ECW 2731 Managerial Economics ECW 2731 Week 1

ECW 2731 Managerial Economics

ECW 2731 Week 1 -2 Subject Adviser Dr Gennadi KAZAKEVITCH Berwick campus, Room 129. Phone: (03) 9904 7135. Fax: (03)9907 4100 Office contact hours: Monday 5 -6 PM and Wednesday 4 -5 PM. E-mail: Gennadi. Kazakevitch@monash. edu. au http: //www-personal. buseco. monash. edu. au/~gennadik/gkazwww. htm

ECW 2731 Week 1 -2 Lecture 1 Subject Information Introduction to Managerial Economics

ECW 2731 Week 1 -2 Subject Information • • • Aims, Questions Assessment Assignment Examination Reading Structure

ECW 2731 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.

? ? ? ECW 2731 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?

ECW 2731 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.

ECW 2731 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

ECW 2731 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.

ECW 2731 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 ECW 2731 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 Managerial Economics Week 11 Capital budgeting Week. 12 Research question Weeks 1 -2 Introduction. The nature of managerial economic decision making Business and current economic situation.

ECW 2731 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

ECW 2731 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

ECW 2731 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

ECW 2731 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.

ECW 2731 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

ECW 2731 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

ECW 2731 Week 1 -2 Capital budgeting process Cash flow estimation Decision rules Alternative projects Cost of capital. Optimal capital budgeting

ECW 2731 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

ECW 2731 Week 1 -2 Topic 1. Introduction: The nature of managerial economic decision making

ECW 2731 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 Managerial Economics Week 11 Capital budgeting Week. 12 Research question Weeks 1 -2 Introduction. The nature of managerial economic decision making Business and current economic situation.

ECW 2731 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 Learning objectives ECW 2731 Week 1 -2 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 ECW 2731 Week 1 -2 Reading Mansfield, Chapter 1.

Introduction. The nature of managerial economic decision making ECW 2731 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 ECW 2731 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 ECW 2731 Week 1 -2 The role of managerial economics in managerial decision making The Process of decision-making ØIdentify objectives ØDefine the problem ØIdentify possible solutions ØSelect the best possible solution ØImplement the decision

Introduction. The nature of managerial economic decision making ECW 2731 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 ECW 2731 Week 1 -2 Economic optimisation Functional relationships Q = f (P) for example Q = 200 - 5 P

Introduction. The nature of managerial economic decision making ECW 2731 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 ECW 2731 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 ECW 2731 Week 1 -2 Economic optimisation Relationship between output and profit -- Roland Corporation

Introduction. The nature of managerial economic decision making ECW 2731 Week 1 -2 Economic optimisation Total, marginal, and average profit -- Roland Corporation

Introduction. The nature of managerial economic decision making ECW 2731 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 The value of firm ECW 2731 Week 1 -2 The present value of the firm’s expected future cash flows N I – firm’s life time - discount rate - current value of the profit earned in t years time

Introduction. The nature of managerial economic decision making ECW 2731 Week 1 -2 The value of firm

Introduction. The nature of managerial economic decision making ECW 2731 Week 1 -2 Economic constraints Limited resourses Labour Capital Finance Raw materials Environment Limited capacity of market Demand Choice/Opportunity cost