ECW2731
Managerial Economics
ECW2731
Week 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: Gennadi.Kazakevitch@monash.edu.au
http://www-personal.buseco.monash.edu.au/~gennadik/gkazwww.htm
ECW2731
Week 1-2
Lecture 1
Subject Information
Introduction to
Managerial Economics
ECW2731
Week 1-2
Subject Information
• Aims, Questions
• Assessment
• Assignment
• Examination
• Reading
• Structure
ECW2731
Week 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.
?????
ECW2731
Week 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?
ECW2731
Week 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.
ECW2731
Week 1-2
Assignment
Due date: 5 p.m., 20 April 2006
Automatically extended until 4:45 PM
Monday, 24 April 2006
We will talk about the assignment later on
ECW2731
Week 1-2
Two hours,
Examination
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.
ECW2731
Week 1-2
•
Reading
E. Mansfield, Managerial Economics, Sixth Edition,
2006
• Any other text in Managerial Economics
• Library search for the research question
• Media
Structure
ECW2731
Week 1-2
Weeks 7-8
Competition,
market structures and
business decisions
Week 9
Pricing strategies and
practices
Week 10
Business and Government.
Weeks 5 - 6
Production and Costs,
technological changes and
industrial innovations
Weeks 3-4
Demand analysis
and estimation
Week 11
Capital budgeting
Managerial
Economics
Week. 12
Research question
Weeks 1-2
Introduction. The nature
of managerial economic
decision making
Business and current
economic situation.
ECW2731
Week 1-2
Introduction. The nature of managerial
economic decision making
Managerial economic
as an economics
discipline
The role of managerial
economics in
managerial decision
making
Economic
optimisation
The value of firm
Economic constraints
Demand
The basic economic
variables
Supply
Costs
Revenue
Profit
ECW2731
Week 1-2
Demand analysis and estimation
Market demand
Market supply
Market equilibrium
Price, cross-price, and income
elasticity of demand
Normal versus inferior good
Implication: optimal pricing policy
Implication: optimal level of
advertising
ECW2731
Week 1-2
Production and Costs
Production functions
Factors of production
Total, marginal and average
product, revenue and costs
Return to factors versus return to
scale
Firm and plant size
Economies and diseconomies of
scale
Optimal level of single input and
optimal combination of multiple
inputs
Fixed and variable costs
Explicit and implicit costs
Short run versus long run in cost
analysis
ECW2731
Week 1-2
Competition, market structures and
business decisions
How does competition affect
business decisions in different
market structures?
Perfect competition; monopoly;
oligopoly; monopolistic
competition, Monopoly/monopsony
confrontation
Competitive strategies.
Measurement of market structures
Market strategies in different
market structures.
Non-price competition.
Multinational companies. Vertical
and horizontal coordination.
ECW2731
Week 1-2
Pricing strategies and practices
What prices should be set?
Mark-up pricing
Competitive strategies.
Price discrimination.
Bundle pricing
Multiple and joint product pricing.
Transfer pricing
ECW2731
Week 1-2
Business and Government
The impact of regulation,
deregulation and taxation policy on
decision making, competitiveness
and efficiency.
Reasons for regulation. Regulatory
response to incentive and
structural failures.
Taxes and subsidies
Anti-Trust Policies.
Problems with regulation
ECW2731
Week 1-2
Capital budgeting
Capital budgeting process
Cash flow estimation
Decision rules
Alternative projects
Cost of capital.
Optimal capital budgeting
ECW2731
Week 1-2
Business and current economic
situation
Research topic
What would be the impact of
high/low interest rates on costs or
capital budgeting?
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
ECW2731
Week 1-2
Topic 1.
Introduction: The nature of
managerial economic decision
making
ECW2731
Week 1-2
Weeks 7-8
Competition,
market structures and
business decisions
Week 9
Pricing strategies and
practices
Week 10
Business and Government.
Weeks 5 - 6
Production and Costs,
technological changes and
industrial innovations
Weeks 3-4
Demand analysis
and estimation
Week 11
Capital budgeting
Managerial
Economics
Week. 12
Research question
Weeks 1-2
Introduction. The nature
of managerial economic
decision making
Business and current
economic situation.
ECW2731
Week 1-2
Introduction. The nature of managerial
economic decision making
Managerial economic
as an economics
discipline
The role of managerial
economics in
managerial decision
making
Economic
optimisation
The value of firm
Economic constraints
Demand
The basic economic
variables
Supply
Costs
Revenue
Profit
Introduction. The nature of managerial economic decision making
ECW2731
Week 1-2
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.
Introduction. The nature of managerial economic decision making
ECW2731
Week 1-2
Reading
Mansfield, Chapter 1.
Introduction. The nature of managerial economic decision making
ECW2731
Week 1-2
Managerial economic as an economics discipline
Economics
Macroeconomics
Money, finance, banking
Microeconomics
“Sector” economics
Labor economics
Economics of IT and
EC
Managerial economics
International Economics
Regional Economics
Economic Development
Introduction. The nature of managerial economic decision making
ECW2731
Week 1-2
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
Economic concepts
Decision making tools
Theory of consumer behaviour
Numerical analysis
Theory of firm
Statistical analysis
Theory of market structures and
pricing
Forecasting
Game theory
Optimisation
Managerial Economics
Use of economics concepts and
decision making tools to solve
managerial decision problems
Optimal solutions
Introduction. The nature of managerial economic decision making
ECW2731
Week 1-2
The role of managerial economics in managerial decision making
The Process of decision-making
Identify objectives
Define the problem
Identify possible solutions
Select the best possible solution
Implement the decision
Introduction. The nature of managerial economic decision making
ECW2731
Week 1-2
The role of managerial economics in managerial decision making
Theory of the firm
A theory indicating how a firm
behaves and what its goals are
Introduction. The nature of managerial economic decision making
ECW2731
Week 1-2
Economic
optimisation
Functional relationships
Q = f (P) for example Q = 200 - 5P
CHERRY CORPORATION
DAILY
SALES
150
100
50
0
PER UNIT
PRICE
10
20
30
40
Introduction. The nature of managerial economic decision making
ECW2731
Week 1-2
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
Introduction. The nature of managerial economic decision making
ECW2731
Week 1-2
Economic
optimisation
CENTRAL POINT
The dependent variable is maximized when
its marginal value shifts from positive to
negative
Introduction. The nature of managerial economic decision making
ECW2731
Week 1-2
Economic
optimisation
Relationship between output and profit
-- Roland Corporation
OUTPUT
PER DAY
0
1
2
3
4
5
6
7
8
9
10
TOTAL MARGINAL AVERAGE
PROFIT
PROFIT
PROFIT
0
100
100
100.0
250
150
125.0
600
350
200.0
1000
400
250.0
1350
350
270.0
1500
150
250.0
1550
50
221.4
1500
-50
187.5
1400
-100
155.6
1200
-200
120.0
Introduction. The nature of managerial economic decision making
Economic
optimisation
ECW2731
Week 1-2
Total, marginal, and average profit -- Roland Corporation
2000
TOTAL
PROFIT
PROFIT
1500
1000
MARGINAL
PROFIT
500
0
-500 0
5
10
OUTPUT PER DAY
15
AVERAGE
PROFIT
Introduction. The nature of managerial economic decision making
ECW2731
Week 1-2
Economic
optimisation
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?
Introduction. The nature of managerial economic decision making
ECW2731
Week 1-2
The value of firm
The present value of the firm’s
expected future cash flows
Profitt N Total revenue  Total cos tt
Value  

t
t
(1

i
)
(1

i
)
t 1
t 1
N
N
– firm’s life time
IProfitt - discount rate
(1  i )t
- current value of the
profit earned in t years
time
Introduction. The nature of managerial economic decision making
ECW2731
Week 1-2
The value of firm
Introduction. The nature of managerial economic decision making
ECW2731
Week 1-2
Economic constraints
Limited resourses
Labour
Capital
Finance
Raw materials
Environment
Limited capacity of market
Demand
Choice/Opportunity cost