1. Introduction, Basic Principles and Methodology
The central themes of Managerial Economics:
Identify problems and opportunities
Analyzing alternatives from which choices can be made
Making choices that are best from the standpoint of the firm or organization

2. Not true that all managers must be managerial economists
But managers who understand the economic dimensions of business problems and apply economic analysis to specific problems often choose more wisely than those who do not.

3. Some Economic Principles of Managers
1. Role of manager is to make decisions. Firms come in all sizes but no firm has unlimited resources so managers must decide how resources are employed

4. Decisions are always among alternatives.
Decision alternatives always have costs and benefits
Opportunity cost = next best alternative foregone.
Marginal or incremental approach
4. Anticipated objective of management is to increase the firm’s value

5. Maximize shareholder’s wealth
Negative impact = principal-agent problem
Firm’s value is measured by its expected profits
Time value of money, discount rates
6. The firm must minimize cost for each level of production

6. The firm’s growth depends on rational investment decisions
Capital budgeting decisions
8. Successful firms deal rationally and ethically with laws and regulations

7. Macroeconomics & Microeconomics
Economists generally divide their discipline into two main branches:
Macroeconomics is the study of the aggregate economy.
National Income Analysis (GDP)
Unemployment
Inflation
Fiscal and Monetary policy
Trade and Financial relationships among nations

8. Microeconomics is the study of individual consumers and producers in specific markets.
Supply and demand
Pricing of output
Production processes
Cost structure
Distribution of income and output
Microeconomics is the basis of managerial economics

9. Methodology, data and application
Methodology- is a branch of philosophy that deals with how knowledge is obtained.
How can you know that you are managing efficiently and effectively?
You need some theory to do some analysis.
Without theory, there can be no good analysis

10. Microeconomics (probably more than other disciplines) provides the methodology for managerial economics Managerial Economics is about both methodology and data You need data to plug into some model to do some analysis. This gives you the information to manage Managerial Economics lends empirical content to the study of effective management

11. Review of Economic Terms
Resources are factors of production or inputs.
Examples:
Land
Labor
Capital
Entrepreneurship

12. Managerial Economics
The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal.

13. Managerial economics is the use of economic analysis to make business decisions involving the best use (allocation) of an organization’s scarce resources.

14. Relationship to other business disciplines
Marketing: Demand, Price Elasticity
Finance: Capital Budgeting, Break-Even Analysis, Opportunity Cost, Economic Value Added
Management Science: Linear Programming, Regression Analysis, Forecasting
Strategy: Types of Competition, Structure-Conduct-Performance Analysis
Managerial Accounting: Relevant Cost, Break-Even Analysis, Incremental Cost Analysis, Opportunity Cost

15. Questions that managers must answer:
What are the economic conditions in a particular market?
Market Structure?
Supply and Demand Conditions?
Technology?
Government Regulations?
International Dimensions?
Future Conditions?
Macroeconomic Factors?

16. Questions that managers must answer:
Should our firm be in this business?
If so, what price and output levels achieve our goals?

17. Questions that managers must answer:
How can we maintain a competitive advantage over our competitors?
Cost-leader?
Product Differentiation?
Market Niche?
Outsourcing, alliances, mergers,
acquisitions?
International Dimensions?

18. Questions that managers must answer:
What are the risks involved?
Risk is the chance or possibility that actual future outcomes will differ from those expected today.

19. Types of risk Changes in demand and supply conditions
Technological changes and the effect of competition
Changes in interest rates and inflation rates
Exchange rates for companies engaged in international trade
Political risk for companies with foreign operations

20. Because of scarcity, an allocation decision must be made
Because of scarcity, an allocation decision must be made. The allocation decision is comprised of three separate choices:
What and how many goods and services should be produced?
How should these goods and services be produced?
For whom should these goods and services be produced?

21. Economic Decisions for the Firm
What: The product decision – begin or stop providing goods and/or services.
How: The hiring, staffing, procurement, and capital budgeting decisions.
For whom: The market segmentation decision – targeting the customers most likely to purchase.

22. Three processes to answer what, how, and for whom
Market Process: use of supply, demand, and material incentives
Command Process: use of government or central authority, usually indirect
Traditional Process: use of customs and traditions

23. Profits are a signal to resource holders where resources are most valued by society
So what factors impact sustainability of industry profitability?
Porter’s 5-forces framework discusses 5 categories of forces that impacts profitability

24. Entry
Power of input sellers
Power of buyers
Industry rivalry
Substitutes and Complements

25. Entry:
Heightens competition
Reduces margin of existing firms
Ability to sustain profits depends on the barriers to entry: cost, regulations, networking, etc.
Profits are higher where entry is low

26. Power of input suppliers:
Do input suppliers have power to negotiate favorable input prices?
Less power if
inputs are standardized,
not highly concentrated
alternative inputs available
Profits are high when suppliers power is low

27. Power of buyers:
High buyer power if
buyers can negotiate favorable terms for the good/service
Buyer concentration is high
Cost of switching to other products is low
perfect information leading to less costly buyer search

28. Industry rivalry:
Rivalry tends to be less intense
in concentrated industries
high product differentiation
high consumer switching cost
Profits are low where industry rivalry is intense

29. Substitutes and complements:
Profitability is eroded when there are close substitutes
Government policies (restrictions e.g. import restriction on drugs from Canada to US) can affect the availability of substitutes.

30. The Five Forces Framework
Sustainable Industry
Profits
Power of
Input Suppliers
Supplier Concentration
Price/Productivity of Alternative Inputs
Relationship-Specific Investments
Supplier Switching Costs
Government Restraints
Buyers
Buyer Concentration
Price/Value of Substitute Products or Services
Customer Switching Costs
Entry
Entry Costs
Speed of Adjustment
Sunk Costs
Economies of Scale
Network Effects
Reputation
Switching Costs
Substitutes & Complements
Price/Value of Surrogate Products or Services
Price/Value of Complementary Products or Services
Industry Rivalry
Timing of Decisions
Information
Concentration
Price, Quantity, Quality, or Service Competition
Degree of Differentiation

31. Market Interactions Consumer-Producer Rivalry
Consumers attempt to locate low prices, while producers attempt to charge high prices.
Consumer-Consumer Rivalry
Scarcity of goods reduces the negotiating power of consumers as they compete for the right to those goods.

32. Producer-Producer Rivalry
Scarcity of consumers causes producers to compete with one another for the right to service customers.
The Role of Government
Disciplines the market process.