Transcript Lectrure 1.
ECW2731 Managerial Economics ECW2731 Week 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 ECW2731 Week 1-2 Lecture 1 Subject Information Introduction to Managerial Economics ECW2731 Week 1-2 Subject Information • Aims, Questions • Assessment • Assignment • Examination • Reading • Structure ECW2731 Week 1-2 Aims This unit reviews the contemporary economic principles 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 decisions Cases and problems illustrate how economic concepts can be applied to specific industries to the problems of formulating rational managerial decisions, corporate and marketing strategies. ????? ECW2731 Week 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 rates on costs, accounting, or capital budgeting? • How important to managerial and marketing decisions are changes, in foreign exchange rates, in technology, in incomes, in government regulations, in sources of energy, in the balance of payments? ECW2731 Week 1-2 Assessment Assignment 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. ECW2731 Week 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 ECW2731 Week 1-2 Two hours, Examination Section A 4 concise essay style questions on theoretical issues of and (or) analytical technique - 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. ECW2731 Week 1-2 • Reading E. Mansfield, Managerial Economics, Sixth Edition, 2006 • Any other text in Managerial Economics • Library search for the research question • Media Structure ECW2731 Week 1-2 Weeks 7-8 Competition, market structures and business decisions Week 9 Pricing strategies and practices Week 10 Business and Government. Weeks 5 - 6 Production and Costs, technological changes and industrial innovations Weeks 3-4 Demand analysis and estimation Week 11 Capital budgeting Managerial Economics Week. 12 Research question Weeks 1-2 Introduction. The nature of managerial economic decision making Business and current economic situation. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making Managerial economic as an economics discipline The role of managerial economics in managerial decision making Economic optimisation The value of firm Economic constraints Demand The basic economic variables Supply Costs Revenue Profit ECW2731 Week 1-2 Demand analysis and estimation Market demand Market supply Market equilibrium Price, cross-price, and income elasticity of demand Normal versus inferior good Implication: optimal pricing policy Implication: optimal level of advertising ECW2731 Week 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 multiple inputs Fixed and variable costs Explicit and implicit costs Short run versus long run in cost analysis ECW2731 Week 1-2 Competition, market structures and business decisions How does competition affect business decisions in different market structures? Perfect competition; monopoly; oligopoly; monopolistic competition, Monopoly/monopsony confrontation Competitive strategies. Measurement of market structures Market strategies in different market structures. Non-price competition. Multinational companies. Vertical and horizontal coordination. ECW2731 Week 1-2 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 ECW2731 Week 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 ECW2731 Week 1-2 Capital budgeting Capital budgeting process Cash flow estimation Decision rules Alternative projects Cost of capital. Optimal capital budgeting ECW2731 Week 1-2 Business and current economic situation Research topic What would be the impact of high/low interest rates on costs or capital budgeting? 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 ECW2731 Week 1-2 Topic 1. Introduction: The nature of managerial economic decision making ECW2731 Week 1-2 Weeks 7-8 Competition, market structures and business decisions Week 9 Pricing strategies and practices Week 10 Business and Government. Weeks 5 - 6 Production and Costs, technological changes and industrial innovations Weeks 3-4 Demand analysis and estimation Week 11 Capital budgeting Managerial Economics Week. 12 Research question Weeks 1-2 Introduction. The nature of managerial economic decision making Business and current economic situation. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making Managerial economic as an economics discipline The role of managerial economics in managerial decision making Economic optimisation The value of firm Economic constraints Demand The basic economic variables Supply Costs Revenue Profit Introduction. The nature of managerial economic decision making ECW2731 Week 1-2 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. Introduction. The nature of managerial economic decision making ECW2731 Week 1-2 Reading Mansfield, Chapter 1. Introduction. The nature of managerial economic decision making ECW2731 Week 1-2 Managerial economic as an economics discipline Economics Macroeconomics Money, finance, banking Microeconomics “Sector” economics Labor economics Economics of IT and EC Managerial economics International Economics Regional Economics Economic Development Introduction. The nature of managerial economic decision making ECW2731 Week 1-2 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 Decision making tools Theory of consumer behaviour Numerical analysis Theory of firm Statistical analysis Theory of market structures and pricing Forecasting Game theory Optimisation Managerial Economics Use of economics concepts and decision making tools to solve managerial decision problems Optimal solutions Introduction. The nature of managerial economic decision making ECW2731 Week 1-2 The role of managerial economics in managerial decision making The Process of decision-making Identify objectives Define the problem Identify possible solutions Select the best possible solution Implement the decision Introduction. The nature of managerial economic decision making ECW2731 Week 1-2 The role of managerial economics in managerial decision making Theory of the firm A theory indicating how a firm behaves and what its goals are Introduction. The nature of managerial economic decision making ECW2731 Week 1-2 Economic optimisation Functional relationships Q = f (P) for example Q = 200 - 5P CHERRY CORPORATION DAILY SALES 150 100 50 0 PER UNIT PRICE 10 20 30 40 Introduction. The nature of managerial economic decision making ECW2731 Week 1-2 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 Introduction. The nature of managerial economic decision making ECW2731 Week 1-2 Economic optimisation CENTRAL POINT The dependent variable is maximized when its marginal value shifts from positive to negative Introduction. The nature of managerial economic decision making ECW2731 Week 1-2 Economic optimisation Relationship between output and profit -- Roland Corporation OUTPUT PER DAY 0 1 2 3 4 5 6 7 8 9 10 TOTAL MARGINAL AVERAGE PROFIT PROFIT PROFIT 0 100 100 100.0 250 150 125.0 600 350 200.0 1000 400 250.0 1350 350 270.0 1500 150 250.0 1550 50 221.4 1500 -50 187.5 1400 -100 155.6 1200 -200 120.0 Introduction. The nature of managerial economic decision making Economic optimisation ECW2731 Week 1-2 Total, marginal, and average profit -- Roland Corporation 2000 TOTAL PROFIT PROFIT 1500 1000 MARGINAL PROFIT 500 0 -500 0 5 10 OUTPUT PER DAY 15 AVERAGE PROFIT Introduction. The nature of managerial economic decision making ECW2731 Week 1-2 Economic optimisation Choose alternative that produces a result the most consistent with managerial objective What is the primary managerial objective? It depends upon the ownership structure Profit maximisation? Sales/revenue maximisation? The value of firm maximisation? Profit per employee maximisation? Introduction. The nature of managerial economic decision making ECW2731 Week 1-2 The value of firm The present value of the firm’s expected future cash flows Profitt N Total revenue Total cos tt Value t t (1 i ) (1 i ) t 1 t 1 N N – firm’s life time IProfitt - discount rate (1 i )t - current value of the profit earned in t years time Introduction. The nature of managerial economic decision making ECW2731 Week 1-2 The value of firm Introduction. The nature of managerial economic decision making ECW2731 Week 1-2 Economic constraints Limited resourses Labour Capital Finance Raw materials Environment Limited capacity of market Demand Choice/Opportunity cost