Lecture One: Introduction Managerial Economics Lecturer: Jack Wu

Managerial Economics Managerial economics: Science of directing scarce resources to manage more effectively resources – financial, human, physical management of customers, suppliers, competitors, internal organization organizations – business, nonprofit, household Managerial econ is based on microeconomics.

Examples of Managerial Economic Questions Coke and Pepsi: : price war (cut price) Nov. ‘ 99  Pepsi raised prices and advertising  Coke followed Question: How did they end price war?

Examples of Managerial Economic Questions: Continued University: Should it expand into distance education? Should it open a medical school? Should it shut down PhD program?

Examples of Managerial Economic Questions: Continued Household – Should we engage maid service (out-sourcing)? Should we buy a bigger car and incur higher fuel consumption?

Examples of Managerial Economic Questions: Continued Fujitsu: DRAM production Why did Fujitsu shut Durham, UK plant while continuing production at Gresham, OR?

Examples of Managerial Economic Questions: Continued Disney: Why did Disney Co. buy property around Disneyland before commencing new investment?

Organizational Boundaries Vertical boundaries delineate activities closer to or further from the end user Horizontal boundaries define the scale and scope of an organization’s operations

Example of vertical boundaries: internet vertical chain: provision of content, internet access, telephone or cable service Case: America Online merged with Time Warner => become a provider of entire vertical chain Case: Google provides internet content, but neither telephone or cable service

Example of Horizontal boundaries: sale of personal computer Scale: the rate of production Scope: the range of different items produced In terms of scale: HP and Lenovo have wider horizontal boundaries than small businesses producing generic machines. In terms of scope: HP has wider horizontal boundaries than Lenovo

Market Market: Buyers and sellers communicate with one another for voluntary exchange market need not be physical industry -- businesses engaged in the production or delivery of the same or similar items

Market: continued Competitive Markets Market Power Imperfect Markets

The firm’s goal: profit maximization The firm’s profit analysis is based on: _ customers _ suppliers _ competitors _ government _ uncertainty _ internal organization management

Customers and Suppliers Customers _ demand analysis and forecasting Suppliers: _ cost analysis _ supply analysis

Competitors and Government Competitors: _competitive analysis and market structure _ economic efficiency _pricing policy _strategic thinking Government: _ externality and public goods _ regulation

Decision Making under Uncertainty Asymmetric information _ adverse selection _ moral hazard

Internal Organization Incentive Schemes Organizational Architecture

Old/New Economy Differences between “ New ” and “ Old ” economy: _ role of network effects in demand **network effects – benefit/cost depends on total number of other users example: Internt _ importance of economies of scale and scope example: Information in Yahoo is scalable