Managerial Economics - 1.

SM1.21 Managerial Economics

Welcome to session 1

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.2

Introduction

■ Objectives
■Evaluation

■Course Outline
■Course timetable
■Methodology

■Definitions

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.3

Objectives

■ To get to know each other

■ To understand the structure and
content of the course
■ To know what you are expected
to do and how to obtain good
grades

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.4

Course Objectives

■ To understand the basic of the

Economic Theory
■

■ To provide a foundation in managerial

economics and the application of
economic theory in industry and
technological based organizations

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.5

Evaluation of Course

■ 2-3 graded Quizzes 20%

■ Presentation 20%
■ Participation 10%
■ Final Exam 50%
■ Self evaluation
■ Course evaluation

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.6

Course Outline

❶ The Nature and ❻ Cost Theory

Scope of MECS ❼ Market Structure
❷ Optimization ❽ Strategies and
Techniques and Pricing
Management ❾ The Role of the
Tools Government
❸ Demand Theory ❿ Risk Analysis and
❹ Demand Estimation 
Capital Budgeting
and Forecasting
➲ Tutorial
❺ Production and Cost
Dr. H. Stoessel S A V Managerial Economics
1999
 Managerial Economics - 1.7

Course Timetable

Week 1 Week 2 Week 3 Week 4

Introduction Optimization Demand and Theory of Demand Estimation
the consumer
Theory of the
Firm
Week 5 Week 6 Week 7 Week 8
Production and Cost Cost Theory and Market Structure Strategies and Pricing
Analysis Estimation

Week 9 Week 10 Week 11 Week 12

The Role of the Risk Analysis Tutorial and Final Exam
Government Capital Budgeting reserve

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.8

Methodology

■ “lecturing”
■ Case Studies T he
best
■ Home study
way to
■ Learning by discovery
lear n is
■ Workshop to
■ Project method teach
■ Q&A
Dr. H. Stoessel S A V Managerial Economics
1999
 Managerial Economics - 1.9

Definitions

■ Manager, Management
■ Economics
(Micro-Macro; Positive,Normative)
■ Goals of Economic Policy

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.10

The Scientific Approach

■ Observation
■ Economic Analysis
■ Statistical Analysis
■ Experiments

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.11

Pitfalls

■ Failing to Keep Other Things

Equal
■ The Post Hoc Fallacy
■ The Whole Is Not Always The Sum
Of The Parts
■ Subjectivity (“Is It a Bird”?)

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.12

Other Issues

■ Basic Problem of Economic

Organization:
- What commodities to produce
- How to produce them
- For Whom shall goods be
produced
■ Inputs and Outputs
■ Market, Command and Mixed
Dr. H. Stoessel S A V Managerial Economics
1999
Market, Command and Managerial Economics - 1.13

Mixed Economy
■ Market Economy ■ Command
Economy

Individuals and The

private firms government
take the takes all
decision in the decisions
market place

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.14

Other issues

■ The Law of Scarcity

■ The Uses of Economics
■ How to read Graphics
■

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.15

How to read graphs

D emand f or c orn
D e m a n d fo r c o rn
3

S e rie s 1 Ser i es1

Price

0
0 5 10 0
0 10

Q u a n t it y Q uanti ty

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.16

Calculation of slope

■ Slope = Supply for corn

3
CD/BD= Price C

s/1 = B D .

A
0
s 0 5 10

■ Quantity

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.17

Calculation of slope

■ By constructing a
tangent line we
can calculate
the slope at a
given point the
same way as
for a straight
line
■ Slope of a curve
= slope of S A V
Dr. H. Stoessel Managerial Economics
1999
 Managerial Economics - 1.18

Discussion of five questions

■ Why are we concerned of What, How and for

Whom to produce?
■ One farmer earns more-all farmers earn less?
■ Define economic and free goods
■ Why are some people rich and others poor?
Should the lazy eat well?
■ Difference between command and market
economy?

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.19

Theory of the Firm

■ Production is organized in firms

because efficiency generally
requires large scale production,
the raising of significant
financial resources and the
careful management and
monitoring of ongoing activities

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.20

Objective and value

■ To maximize profits
or
■ To maximize the value of the firm

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.21

Theories of profit

■ Risk
■ Frictional Theory
■ Monopoly Theory
■ Innovation Theory
■ Managerial Efficiency Theory

Dr. H. Stoessel S A V Managerial Economics

1999
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Explicit and implicit Cost

■ Explicit costs comprise all

payments
■ Implicit costs include the
opportunity cost

Dr. H. Stoessel S A V Managerial Economics

1999
Business profit vs. economic Managerial Economics - 1.23

profit

■ Business Profits (accounting

profits) are the firms total
revenue from the sale of it’s
outputs minus the firm’s explicit
cost
■ Economic profits are total
revenues minus explicit and
implicit costs
Dr. H. Stoessel S A V Managerial Economics
1999
Example Business Managerial Economics - 1.24

vs.Economic
■ Firm A ■ Firm B
■ Revenue: 100 ■ Revenue 100

■ Raw Material 30 ■ Raw Material 30

■ Payroll 20 ■ Payroll 20
■ Rent of land 20
■ Interest on loan 10
■

■ Total cost 80
■ ■ Total Cost 50
■ Profit 20

Dr. H. Stoessel S A ■V ProfitManagerial50

Economics
1999
 Managerial Economics - 1.25

Balance Sheet A and B

■ Fixed assets 30 ■ Fixed assets 100

■ Inventory 30 ■ Inventory 30
■ Cash 20 ■ Cash 50

Total assets 80 Total assets 180

■ Bank Loan 50 ■ Equity 130

■ Equity 10 ■ Profit 1996 50
■ Profit 1996 20

Total Liabilities 80 Total Liabilities 180

Dr. H. Stoessel S A V Managerial Economics

1999
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The nature of Profit

■ Profits as implicit returns

■ reward for risk and innovation
■ Monopoly returns

Dr. H. Stoessel S A V Managerial Economics

1999
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Function of Profit

■ Profits provide the crucial signals

for the reallocation of society’s
resources to reflect changes in
consumers’ tastes and demand

Dr. H. Stoessel S A V Managerial Economics

1999
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Constraints

■ Time
■Human Resources
■Capital

■Technology

■Raw Materials

Dr. H. Stoessel S A V Managerial Economics

1999
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Demand Theory

■ You can make even a parrot into

a learned economist; all it must
learn are the two words
“supply” and “demand”

Dr. H. Stoessel S A V Managerial Economics

1999
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Supply

■ The supply curve S u p p ly o f c o r n

relates quantity 6

supplied to 5

price 4

3 S u p p ly

Price
2

0
0 10 20
Q u a n tity

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.31

The Demand Curve

■ The demand curve slopes

downward to the right

Dr. H. Stoessel S A V Managerial Economics

1999
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The Equilibrium

■ The Equilibrium is found at the

intersection of supply and
demand curve. It is also called
the market clearing price
because quantity demanded and
supplied equal at this price.

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.33

Behind the supply curve

■ Businesses supply commodities

for profit (not for charity)
■ The key is the cost of production
■ Cost of production are affected by
technological change and prices
of inputs
■ Prices of related goods
■ The market organization
S A V
Dr. H. Stoessel Managerial Economics
1999
 Managerial Economics - 1.34

Behind the demand curve

■ The good’s own price

■ The average income
■ Population
■ Prices of related goods
■ Tastes
■ Special Influences

Dr. H. Stoessel S A V Managerial Economics

1999
 Managerial Economics - 1.35

The Market Game

■ The Auction

Dr. H. Stoessel S A V Managerial Economics

1999