managerial economics2[1]

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Definition . 1. Appl ication 2 . S co p e . 3 . M ethodo logy . 4 . C om p etitive markets . 5 . M arket p ower .

6 . I m p erfect M arket . 7 . L oca l versus g loba l markets .

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Managerial economics is the application of enonomics theory and quantitative methods i . e .

Mathmatics and Statistics to the managerialdecision making process . Managerial economics is the science of directing

scarce resources to manage cost effectively . Itconsists of three branches: competitive markets,market power and imperfect markets . A marketconsists of buyers and sellers that communicate

with each other for voluntary exchange . Whethera market is local or global, the same managerialeconomics apply .

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A seller with market power will have freedomto choose suppliers, set prices and use

advertising to influence demand.A market isimperfect when one party directly conveys a

benefit or cost to others, or when one party hasbetter information than others .

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(a) Businesses (such as decisions in relation to

customers including pricing and advertising;suppliers; competitors or the internal workersof the organization), nonprofit organizationsand households .

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(b) The old economy and new economy inessentially the same way except for two distinctiveaspects of the new economy: the importance of network effects and scale and scope economies .

i. network effects in demand the benefit provided bya service depends on the total number of other users,e . g . , when only one person had email, he had no one tocommunicate with, but with 100 M users on line, the

demand for Internet services will increase rapidly.

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ii . scale and scope economies scalability is thedegree to which scale and scope of a business can beincreased without a corresponding increase in costs,e . g . , the information in Yahoo is eminently scalable (thesame information can serve 100 as well as 100 M users)and to serve a larger number of users, Yahoo needsonly increase the capacity of its computers and links .

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(a) Microeconomics the study of individualeconomics behavior where resources are costly, e . g . ,how consumers respond to changes in prices andincome, how businesses decide on employment and

sales, voters behavior and setting of tax policy . (b) Managerial economies the application of

microeconomics to managerial issues (a scope morelimited than microeconomics) .

(c) Macroeconomics the study of aggregateeconomic variables directly (as opposed to theaggregation of individual consumers andbusinesses), e . g . , issues relating to interest andexchange rates, inflation, unemployment, import andexport policies .

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(a) Fundamental premise - economic behavior issystematic and therefore can be studied . Systematic economic behavior means individualsshare common motivations and behavesystematically in making economic choices, i . e . aperson who faces the same choices at twodifferent times will behave in the same way bothtimes .

(b) Economic model a concise description of behavior and outcomes:

i. focuses on particular issues and key variables(e . g . , price, salary), omits considerableinformation, hence unrealistic at times;

ii . constructed by inductive reasoning; iii . to be tested with empirical data and revised as

appropriate .

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(a) Markets . i. a market consists of buyers and sellers that

communicate with one another for voluntaryexchange . It is not limited by physical structure .

ii . in markets for consumer products, the buyersare households and sellers are businesses .

iii . in markets for industrial products, both buyersand sellers are businesses .

iv. in markets for human resources, buyers arebusinesses and sellers are households .

v. Note: an industry is made up of businessesengaged in the production or delivery of thesame or similar items .

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(a) Market power - the ability of a buyer orseller to influence market conditions . A seller with market power will have the

freedom to choose suppliers, set prices andinfluence demand . (b) Businesses with market power, whether

buyers or sellers, still need to understandand manage their costs .

(c) In addition to managing costs, sellers with market power need to manage theirdemand through price, advertising, andpolicy toward competitors .

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(a) Imperfect market - where one partydirectly conveys a benefit or cost to others,or where one party has better informationthan others .

(b) The challenge is to resolve theimperfection and be cost-effective .

(c) Imperfections can also arise within an

organization, and hence, another issue inmanagerial economics is how to structureincentives and organizations .

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(a) Local markets owing to relatively high costs of communication and trade, some markets are local, e . g . ,housing, groceries . The price in one local market is

independent of prices in other local markets.

(b) Global markets - owing to relatively low costs of communication and trade, some markets are global,e . g . , mining, shipping, financial services . The price of an item with a global market in one place will move

together with the pries elsewhere . (c) Whether a market is local or global, the same

managerial economic principles apply .

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managerial economics2[1]

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