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Introduction to Managerial Economics

Introduction to Managerial Economics. Plan for this week. Course introduction Course: scope, goals, and topics Preliminaries: background concepts. Who am I?. Name: Pascal Courty Nationality: French PhD in Economics from University of Chicago

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Introduction to Managerial Economics

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  1. Introduction to Managerial Economics

  2. Plan for this week • Course introduction • Course: scope, goals, and topics • Preliminaries: background concepts

  3. Who am I? • Name: Pascal Courty • Nationality: French • PhD in Economics from University of Chicago • Research: pricing policies (industrial organization), incentive compensation (personnel economics) • You want to learn more about me • http://web.uvic.ca/~pcourty/

  4. Course description • This is a course in applied microeconomics with a primary focus on the needs of managers • We study firms and markets, how they operate and how the market mechanism works • The goal is to provide a range of economic tools and concepts to analyze market outcomes, and then help understand how to apply them in practice

  5. Microeconomics Tool Kit Strategy Tool Kit Course Content 1. Introduction 2. Demand 3. Elasticity 4. Supply 5. Competitive Mkts 6. Economic Efficiency 8. Monopoly 9. Pricing Policy 10. Strategic Thinking 11. Oligopoly

  6. Course requirements • Problem sets (top 3 grades out of 5 problem sets) based on a real world case study and formal exercises (30%) • Midterm exam on November 9th (40%) • Industry project (30%)

  7. What does microeconomics brings to management education? • Formal models (= Stylised descriptions) • Role of assumptions is to abstract from irrelevant details • Models provide an explicit analysis using a transparent and logical method • Useful frameworks to discuss management problems • Language to discuss business situations • One of the intellectual foundation for management education

  8. Source: Airbus Reproduced with permission

  9. Airbus vs Boeing • Airbus: Until 2001, established under French law as a “Groupe d’Intérêt Economique” • Boeing: Listed company April 2004 Dec. 2004 Dec. 2005 June 2006 Boeing launches 787 Airbus launches A350 2005 sales Airbus: 1111 Boeing: 1029 Airbus delays A380; shares fall 26%

  10. Airbus vs Boeing • 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?

  11. Managerial economics • Science of directing scarce resources • resources – financial, human, physical • management of customers, suppliers, competitors, internal organization • setting – business, nonprofit, household

  12. Old/new economy • Network effects – benefit/cost depends on total number of other users • Scaleability – economies of scale and scope

  13. Preliminaries • Scope and methodology • Timing • Organization • Market • Globalization

  14. Preliminaries: Scope • Managerial economics based on microeconomics • micro – individual economic behavior • macro – aggregate economic behavior • Example: increase in oil price • micro effects – vehicle users, electric power generators • macro effects – inflation, unemployment

  15. Preliminaries: Methodology • Economic model – concise abstraction of behavior and outcomes • Marginal vis-à-vis average • Stock vis-à-vis flow • Other things equal

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

  17. Preliminaries • Scope and methodology • Timing • Organization • Market • Globalization

  18. 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

  19. 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:

  20. Preliminaries • Scope and methodology • Timing • Organization • Market • Globalization

  21. 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)

  22. 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

  23. Individual behavior • Bounded rationality: individuals have limited cognitive abilities and cannot fully exercise self-control • Separate accounting for different categories of benefits and costs • Lack self-control: addictive behavior and difficulty postponing immediate gratification for longer-term benefits • More sensitive to losses than to gains • Decisions may depend on how choices are “framed”

  24. Preliminaries • Scope and methodology • Timing • Organization • Market • Globalization

  25. Market • Definition: 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

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

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

  28. 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

  29. Market power:Prozac • August 2001: US Court of Appeals limited Prozac patent • Lilly market value dropped $36 billion • Barr market value rose $1.1 billion • Huge discrepancy in impact – why?

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

  31. Imperfect market:Disneyland Hong Kong • Disney insisted on rights to adjoining property before commencing new investment. • Why?

  32. Preliminaries • Scope and methodology • Timing • Organization • Market • Globalization

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

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

  35. Globalization: Communications • Transport • air transport liberalization • containerization of surface transport • Telecommunications • de-regulation • scale economies in bandwidth

  36. Globalization: Outsourcing tele-radiology transcription increasing bandwith outgoing call center, eg, telemarketing record-keeping incoming call center, eg, customer service

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

  38. Summary • Scope and methodology • Timing • Organization • Market • Globalization

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