100
80
Where?
How? When?
What?
Why?
2014
60
East
West
North
40
20
0
1st Qtr
2nd Qtr 3rd Qtr 4th Qtr
Who?
Managerial Economics
Stefan Markowski
Introduction: The scope
of managerial economics
The economics of competitive advantage
Course aims
• The aim of the course is to apply the basic concepts and
principles of microeconomics within the broader
framework of organisational management
• In particular, the course aims to:
– outline economic determinants of managerial decisions under
different market conditions, methods of economic analysis, decision
support aids and tools and selected economic theories that help
managers understand economic processes and structures; and
– develop skills needed to analyse links between the firm’s business
activities, its external environment and the broader socio-economic
phenomena
• While the course focuses on managerial decision making
in the commercial (private) sector, the application of
microeconomic principles in the public sector will also be
considered
Student learning outcomes
• By the conclusion of this course you should be
able to:
– understand and identify factors impacting managerial
decision making;
– outline the scope of managerial decision making and
the available decision aids;
– explain managerial decision under different market
conditions;
– evaluate the impact of external and internal factors on
managerial decision making;
– apply managerial decision making tools; and
– determine the demand for and supply of the focal
firm’s products
Detailed course schedule
Day no
Topic
Textbook ch.
1 (24 Nov;
3 hrs)
1. Introduction. Decision making process and its elements. The scope of
economic decision making. Application of marginal analysis
Chs. 1-2
2
3
3
3
2. Demand analysis and demand elasticities
Ch. 3
3. Buyer product valuation and choices. Consumer surplus. Buyer pricing
decisions
Ch. 4
4 (27 Nov;
2 hrs)
4. Production/transformation process. Production technologies and input-output
structure
Ch. 5
5 (28 Nov;
2 hrs)
5. Cost structure and cost drivers of producer pricing strategies. Production
scale and scope.
Chs. 5 and 7
6 (1 Dec; 3
hrs)
6. Structure-conduct-performance. Market structures: competition and
contestability. Pricing strategies of buyers and sellers
Ch. 8
7 (2 Dec; 3
hrs)
7. Market structures: monopoly/monopsony, monopolistic competition and
oligopoly. Pricing strategies and strategic behaviour
Chs. 9-10
8 (3 Dec; 3
hrs)
8. Input sourcing and investment. Pricing and market power
Chs. 6 and 11
9 (4 Dec; 2
hrs)
9. Decision making under conditions of uncertainty. Informational asymmetries
and risk management
Ch. 12
10 (5 Dec;
2 hrs)
10. Market research and market analysis. Auction and rings. Strategic
behaviour
Ch. 13
11 (8 Dec;
2 hrs )
12 (9 Dec;
2 hrs)
11. Public sector perspective
Ch. 14
13 (11
Dec; 2 hrs)
Examination
(25 Nov;
hrs)
(26 Nov;
hrs)
12. Revision
13. Examination
Readings
Main reading:
M. R. Baye, Managerial economics and business
strategy, 7th edition, Irwin/McGraw-Hill, 2010
Focus on managerial challenges rather than
economic issues as such. Please note that
Microeconomics is specified as a prerequisite of
this course
Topic 1: The scope of managerial
economics
Topic Contents
1.1
Economics and
economists
1.6
1.2
Why economics
is useful to
managers
Decision making
processes and
their elements
1.7
Principles of
economic
interaction
1.8
Principles of
decision
making
Circular flow of
economic activity
1.9
Firms and
governments
Marginal
analysis
1.10
Further reading
1.3
1.4
1.5
Managers and
the market
1.1 Economics and economists
• Economics is the study of how people manage
and/or should manage their scarce resources
• An economy is a group of people interacting
with each other as producers, consumers and
traders. It used to have spatial boundaries but it
may also be virtual
• To understand how it works, economists
study/analyse how:
– individuals, firms, communities and governments make
decisions about scarce resources
– economic decision-makers interact with each other
– private and social products and outcomes of this interaction
1.1 Economics and economists
• Microeconomics is the study of individual (e.g.,
persons, households, firms) economic behaviour
under conditions of scarcity and uncertainty
• Macroeconomic is the study of aggregate
economic variables such as national income,
consumption or investment
• Specialised or functional areas of economics
application such as growth, development,
health or education
• Managerial economics is the science (and art)
of directing scarce resources to manage more
effectively (using economic principles to
manage better)
1.2 Why economics is useful
to managers
• It helps to understand:
 gains from specialisation and trade
 economic trade-offs and valuation
 opportunity cost (opportunities foregone) of production
and consumption
 the nature of substitution and complementarity in
economic activities
 the application of ”thinking at the margin”
 the nature of economic incentives and disincentives
 the mechanics of net benefit and profit maximisation
 market power and how people interact in markets
1.3 Managers and the market
• Products/outputs of production activities are
validated in output markets
– value chains run from downstream (end product) to
upstream
– cost (supply) chains run from upstream to downstream
• Markets for outputs – goods and services
(selling/marketing)
• Markets for inputs – labour, capital, knowledge,
land (sourcing/procurement/hiring/renting)
• The discipline of the market - money votes
• Market power –the power to set the terms of
market exchange
1.3 Managers and the market
Value
Costs
1.3 Managers and the market
1.3 Managers and the market
• Markets comprise clusters of buyers and sellers
who try to engage each other to exchange
goods and services
• Market as an area of opportunity (what, where,
why?)
• Market as a source of information
• Market as a source of seller/buyer power
• Market as a source of uncertainty and as risk
mitigation mechanism
• Market as an economic umpire (winners and
losers)
1.4 Principles of decision making
• Resources are finite, thus scarce, and should be
used economically
• Decision-makers face trade-offs and must make
choices
• Every choice implies opportunity cost
• To economise, decision-makers must think at
the margin (see below)
• Decision-makers usually respond to incentives
• Decision-makers should consider the value of
time (or time value of money)
1.5 Marginal analysis
• To economise, we compare the cost of an
incremental (marginal) unit of activity, its
marginal cost, with the benefit produced by this
increment of activity, marginal benefit
• If Marginal Benefit > Marginal Cost, it pays to
engage in an activity providing that its Average
(or Total) Benefit equals or exceeds its Average
(or Total) Cost
• Thus, to maximise the Net Benefit (Benefit less
Cost) of an economic activity we should engage
in it as long as its MB>MC providing that its
AB>AC
• Max NB when MB=MC and AB>AC or TB>TC
1.5 Marginal analysis
Costs and Benefits
Total cost, TC
MB
Max NB
loss
MC
profit/net gain
Total benefit, TB
loss
Optimal scale
Volume of output
or scale of activity
1.6 Decision making processes
and their elements
• Production perspective
– Scoping (definition/measurement/analysis)
– Design
– Development
– Production
– Launch
– In-production optimisation/refinement/improvement
– Control/evaluation
– Decommission
• Sourcing perspective
– Requirements specification
– Acquisition/tendering
1.6 Decision making processes
and their elements
– Sustainment in-service/use
– Disposal
– Evaluation
• The process of organisational decision making
– Organisational planning
– Organising
– Leading
– Monitoring and control
– Change management incl. corrective action
– Evaluation
• In managerial economics we normally use economic
models which provide concise description of
activities of interest and allow us to analyse options
1.6 Decision making processes
and their elements
• Example production mgt for six sigma quality
1.7 Principles of economic
interaction
• Trade can make everyone better off
• Markets are usually good for organising
economic activity and moving resources to
areas of best use
• Governments may sometimes improve on the
market performance but they could also make
things worse
• But, institutions of the state are needed to
underpin market operations (e.g., produce
“money” to trade or create a legal framework to
contract business)
1.7 Principles of economic
interaction
• Distinction between
– stocks (quantities of specified items measured at a
point in time); and
– flows (changes in quantities measured over a period of
time)
• They can be mixed but should not be confused
• Ceteris paribus – “holding other things equal” to
examine a change associated with or attributed
to the factor being studied independently of
changes associated with/attributed to other
factors or influences
1.7 Principles of economic
interaction
• Markets facilitate physical exchange of goods
and services and the exchange of property
rights
• Property rights are the rights established in law
to receive the benefits of ownership of a good,
service or an asset
• For some goods and services ‘marketable’
property rights cannot be economically
produced and/or enforced, e.g., positive or
negative externalities (re: Topic 11)
• Market participants often seek market power to
set terms of exchange to favour their interests
(re: market structures)
1.8 Circular Flow of Economic
Activity
Macroeconomic model: Circular flow of economic activity
Output Markets
Firms/
buyers/
Input Markets
sellers/
employers
Principle of market exchange: Buying is also selling, e.g., to
exchange goods for money is to exchange money for goods
People/households/
consumers/investors
/savers/employees
1.9 Firms and governments
• The nature of the firm
• Business objectives
– profit
– rents
– satisfaction
• The principal-agent framework
– owners/shareholders
– managers/employees
• Limits of government economic intervention
– rationale for intervention: market failure
– principal-agent problem
– rationale for non-intervention: government failure
– excessive government
1.10 Further reading
M. R. Baye, Managerial economics and business
strategy, 7th edition, Irwin/McGraw-Hill, 2010:
chs. 1-3