Welcome to
EC 209: Managerial
Economics- Group A
By: Dr. Jacqueline Khorassani
Class 1: Week One
1
Monday, September 3
11:00-11:50
Fottrell (AM)

Study the Course Contract available on line
at www.marietta.edu/~khorassj
– Click on Fall 2007 Courses
– Click on EC 209 : Managerial Economics

Click on Course Contract
– It is in Microsoft Word format


Make sure you understand the contract
Ask me questions via an email to
khorassj@marietta.edu or
jacqueline.khorassani@nuigalway.ie .
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Highlights of the Contract



Why Managerial Economics?
Suppose you are the manager of a ice-cream shop
Lists some of the decisions you have to make
– Price of ice-cream
– Quantity of ice-cream
– Inputs (how to minimize cost subject to the constraint of
quality of inputs)
– Productivity/ efficiency

Where have you leaned about these stuff?
– MICROECOMICS
3
Why Managerial Economics?

Do managers have full information?
– No

Where have you learned about
decision making under uncertainty?
– STATISTICS

Managerial Economics is about
microeconomics, statistics, and more
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Textbook


Managerial Economics and Business
Strategy, fifth edition, by Michael R. Baye.
Purchase this book from the college
bookshop because a chapter from another
economics textbook is included with the
version of the book available in the college
bookshop. We will be using this chapter
during the course.
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Means of Communication
1.
Class

2.
My website

3.
Mondays: 11:00-11:50, Fottrell (AM)
Tuesdays: 15:00-15:50, Cairnes Theatre
Thursdays: 15:00-15:50, Tyndall Theatre
www.marietta.edu/~khorassj
Email
1. khorassj@marietta.edu
2. Jacqueline.khorassani@nuigalway.ie
6
Means of Communication
4. Office



310 St. Anthony’s
Phone: 091- 493105 (office
Hours

Mondays: 14:00-15:00
Tu & Th: 12:00-13:00
Wednesdays: 13:00-14:00
& by appointment.
5. Blackboard (Later)
–
http://balckboard.nuigalway.ie
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My Teaching Philosophy

I am not a lecturer
– In other words, I am not going to be a
transmitter of knowledge.



I am a designer
You are not knowledge sponges
You are knowledge constructors
8
My tasks
1. Design a map that will lead you toward the
construction of your knowledge.
–
Study guides will be posted on my website in the
beginning of each week.
2. Help you figure out how to ask the right
questions when you feel lost.
3. Ask you questions in an attempt to find out if
you are on the right track.
4. Give clear and meaningful answers to your
questions.
–
PowerPoint slides of the classroom activities will be
posted on my website at the end of each week.
9
Your tasks
1.
2.
Study and follow the map
Ask questions when you feel lost
– A dumb question is better than no
question
3.
Respond to my questions
– Be prepared to be wrong
sometimes
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Our joint task

is to build a learning environment
in which we feel free and
comfortable to express our
thoughts; to respectfully disagree
with each other at times; and to
learn from each other.
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Assignments




Carry 100 points (25% of the course
grade).
Will be completed on line on Aplia
You will need to register on line.
The details are outlined in the course
contract.
12
Examination
 There
is only one exam at
the end of the term.
 Carries 300 points or 75%
of the course grade.
13
Study the textbook’s
Preface
 Believe
me it is not a waste
of time to read the Preface
of a book
 Ask me questions via an
email.
14
Chapter 1

Who is a manager?
– A person who directs resources to achieve a
stated goal.

What is economics?
– The science of making decisions in the presence
of scare resources.

What is managerial economics?
– The study of how to direct scarce resources in
the way that most efficiently achieves a
managerial goal.

What are some goals and constraints of
managers?
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Costs

What is the accounting (explicit) cost of
producing ice-cream
– The explicit costs of the resources needed to
produce ice-cream.


Milk, ice-cream machine, labor,….
What is the opportunity cost of producing
ice-cream?
– The cost of the explicit and implicit resources
that are foregone when a decision is made.

What is an example of implicit cost?
– If you run your own ice-cream shop and do not directly
(explicitly) pay salary to yourself.
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Ec 209: Managerial
Economics-Group A

Week One- Class 2
– Tuesday, September 4
– Cairness

Is anybody here for the first time?
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I received a question


This class does not have a regular
tutorial
There will be teaching assistant who
will hold office hours and special
tutorial sessions as needed
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Profits

Accounting Profits
– Total revenue minus total explicit cost.

Economic Profits
– Total revenue minus total opportunity
cost.

Which one is higher?
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What are accounting profits
and Economic profit of the
ice-cream shop?






Revenue = €2000
Cost of labor = €500
Cost of other inputs = €700
The owner is the manager but she
does not pay herself salary
Accounting profit=?
Economic profit=?
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Why profits are
important?


The reason you are making profits is
because people are willing and able to
pay a high price (relative to your cost)
for your ice-cream.
Why do they pay a high price?
– Because the value of ice-cream to them is
high. (They really want it badly.)
21
The Five Forces Framework and Profitability
1. Entry
2. Power of
Input Suppliers
3. Power of
Buyers
Sustainabl
e Industry
Profits
3. Industry Rivalry
4. Substitutes & Complements
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Understand Incentives

Are important
– Examples
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Market Interactions

Is there a rivalry between consumer &
Producer
– Consumers attempt to locate low prices,
while producers attempt to charge high
prices.

Is there a rivalry between consumer &
consumer?
– Scarcity of goods
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Market Interactions

Is there a rivalry between Producer &
Producer>
– Scarcity of consumers
– Scarcity of resources

What is the role of Government
– Disciplines the market process.
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Would you prefer to
receive





€100 today or €100 next year?
€100 today or €105 next year?
€100 today or €120 next year?
What affects your decision?
Bring calculators to this class please
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The Time Value of Money
• Present value (PV) of a lump-sum
amount (FV) to be received at the end
of “n” periods when the per-period
interest rate is “i”:
PV 
FV
1  i 
n
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If interest rate is 10%


Then the present value of €110 to be
received one year form now is
PV = 110/(1+0.1) = 100
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Examples
1.
Lotto
–
2.
winner choosing between a single lump-sum
payout of $104 million or $198 million over 25
years.
Business

You need to choose between a project with a
expected profit of €200 next year and another
one with the expected profit of €230 in 2
years.
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Present Value of a Series
• Present value of a stream of future amounts
(FVt) received at the end of each period for
“n” periods:
PV 
FV1
1  i 
1

FV2
1  i 
2
 ...
FVn
1  i 
n
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Example
• You will be receiving 100 next year, 200 in
2 years and 50 in 3 years
• What is the present value of this income
stream if the interest rate is 10%?
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EC 209: Managerial
Economics

Week One: Class 3
– Thursday, September 6
– 15:10- 16:00

Teaching Assistant
– Darragh Flannery
– d.flannery@nuigalway.ie
– Office: 234 , St. Anthony's
– Office Hours: Mondays
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Note:

Aplia Enrollment
– Is Under Professor Brendan Kennley’s
name
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Notes:




At the end of each week, I post classroom
slides on line.
In the beginning of a new week, I post a
study guide on line.
Your job is to review the study guide and
ask me questions.
If you don’t ask, I assume that you have no
problem and I may not cover certain
material. But you are responsible to
know everything that is on the study
guide.
34
I received a question on
implicit/explicit cost

Explicit cost is out of pocket cost
– Pay €200 to attend this class

Implicit cost is forgone benefit
– When attend class can’t go to movies


Value of movies to you = €50
Total opportunity cost of class =
implicit cost + explicit cost = €250
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What is the net present value of a
stream of future amounts?
• Suppose a manager can purchase a stream
of future receipts (FVt ) by spending “C0”
dollars today. The NPV of such a decision is
NPV 
FV1
1  i 
If
1

FV2
1  i 
2
 ...
FVn
1  i 
n
 C0
Decision Rule:
NPV < 0: Reject project
NPV > 0: Accept project
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What is the present value of a
perpetuity of identical cash flows?
• An asset that perpetually generates a stream of cash
flows (CF) at the end of each period is called a
perpetuity.
• The present value (PV) of a perpetuity of cash flows
paying the same amount at the end of each period is
CF
CF
CF
PVPerpetuity 


 ...
2
3
1  i  1  i  1  i 
CF

i
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What is the value of a firm?
• The value of a firm equals the present value of
current and future profits.
– PV = S pt / (1 + i)t
• If profits grow at a constant rate (g < i) and current
period profits are po:
1 i
PVFirm  p 0
before current profits have been paid out as dividends;
ig
1 g
Ex  Dividend
PVFirm
 p0
immediately after current profits are paid out as dividends.
ig
• If the growth rate in profits < interest rate and both
remain constant, maximizing the present value of all
future profits is the same as maximizing current
profits.
38
What are some variables
that managers can control?

Control Variables
– Quantity of Output
– Price
– Product Quality
– Money spent on advertising
– Money spent on R&D
39
Basic Managerial Question: How
much of the control variable should
be used to maximize net benefits?

Where
– Net benefits = total benefits – total costs
40
Marginal analysis: Suppose the control
variable under study is output, Q
• Marginal Benefit, MB
– Is the benefit of the last unit of control variable output
,Q.
– Is equal to the change in total benefits divided by a
change in the output Q:
B
MB 
Q
• Graphically, the MB curve is the slope
(derivative) of the total benefit curve.
41
Marginal Cost (MC)
• Is the cost of the last unit of output, Q
• Is equal to the change in total costs
divided by a change in the control
variable, Q:
C
MC 
Q
• Graphically, the MC curve is the slope
(derivative) of the total cost curve
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Marginal Principle



To maximize benefits, the managerial
control variable (Q) should be increased
up to the point where MB = MC.
MB > MC means the last unit of the
output increased benefits more than it
increased costs  need to produce
more output
MB < MC means the last unit of the
output increased costs more than it
increased benefits  need to produce
less output
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The Geometry of Optimization
Total Benefits
& Total Costs
Costs
Slope =MB
Benefits
B
Slope = MC
C
Q*
Q
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Conclusions



Make sure you include all costs and
benefits when making decisions
(opportunity cost).
When decisions span time, make sure
you are comparing apples to apples (PV
analysis).
Optimal economic decisions are made
at the margin (marginal analysis).
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