Chapter 1

1. Chapter 1 Introduction

2. Introduction • Economics and Managerial Decision Making • The Economics of a Business • Review of Economic Terms

3. Learning Objectives • Define managerial economics • Relationship to microeconomics and related fields • Cite important types of decisions regarding allocation of scarce resources • Provide examples of how changes affect company’s ability to earn an acceptable return • Cite and compare the three basic economic questions from the standpoint of a country and a company

4. Economics and Managerial Decision Making • Economics is “the study of the behavior of human beings in producing, distributing and consuming material goods and services in a world of scarce resources.” (McConnell, 1993)

5. Economics and Managerial Decision Making • Management is the discipline of organizing and allocating a firm’s scarce resources to achieve its desired objectives. Involves the ability to organize and administer various tasks in pursuit of certain objectives.

6. Economics and Managerial Decision Making • Managerial economics is the use of economic analysis to make business decisions involving the best use (allocation) of an organization’s scarce resources.

7. Economics and Managerial Decision Making • Relationship to other business disciplines • Marketing: Demand, Price Elasticity • Finance: Capital Budgeting, Break-Even Analysis, Opportunity Cost, Economic Value Added • Management Science: Linear Programming, Regression Analysis, Forecasting • Strategy: Types of Competition, Structure-Conduct-Performance Analysis • Managerial Accounting: Relevant Cost, Break-Even Analysis, Incremental Cost Analysis, Opportunity Cost

8. Economics and Managerial Decision Making • Questions that managers must answer: • What are the economic conditions in a particular market? • Market Structure? • Supply and Demand Conditions? • Technology? • Government Regulations? • International Dimensions? • Future Conditions? • Macroeconomic Factors?

9. Economics and Managerial Decision Making • Questions that managers must answer: • Should our firm be in this business? • If so, what price and output levels achieve our goals?

10. Economics and Managerial Decision Making • Questions that managers must answer: • How can we maintain a competitive advantage over our competitors? • Cost-leader? • Product Differentiation? • Market Niche? • Outsourcing, alliances, mergers, • acquisitions? • International Dimensions?

11. Economics and Managerial Decision Making • Questions that managers must answer: • What are the risks involved? • Risk is the chance or possibility that actual future outcomes will differ from those expected today.

12. Economics and Managerial Decision Making • Types of risk • Changes in demand and supply conditions • Technological changes and the effect of competition • Changes in interest rates and inflation rates • Exchange rates for companies engaged in international trade • Political risk for companies with foreign operations

13. The Economics of a Business • Economics of a business refers to the key factors that affect the ability of a firm to earn an acceptable rate of return on its owners’ investment. • The most important of these factors are • competition • technology • customers

14. The Economics of a Business • Four Stage Model of Change • Stage I • “The good old days” • Market Dominance • High Profit Margins • Cost Plus Pricing • Changes in Technology, Competition, Customers forced into Stage II

15. The Economics of a Business • Four Stage Model of Change • Stage II • Cost management • Cost Cutting • Downsizing • Restructuring • “Reengineering” to deal with changes

16. The Economics of a Business • Four Stage Model of Change • Stage III • Revenue Management • Cost cutting has limited benefit • Focus on “top-line growth”

17. The Economics of a Business • Four Stage Model of Change • Stage IV • Revenue Plus • Grow revenues profitably

18. Review of Economic Terms • Microeconomics is the study of individual consumers and producers in specific markets. • Supply and demand • Pricing of output • Production processes • Cost structure • Distribution of income and output

19. Review of Economic Terms • Macroeconomics is the study of the aggregate economy. • National Income Analysis (GDP) • Unemployment • Inflation • Fiscal and Monetary policy • Trade and Financial relationships among nations

20. Review of Economic Terms • Scarcity is the condition in which resources are not available to satisfy all the needs and wants of a specified group of people.

21. Review of Economic Terms • Resources are factors of production or inputs. • Examples: • Land • Labor • Capital • Entrepreneurship

22. Review of Economic Terms • Opportunity cost is the amount or subjective value that must be sacrificed in choosing one activity over the next best alternative.

23. Review of Economic Terms • Because of scarcity, an allocation decision must be made. The allocation decision is comprised of three separate choices: • What and how many goods and services should be produced? • How should these goods and services be produced? • For whom should these goods and services be produced?

24. Review of Economic Terms • Economic Decisions for the Firm • What: The product decision – begin or stop providing goods and/or services. • How: The hiring, staffing, procurement, and capital budgeting decisions. • For whom: The market segmentation decision – targeting the customers most likely to purchase.

25. Review of Economic Terms • Three processes to answer what, how, and for whom • Market Process: use of supply, demand, and material incentives • Command Process: use of government or central authority, usually indirect • Traditional Process: use of customs and traditions

26. Review of Economic Terms • Entrepreneurship is the willingness to take certain risks in the pursuit of goals.