Chapter 1 Introduction Chapter One Copyright 2009 Pearson

Chapter 1 Introduction Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 1

Overview Economics and managerial decision making Economics of a business Review of economic terms Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 2

Learning objectives define managerial economics cite important types of resource allocation decisions illustrate how economic changes affect a firm’s ability to earn an acceptable return apply to an individual firm the three basic questions faced by a country Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 3

Economics and managerial decision making p Economics The study of the behavior of human beings in producing, distributing and consuming material goods and services in a world of scarce resources Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 4

Economics and managerial decision making p Management The science of organizing and allocating a firm’s scarce resources to achieve its desired objectives Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 5

Economics and managerial decision making p Managerial economics The use of economic analysis to make business decisions involving the best use (allocation) of an organization’s scarce resources Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 6

Economics and managerial decision making p Relationship to other business disciplines Marketing: demand, price elasticity Finance: capital budgeting, breakeven analysis, opportunity cost, value added Management science: linear programming, regression analysis, forecasting Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 7

Economics and managerial decision making p Relationship to other business disciplines Strategy: types of competition, structure-conduct-performance analysis Managerial accounting: relevant cost, breakeven analysis, incremental cost analysis, opportunity cost Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 8

Economics and managerial decision making p Questions that managers must answer: n What are the economic conditions in our particular market? p market structure? p supply and demand? p technology? Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 9

Economics and managerial decision making p Questions that managers must answer: n What are the economic conditions in our particular market? p government regulations? p international dimensions? p future conditions? p macroeconomic factors? Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 10

Economics and managerial decision making p Questions that managers must answer: n Should our firm be in this business? p if so, at what price? p and at what output level? Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 11

Economics and managerial decision making p Questions that managers must answer: n How can we maintain a competitive advantage over other firms? p cost-leader? p product differentiation? p market niche? p outsourcing, alliances, mergers? p international perspective? Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 12

Economics and managerial decision making p Questions that managers must answer: n What are the risks involved? p shifts in demand/supply conditions? p technological changes? p the effect of competition? p changing interest rates and inflation rates? Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 13

Economics and managerial decision making p Questions that managers must answer: n What are the risks involved? p exchange rates (for companies in international trade)? p political risk (for firms with foreign operations)? Risk is the chance that actual future outcomes will differ from those expected Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 14

Economics of a business p The economics of a business refers to the key factors that affect the firm’s ability to earn an acceptable rate of return on its owners’ investment The most important of these factors are n competition n technology n customers Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 15

Economics of a business p Change: the four-stage model n Stage I (the ‘good old days’) p market dominance p high profit margin p cost plus pricing … changes in technology, competition, customers force firm into Stage II. . Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 16

Economics of a business p Change: the four-stage model n Stage II (crisis) p cost management p downsizing p restructuring … ‘re-engineering’ to deal with changes and move firm into Stage III. . Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 17

Economics of a business p Change: the four-stage model n Stage III (reform) p revenue management p cost cutting has limited benefit … focus on ‘top-line’ growth. . Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 18

Economics of a business p Change: the four-stage model n Stage IV (recovery) p revenue plus … revenue grows profitably Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 19

Economics of a business p Example: Avon p p Chapter One well established company, in stage I until late 1970 s found itself in Stage II during 1980 s since mid 1990 s, entered stage III expanded into emerging markets and updated its image Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 20

Economics of a business p Example: Sears, Kmart p p p Chapter One Wal-Mart effect Sears pushed down to number three in late 1980 s … repositioned itself as a clothing store Kmart filed for bankruptcy in 2002 … plan to acquire Sears Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 21

Economics of a business p Example: Kodak p p Chapter One struggled to transition from chemical-based film to digital imaging responded by developing strong cash flows in new product range Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 22

Review of economic terms p Microeconomics is the study of individual consumers and producers in specific markets, especially: p supply and demand p pricing of output p production process p cost structure p distribution of income Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 23

Review of economic terms p Macroeconomics is the study of the aggregate economy, especially: p national output (GDP) p unemployment p inflation p fiscal and monetary policies p trade and finance among nations Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 24

Review of economic terms p Resources are inputs (factors) of production, notably: p land p labor p capital p entrepreneurship Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 25

Review of economic terms p Scarcity is the condition in which resources are not available to satisfy all the needs and wants of a specified group of people p Opportunity cost is the amount (or subjective value) that must be sacrificed in choosing one activity over the next best alternative Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 26

Review of economic terms p Allocation decisions must be made because of scarcity. Three choices: What should be produced? How should it be produced? For whom should be produced? Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 27

Review of economic terms p Economic decisions of the Firm What - begin or stop providing goods/services (production) How - hiring, staffing, capital budgeting (resourcing) For whom – target the customers most likely to purchase (marketing) Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 28

Review of economic terms p Entrepreneurship is the willingness to take certain risks in the pursuit of goals p Management is the ability to organize resources and administer tasks to achieve objectives Chapter One Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 29

Global application p Example: Western Union p p p Chapter One began over 100 years ago huge changes in technology to survive, the company branched out Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 30

Global application p Example: VNU p p Chapter One Dutch publishing company transformed itself into a global provider of marketing and media information Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 31