supply of the other product. Complimentary in Production - When the two goods are considered complements in production, an increase in the price of one good, cause producers to increase the production of both goods. - Example: An increase in the price of a complementary good will increase the supply both the goods. Producer’s Expectations - - An increase in the sales forecast because of a growing economy will lead to an increase in supply. An expectation of increase in the price of a given good will sometimes lead to a decrease in the current supply in the market. Level of Technology - - Technology advancements allow firms to be competitive in the market Technological advancements lead to higher productivity, lower cost per unit of production and increase in supply. It also affects the quality of the product in the market. Failure to innovate will mean failure to the business so managers have to learn to embrace technology and innovation. Number of Firms in the Market - - Depends on barriers to entry When there are low barriers to entry, means that more firms can enter the market and supply the same market. A manager has to think of strategies to remain competitive in the market - where there are many firms offering close substitute products. Usually when the market becomes competitive it causes a reduction in the price of the product and the firms’ profitability ➢ Knowledge about how these factors affect supply can help’ pr managers plan production schedule ahead of time, and device strategy to enable them to compete in the market either through competitive pricing or product innovation. Government regulations can also affect the supply of certain products. This means a producer or seller has to be aware of these government regulations and he/she has to somehow analyze how it can affect the business to be able to plan ahead of time and make necessary adjustments in the business operations. an invisible hand that guides the market and dictates the market price. Review of Basic Concepts • • • Effects of Price Restrictions • Additional Readings: One Year after rice tariffication: Farmers hurting, angry at the new law Republic Act No. 11203, better known as the “rice tariffication law” or RTL, is now one year old. The purpose of RTL is fully reflected in its title: “An Act liberalizing the importation, exportation, and trading of rice, lifting for the purpose the quantitative import restriction on rice, and for other purposes” Attached the pdf of the entire article! Module 2 - Topic 3: Market Equilibrium • Market Price - The market price is determined through the interaction of buyers and sellers. - It is determined by how many will be demanded and supplied at a certain market price where the buyers and sellers have both agreed. • Invisible Hand Concept - The price depends on the willingness of the buyers to pay for a certain price to obtain the product and same with the seller, it depends on the willingness of the seller to supply the product at the given market price. - This is the “invisible hand” concept of Adam Smith which states that there is Market Equilibrium - The point where buyers and sellers meet, where quantity demanded is exactly equal to quantity supplied at a specific price. Surplus - Occurs when quantity supplied is greater than quantity demanded Shortage - Occurs when quality supplied is than quantity demanded • Price Ceiling - The maximum price the government permits sellers to charge for a good. - When this price is below equilibrium, a shortage occurs. - Imposed to protect the consumers - Usually happens when there is a calamity where the government imposes a price freeze to ensure that the basic goods and services remains affordable to the consumers - On the part of the sellers, such government restrictions must be strictly followed - Managers should device strategies for the company to still remain profitable while strategy can be sourcing raw materials at a cheaper price to lower the cost of production and ultimately the price charge to the product. Price Floor - The minimum price the government permits sellers to charge for a good. - When this price is above equilibrium, a surplus occurs. - Imposed to protect the producers - E.g. Farmers which usually suffer from low farm gate prices, to protect them from unfair business practices, the government placed a price floor, however such regulation leads to a surplus of a product. In other countries the government results to buying the surplus goods. Changes in Market Equilibrium • • • • Increase in Consumers’ Income - Increase in demand (normal goods) - Demand curve to the right - Supply remains constant - Leads to shortage, but do not take a long time - The shortage will drive the prices up to eliminate the excess demand - Quantity will increase Increase in Number of Firms - Supply increases - Supply curve shifts to the right - Demand remains constant - Leads to a surplus - The excess supply will drive the prices down to eliminate the surplus - Prices will fall until the market is in a new equilibrium with a lower price - The quantity will increase Decrease in demand caused by a shift of consumers’ preference - Demand curve shifts to the left - Supply remains constant - Leads to a surplus - Once the seller realizes that there is an excess supply he or she will reduce the price until the market is in a new equilibrium with a lower price - Price will fall - Quantity will also fall Increase in the Price of an input - Supply factor - Causes an increase in the cost of production - Decrease in supply other factors held constant - Shifting the supply curve to the left - Demand remains constant - Lower supply and constant demand leads to a shortage - When the seller realizes that there are many consumers wanting to buy the product he/she will drive the price to increase to eliminate shortage - Price will increase until the market is in a new equilibrium - Quantity will fall ➢ Knowledge about this concept can come in handy for managers. ➢ Knowing how the market will react to any change in this factor will help managers plan ahead and develop strategies to shield the firm against any negative effect of such uncontrollable factors on demand and on supply Supplementary Video Outline • • • Under Supply - Prices go up when supply is lower than the demand Over Supply - Prices go down when supply is higher than the demand Market equilibrium - When demand and supply is equal
