Lecture One

1. Lecture One IMBA NCCU Managerial Economics Lecturer: Jack Wu

2. Introduction to Managerial Economics

3. CASE: BOEING AND AIRBUS • Airbus: Until 2001, established under French law as a “Groupe d’Intérêt Economique” • Boeing: Listed company • April 2004: Boeing launches 787 • December 2004: Airbus launches A350

4. Questions of Managerial Economics Related to the Case • Why did Airbus corporatize in 2001? What are benefits from corporatization? • Why did Airbus Chief Commercial Officer John Leahy remark that A350 would “put a hole in Boeing’s Christmas stocking”? • How should Boeing respond?

5. HOW SHOULD BOEING RESPOND? • Should Boeing proceed with its plan to develop the Dreamliner or should it alter its development plans? • Should Boeing respond by changing its pricing for its new jet?? • How much would development and manufacturer cost, and how do these costs depend on sales volume? • Did Airbus respond correctly to Boeing’s Dreamliner?

6. Managerial Economics Managerial economics: Science of directing scarce resources to manage more effectively • resources – financial, human, physical • management of customers, suppliers, competitors, internal organization • organizations – business, nonprofit, household

7. APPLICATION OF MANAGERIAL ECONOMICS • Boeing has limited resources. • Boeing managers seek to maximize the financial return from these limited resources. • They should apply managerial economics to develop pricing and R&D strategies, design their organizations, and so on. • The same is true of Airbus.

8. NEW ECONOMY: INTERNET • Managerial Economics also applies to the new economy. • Example: In pricing, Airlines use online auctions to segment their market between business and leisure travelers. • Example: In competitive strategy, Google competes fiercely with Yahoo.

9. Old/New Economy • Differences between “New” and “Old” economy: _ role of network effects in demand **network effects – benefit/cost depends on total number of other users example: Internt _ importance of economies of scale and scope example: Information in Yahoo is scalable

10. Scope of Managerial Economics • Managerial econ is based on microeconomics. • Microeconomics • Microeconomics is the study of how individual households and firms make decisions and how they interact with one another in markets. • Macroeconomics • Macroeconomics is the study of the economy as a whole.

11. EXAMPLE: INCREASE IN OIL PRICE • Micro effect: vehicle users, electronic power generators • Macro effect: inflation, unemployment

12. Methodology • economic model – concise description of behavior and outcomes • marginal vis-à-vis average • stock vis-à-vis flow • other things equal

13. Methodology • Timing • static model – single point in time • dynamic model – focus on sequence of actions and payments

14. Timing • Discount future values to be comparable with present values • If discount rate = 10%, • $1 next year worth 1/1.10 = 91 cents now • $1 two years worth about 83 cents now

15. Timing • Net present value: sum of discounted values of inflows and outflows over time • Example: • Month 1: gain of $3 million • Months 2 and 3: loss of $2 million • Net present value:

16. Organization • Vertical boundaries – closer to or further from end user • Samsung Electronics – vertical boundaries longer than • Intel – specializes in semiconductors (upstream) • Motorola – specializes in mobile phones (downstream)

17. Organization • Horizontal boundaries – scale and scope of activities • Samsung Electronics – horizontal boundaries broader than • LG.Philips LCD – specializes in LCD • Motorola – specializes in mobile phones

18. Another Example of vertical boundaries: internet • vertical chain: provision of content, internet access, telephone or cable service • Case: America Online merged with Time Warner => become a provider of entire vertical chain • Case: Google provides internet content, but neither telephone or cable service

19. Another Example of Horizontal boundaries: sale of personal computer • Scale: the rate of production • Scope: the range of different items produced • In terms of scale: HP and Lenovo have wider horizontal boundaries than small businesses producing generic machines. • In terms of scope: HP has wider horizontal boundaries than Lenovo

20. Market • Market: Buyers and sellers communicate with one another for voluntary exchange • market need not be physical • industry -- businesses engaged in the production or delivery of the same or similar items

21. Market: continued • Competitive Markets • Market Power • Imperfect Markets

22. Competitive market • Benchmark for managerial economics • Extremely competitive market • many buyers and many sellers • no room for managerial strategizing • Achieves economic efficiency

23. Competitive market • Model: • demand • supply • market equilibrium

24. Market power • Definition – ability of a buyer or seller to influence market conditions • Seller with market power must manage • costs • pricing • advertising expenditure • R&D expenditure • strategy toward competitors

25. Imperfect market • Definition: where • one party directly conveys a benefit or cost to others, or • one party has better information than others

26. Globalization: Why? • Growth of cross-border trade and investment • falling trade barriers • falling financial barriers • falling communications costs

27. Globalization: Trade system • World Trade Organization • Regional free trade areas • European Union • North American Free Trade Agreement • ASEAN • ASEAN-China, ASEAN-India

28. GLOBALIZATION: OUTSOURCING • Outsourcing: the purchase of services or suppliers from external sources. • U.S. financial services business outsource customer service to contractors in the Philippines and India

29. Globalization: e-commerce • Extends geographical reach –Google, eBay, Yahoo, Amazon • Limitations • payments system • trade barriers • shipment costs