INTRODUCTION TO BUSINESS
ADMINISTRATION: ECONOMICS
(MANAGERIAL ECONOMICS, Part I)
Lecturer: Ekaterina Vladimirovna Sokolova
(Public Administration Department)
E-mail: sokolova@som.pu.ru
Course Structure
(Economics or Managerial Economics, Part I)
•
Topic 1. Basics of economic analysis
•
Topic 2. Demand and supply
–
–
•
Topic 2.1. Individual consumer demand
Topic 2.2. Market demand and supply
Topic 3. Production analysis and cost analysis
–
–
•
Topic 3.1. Production policy
Topic 3.2. Theory of cost
Topic 4. Market structure analysis
–
–
Topic 4.1. Perfect competition and monopoly
Topic 4.2. Monopolistic competition and oligopoly
Grading Policy
MIB (Economics)
•
70% - mid-term (or final) exam
•
30% - individual in-class assignments
MITIM (Managerial Economics) 2 grades
1st :
•
70% - mid-term (final for MIB) exam
•
30% - individual in-class assignments
2nd :
•
70% - final exam (Winter session, Managerial Economics,
Part II)
•
30% - individual in-class assignments (Managerial
Economics, Part II)
Final grade = 1st *1/3 + 2nd * 2/3
Economics (Managerial Economics, Part I),
Final Evaluation (Mid-term or final exam)
35 points
• for written mid-term exam (for MITIM
students)
or
• final exam (for MIB students)
Economics (Managerial Economics, Part I),
Current Evaluation
•
15 points for 3 in-class assignments (5
points each)
–
after the end of the corresponding group of topics
–
each assignment includes 5 multiple choice questions
•
–
The student can receive 5 points for each group of
topics and these points will be considered in final mark
respectively the individual assignment can give 15
points
Economics (Managerial Economics, Part I),
Individual In-class Assignments
• Three individual assignments (after the end of the
corresponding group of topics)
• Each assignment includes 3 tasks
– The student can receive 3 points for each group of
topics and these points will be considered in final mark
• Respectively the individual assignments give 12
points for final mark
In-class Group Work
•
In-class group work will take place at seminars
•
Discussion of cases and answering given
questions
•
Doesn’t give any points for final mark
Literature
• Microeconomics: Optimization, Experiments,
and Behaviour. Burkett, John
P. 2006. Oxford Univ. Press., Source:
http://site.ebrary.com/
• Microeconomics Demystified. Depken,
Craig. 2005. The McGraw-Hill Companies.,
Source: http://site.ebrary.com/
• Baye M. Managerial Economics and Business
Strategy [Text] / M. Baye. – McGraw-Hill,
2006. – 620 p.
Topic 1.
Basics of economic analysis
• Economics – the science of making
decisions in the presence of scarce
resources
Managerial Economics vs. Microeconomics:
Common and Different
Computer Manufacturer (e.g.: IBM)
Similar concepts
Microeconomics
Managerial Economics
In which way
were the prices
set?
How should the prices
be set?
Opportunity Cost
• Def #1: the cost of the explicit and implicit resources
that are forgone when a decision is made
• Def #2: the value of the other products that the
resources used in its production could have produced
instead
• The opportunity cost of using a resource includes
both the explicit (or accounting) cost of the resource
and the implicit cost of giving up the next-best
alternative use of the resource
Economic vs. Accounting Profits
• Def : Accounting profit – the total amount of money
taken in from sales (total revenue, or prices times
quantity sold) minus the money cost of producing
goods or services
• Def : Economic profit – the difference between total
revenue (TR) and total opportunity cost (TC)
Reasons for the Existence of Profit
• Innovation
• Risk
• Monopoly power
The Five Forces Framework and
Industry Profitability
• Entry
• Power of input suppliers
• Industry (market) rivalry
• Substitutes and complements.
• Power of buyers
Incentives
• Def: Incentives – affect how resources are
used and how hard employees work
– E.g.: “A manager should be doing a good job” –
mistake
• But!: the effect of a per hour salary for workers to
increase output
Markets
• Consumer-producer rivalry
• Consumer-consumer rivalry
• Producer-producer rivalry
• Government and the market
Managerial Interests and Sales
Maximization
• Separation of ownership from control in large
corporations
• Sales represent a measure of management’s
success, especially since many observers focus
attention on a firm’s share of the market as an
indicator of its performance
Economic Optimization Process
Economic Optimization Process
• Choices involve benefits and costs
• Optimal decision – choice alternative that produces a
result most consistent with managerial objectives
Profit Maximization
• Maximizing profit means maximizing the value of the
firm, which is the present value of current and future
profits
The Role of Constraints
Value of firm
equals
Limited by
Input, legal, and
other constraints
TRt  TCt

t
1  i 
t 1
n
The value of i
depends on:
Values of TRt
depend on:
Values of TCt
depend on:
1. Riskiness of firm
1. Demand and forecasting
1. Production techniques
2. Conditions in
capital market
2. Pricing
2. Cost functions
3. New product developing
3. Process development
Expressing Economic Relations
• spreadsheet – table of electronically stored data
• graph – visual representation of data
• equation – analytical expression of functional
relationship
• dependent variable – Y variable determined by X
values
• independent variable – X variable determined
separately from the Y variable
Total, Average, and Marginal Relations
(1)
• Marginal – change in the dependent variable caused
by a 1-unit change in an independent variable
– Marginal revenue
– Marginal cost
– Marginal profit
Total, Average, and Marginal Relations
(2)
Units of output, Total profits,  Marginal profits, Average
Q
profits,

0
0
0
-
1
19
19
19
2
52
33
26
3
93
41
31
4
136
43
34
5
175
39
35
6
210
35
35
7
217
7
31
8
208
-9
26

Graphing Total, Marginal, and Average
Relations
• Marginal profit is the slope of the total profit curve
• Total profit is maximized when the marginal profit
equals zero
• Average profit rises (falls) when marginal profit is
greater (less) than average profit
Marginal Analysis in Decision Making
• Finding maximums or minimums
• Distinguishing maximums from minimums
• Maximizing the difference between two functions
Multivariate Optimization
• The marginal effect of each independent variable on
the dependent variable
– holding constant the effect of all other independent variables
• Partial derivatives
– The unchanged variables are treated as constants in the
differentiation process
Incremental Concept in Economic
Analysis
• Marginal relations measure only the effect associated
with unitary changes in variables
• The incremental concept is often used as the
practical equivalent of marginal analysis
• Def: Incremental change is the total change resulting
from a decision
– E.g.: Incremental profit is the profit gain or loss associated
with a given decision