Why should managers study economics? To develop the economics insight necessary to identify your business' competitive advantage.

. To identify how the ups and downs in economy-wide economic activity will impact your business. To improve your business' profitability.

Microeconomics and Macroeconomics Microeconomics: 1. Branch of economics that analyzes the decisions of individual consumers, firms and industries. 2. Microeconomics is analogous to viewing a detailed picture of the economy under the microscope. 3. Prices, amounts of money charged for goods and services in the economy, influence the behavior of consumers and producers. 4. Prices of outputs and inputs (land, labor capital, raw materials, entrepreneurship) affect production decisions of firms. 5. Managerial Economics: Microeconomics applied to managerial decisions of businesses

Macroeconomics:

Branch of economics that focuses on overall economic activity. Macroeconomics is analogous to viewing a big picture of the economy from 30,000 feet in the air. Microeconomics Microeconomics is the branch of economics that analyzes the decisions that individual consumers, firms and industries make as they produce, buy and sell goods and services Macroeconomics Macroeconomics is the branch of economics that focuses on the overall level of economic activity, changes in the price level, and the amount of unemployment by analyzing group or aggregate behavior in different sectors of the economy.

Microeconomic Influences on Managers

How consumer behavior affects their revenue? How production technology and input prices affect their costs?

How the market and regulatory environment in which managers operate influences their ability to set prices and to respond to the strategies of their competitors?

Market Demand Demand is the number of units of a good or service that buyers are willing and able to buy at various prices, when other factors, like, buyers incomes, tastes and preferences and the prices of goods related in consumption are held constant. Market Supply Market supply is the number of units of a good or service that businesses are willing and able to produce at various prices, when other factors, like, resource prices, production technology and prices of goods related in production are held constant. Market Equilibrium In efficient markets with flexible prices, the market price fluctuates to eliminate shortages (an excess of quantity demanded over quantity supplied) and surpluses (an excess of quantity supplied over quantity demanded). Relative Price The price of one good in relation to the price of another similar good. Market Structure Markets:The mechanisms used for the buying and selling of products. There are four markets used in microeconomics, ranging from perfect competition, monopolistic competition, oligopoly, to monopoly. 1. Perfect Competition:

Market structure characterized by a large number of firms that sell an undifferentiated product, with easy entry into the market and complete information available for all participants. Each firm is considered a price-taker that has no influence on the market price of the product. Each firm produces identical goods and services.

Easy for new firms to enter market. Complete information to all buyers and sellers in the market.

Profits signal new firms to enter the market until all profits are competed away as new firms enter the market to capture the excess profit. Profit: Total revenue to the firm from the sales of its product minus the total cost of production.

Market Power:Ability of a firm to influence the market price of its product and strategies to earn large profits over time. 2. Imperfect Competition:Market structures of monopoly, oligopoly and monopolistic competition in which firms have some market power. 3. Monopoly: Market structure characterized by a single firm producing a good with no close substitutes. Barriers to entry (structural, legal or regulatory) exist that prevent other firms from entering the market easily. A firm with market power is considered a price maker and has to lower prices to sell more output. 4.

One firm producing a good or service with no good substitutes New entry is blockaded Imperfect information

Monopolistic Competition: Market structure in which many firms have some degree of market power and produce differentiated products. Large number of firms Each firm produces a good or service that, in some significant way, is different Relatively easy for new firms to enter the market Imperfect information

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Oligopoly: Market structure in which a small number of large firms dominate the market. These firms have market power but must consider their rivals actions into account when developing strategies. Few large, mutually interdependent, firms Firms may produce similar or highly differentiated products Significant barriers to new entry Imperfect information

Goal of the firm The goal of firms is profit maximization. Firms develop strategies to earn the highest profits possible. Understanding Microeconomics Helps managers develop competitive advantage and increase profitability by: Understanding how consumer behavior affects their revenues. Understanding how production technologies and input prices affect their costs. Understanding how the market and regulatory environment influences their ability to set prices and implement competitive strategies. Microeconomic influence on Managers Domestic business cycle fluctuations Global economic conditions Inflation Interest rate fluctuations Technological change

The circular flow of economic activity

1.

Consumers buy goods and services produced by firms in the product market.

2. Consumers supply inputs (land, labor, capital equipment and entrepreneurship) to firms in the resource market. They receive payments for these inputs in the form of wages, rent, interest and profits. 3. Absolute Price Level: Measure of the overall price level in the economy.

The circular flow model is used to analyze spending behavior in the economy. Gross Domestic Product (GDP): Measure of the total market value of all final goods and services that are produced in a country at a given period of time. These include:

Personal Consumption Expenditures (C) by households on durable and non-durable goods and services. Gross Private Domestic Investment Spending (I) on non-residential structures, equipment, and software in addition to residential structures and inventories. Government Consumption Expenditures and Gross Investment (G) at the federal, state and local levels. Net Export Spending (F), or Export Spending (X) minus Import Spending (M).

GDP=C+I+G+F or GDP=C+I+G+(X-M)

Personal Consumption Expenditures

Spending by households on durable goods, nondurable goods, and services (C). Largely determined by consumer income but also influenced by such factors as consumer wealth and confidence.

Gross Private Domestic Investment

Spending by households and firms on nonresidential structures, equipment, software, residential structures and inventories (I). Largely determined by market interest rates but also influenced by business confidence.

Government Spending and Gross Investment

Central, state and local government consumption spending and gross investment (G). Largely determined within the political process but may be used to try to manage macroeconomic activity.

Net Export Spending

Net exports are the difference between the value of US exports and US imports (X-M). Net exports are primarily determined by currency exchange rates, relative prosperity and relative interest rates.

Real Gross Domestic Product

Real gross domestic product is the market value of all final goods and services produced in the economy. GDP = C+I+G+(X-M)

Understanding Macroeconomics

Macroeconomic factors like, inflation, exchange rates, interest rates, and economic growth rates around the world are largely beyond a managers control. Knowledge of these factors and how they affect your business is a key factor in the development of a businesss competitive strategies.

At the macro level, changes in the GDP, or the overall level of economic activity, come from the following. 1. 2. Changes in consumption and investment behavior in the private sector. Monetary policy and fiscal policy. Monetary Policy: Actions of the central bank that affect the interest rates and the amount of funds available for loans which influence consumer and business spending in the economy. Fiscal Policy: Actions of the national government that affect taxes and spending that are used to stimulate or restrain the economy. 3. Changes in the foreign sector including currency devaluation and economic collapse.