lectrure 1

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ECW2731

Managerial Economics

8/8/2019 Lectrure 1


ECW2731Week 1-2

Subject Adviser

Dr Gennadi KAZAKEVITCH

Berwick campus, Room 129.

Phone: (03) 9904 7135.Fax: (03)9907 4100

Office contact hours:

Monday5-6 PM and Wednesday 4-5 PM.

E-mail: [email protected]

http://www-personal.buseco.monash.edu.au/~gennadik/gkazwww.htm

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ECW2731Week 1-2

Lecture 1

Subject Information

Introduction toManagerial Economics

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ECW2731Week 1-2

Subject Information Aims, Questions

Assessment

Assignment

Examination

Reading Structure

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ECW2731Week 1-2 Aims

This unit reviews the contemporary economicprinciples in the context most relevant to business

people:

± Market processes,

± demand patterns, cost structures,

± market conditions

± pricing policies, and

± the impact of regulation on business decisionsCases and problems illustrate how economic concepts can

be applied to specific industries to the problems of

formulating rational managerial decisions, corporate

and marketing strategies.

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ECW2731Week 1-2

Questions

How do markets work?

How do customers value products?

What are the relevant production and cost measures

for decision making? How does competition affect business decisions in

different market structures?

What prices should be set?

What would be the impact of changes in interest rateson costs, accounting, or capital budgeting?

How important to managerial and marketing decisionsare changes, in foreign exchange rates, in technology, inincomes, in government regulations, in sources of

energy, in the balance of payments?

?????

?????

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ECW2731Week 1-2

AssessmentAssignment 4000 words - 40%.

Two-hour written examination - 60 %

To pass the unit you must:

(a) complete all the required work, and

(b) obtain an overall grade of at lease 50% of the total marks, and

(c) obtain at least a 50% grade for the examination.

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ECW2731Week 1-2 Assignment

Due date: 5 p.m., 20 April 2006

Automatically extended until 4:45 PM

Monday, 24 April 2006

We will talk about the assignment later on

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ECW2731Week 1-2

ExaminationTwo hours,

Section A

4 concise essay style questions on theoretical issues of and (or) analyticaltechnique - 60%.

You will be informed about narrow topics in the end of semester.

Section B

Research Question

You will be informed about narrow topics in the middle of semester.

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ECW2731Week 1-2

Reading

E. Mansfield, Managerial Economics, Sixth Edition,

2006

Any other text in Managerial Economics Library search for the research question

Media

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ECW2731Week 1-2

Weeks 7-8

Competition,

market structures and

business decisions

Structure

Managerial

Economics

Weeks 5 - 6

Production and Costs,technological changes and

industrial innovations

Weeks 1-2

Introduction. The nature

of managerial economic

decision making

Week 9

Pricing strategies and

practices

Week 10

Business and Government.

Week 11

Capital budgeting

Week. 12

Research question

Business and current

economic situation.

Weeks 3-4

Demand analysis

and estimation

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ECW2731Week 1-2

Introduction. The nature of managerial

economic decision making

op m sa on

Economic

optimisation

The value of firm

Economic constraints

The basic economic

variables

Demand

Supply

Costs

Revenue

Profit

The role of managerial

economics in

managerial decision

making

Managerial economic

as an economics

discipline

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ECW2731Week 1-2

Demand analysis and estimation

Price, cross-price, and income

elasticity of demand

Normal versus inferior good

Implication: optimal pricing policy

Implication: optimal level of

advertising

Market demand

Market supply

Market equilibrium

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ECW2731Week 1-2 Production and Costs

Production functions

Factors of production

Total, marginal and average

product, revenue and costs

Return to factors versus return to

scale

Firm and plant size

Economies and diseconomies of

scale

Optimal level of single input and

optimal combination of multipleinputs

Fixed and variable costs

Explicit and implicit costs

Short run versus long run in cost

analysis

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Pricing strategies and practices

What prices should be set?

Mark-up pricing

Competitive strategies.

Price discrimination.

Bundle pricing

Multiple and joint product pricing.

Transfer pricing

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ECW2731Week 1-2 Business and Government

The impact of regulation,deregulation and taxation policy on

decision making, competitiveness

and efficiency.

Reasons for regulation. Regulatory

response to incentive and

structural failures.

Taxes and subsidies

Anti-Trust Policies.

Problems with regulation

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ECW2731Week 1-2 Capital budgeting

Decision rules

Capital budgeting process

Cash flow estimation

Alternative projects

Optimal capital budgeting

Cost of capital.

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ECW2731Week 1-2 Business and current economic

situation

Research topic

,

etc

How important, to managerial and

marketing decisions, are changes

in

foreign exchange rates, in interest

rates, in incomes, in the balance of

payments, liberalisation of trade,

etc

What would be the impact of

high/low interest rates on costs or

capital budgeting?

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ECW2731Week 1-2

Topic 1.

Introduction: The nature ofmanagerial economic decision

making

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ECW2731Week 1-2

Weeks 7-8

Competition,

market structures and

business decisions

Managerial

Economics

Weeks 5 - 6

Production and Costs,technological changes and

industrial innovations

Weeks 1-2

Introduction. The nature

of managerial economic

decision making

Week 9

Pricing strategies and

practices

Week 10

Business and Government.

Week 11

Capital budgeting

Week. 12

Research question

Business and current

economic situation.

Weeks 3-4

Demand analysis

and estimation

8/8/2019 Lectrure 1


ECW2731Week 1-2

Introduction. The nature of managerial

economic decision making

op m sa on

Economic

optimisation

The value of firm


The basic economic

variables

Demand

Supply

Costs

Revenue

Profit

The role of managerial

economics in

managerial decision

making

Managerial economic

as an economics

discipline

8/8/2019 Lectrure 1


ECW2731Week 1-2

Introduction. The nature of managerial economic decision making

Learning objectives

This topic is deals with the nature and the scope of

Managerial Economics as a whole.

The place of Managerial economics in the Economics

discipline.

How do managers make their decisions?

The elements of the economic theory of firm that we need

to understand nature of managerial economic decision

making are:

Economic optimisation;

The value of firm;

Economic constraints;

The basic economic variables, including demand

supply, costs, revenue and profit.

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ECW2731Week 1-2


Reading

Mansfield, Chapter 1.

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ECW2731Week 1-2


Managerial economic as an economics discipline

Macroeconomics

Economics

Microeconomics

International Economics

Regional Economics

Money, finance, banking ³Sector´ economicsLabor economics

Economics of IT and

EC

Managerial economics

Economic Development

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The role of managerial economics in managerial decision making

Managerial decision problems

Product price and output

Make or buy

Production technique

Internet strategy

Advertising media and intensity

Investment and financing

Economic concepts

Theory of consumer behaviour

Theory of firm

Theory of market structures and

pricing

Decision making tools

Numerical analysis

Statistical analysis

Forecasting

Game theory

Optimisation

Managerial Economics

Use of economics concepts and

decision making tools to solve

managerial decision problems

Optimal solutions

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The Process of decision-making

Identify objectives

Define the problem

Identify possible solutions

Select the best possible solution

Implement the decision


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Theory of the firm

A theory indicating how a firm

behaves and what its goals are


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op m sa on

Economic

optimisation

Functional relationships

Q = f (P) for example Q = 200 - 5P

CHERRY CORPORATION

DAILY PER UNIT

SALES PRICE

150 10

100 2050 30

0 40

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op m sa on

Economic

optimisation

Marginal value

The marginal value of a dependent variable

is the change in this dependent variable

associated with a 1-unit change in a particular independent variable

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op m sa on

Economic

optimisation

CENTRAL POINT

The dependent variable is maximized when

its marginal value shifts from positive to

negative

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op m sa on

Economic

optimisation

Relationship between output and profit

-- Roland CorporationOUTPUT TOTAL ARGINAL AVERAGE

PER AY PROFIT PROFIT PROFIT

0 0

1 100 100 100.0

2 250 150 125.0

3 600 350 200.0

4 1000 400 250.0

5 1350 350 270.0

6 1500 150 250.07 1550 50 221.4

8 1500 -50 187.5

9 1400 -100 155.6

10 1200 -200 120.0

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op m sa on

Economic

optimisationTotal, marginal, and average profit -- RolandCorporation

-500

0

500

1000

1500

2000

0 5 10 15

OUTPUT PER DAY

P R O F I T

TOTAL

PROFITMARGINAL

PROFIT

AVERAGE

PROFIT

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op m sa on

Economic

optimisation

Choose alternativethat produces a result the most

consistent

with managerial objective

What is the primarymanagerial objective?

It depends upon the ownership structure

Profit maximisation?

Sales/revenue maximisation?

The value of firm

maximisation?

Profit per employee

maximisation?

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The value of firm

1 1

cos

(1 ) (1 )

N N t t

t t t t

Prof it Total r evenue Total t Val ue

i i! !

! !

§ §

N ± firm¶s life time

I - discount rate

- current value of the

profit earned in t years

time

N ± firm¶s life time

I - discount rate

- current value of the

profit earned in t years

time

(1 )t t Prof it

i

The present value of the firm¶s

expected future cash flows

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The value of firm

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Limited resourses

Labour

Capital

Finance

Raw materials

Environment

Limited capacity of market

Demand

Choice/Opportunity cost

lectrure 1

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