Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Managerial Economics in a Global Economy Chapter 1 B

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University  SCOPE OF THE COURSE: This course emphasizes the practical application of economic theory to managerial decision-making and problem solving. A primary focus of the course is to use the tools of microeconomics together with quantitative and statistical methods to understand, analyze, and predict the behavior of consumers and business firms.. This course emphasizes the practical application of economic theory to managerial decision-making and problem solving. A primary focus of the course is to use the tools of microeconomics together with quantitative and statistical methods to understand, analyze, and predict the behavior of consumers and business firms..  COURSE REQUIREMENTS: Prior knowledge of microeconomic & macroeconomics analysis and statistics is crucial. Student may need to learn “Internet Searching” for some case studies and other related assignments. Prior knowledge of microeconomic & macroeconomics analysis and statistics is crucial. Student may need to learn “Internet Searching” for some case studies and other related assignments.

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University COURSE CONTENTS: · Introduction: (scope of managerial economics, tools of analysis & optimization). · Demand, markets, and elasticity. · Regression analysis, diagnostic statistics, curve fitting, and violations. · Estimating structural demand functions. · Forecasting: (Structural demand equations, simple time series models, & qualitative forecasting). · Production, Costs and profitability analysis (short and long run). · Market Structure and Globalization: perfect competition, monopolistic competition, oligopoly, & monopoly, market power and market domination including; cartels, local and international dominating firms, and pricing practices (price discrimination, action reaction pricing policies, and non profit pricing). · Capital Budgeting and investment decisions · Risk analysis. · Linear Programming. · Government and Business · Government and Business

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Managerial economics: provides a wide variety of practical techniques that we can use to reduce costs and eliminate wastes and maximize profits. Managerial economics provides a link between economic theory and the decision sciences in the analysis of managerial decision making. Economic theory: - MICROECONOMICS: focus on individual consumers, firms, and industries. Its role is relatively important. Managerial economics draws heavily from microeconomics. However, managerial economics is quite different.

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University - MACROECONOMICS: focus on aggregate output, income, and employment  There is a relationship between managerial economics and decision sciences  Managerial economics has arisen from a complex mixture of various parts of economics and the decision sciences including statistics.

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Managerial Decision Problems Economic theory Microeconomics Macroeconomics Decision Sciences Mathematical Economics Econometrics MANAGERIAL ECONOMICS Application of economic theory and decision science tools to solve managerial decision problems OPTIMAL SOLUTIONS TO MANAGERIAL DECISION PROBLEMS

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Establish Objectives Define the Problem Identify Possible Solutions Consider input constraints Consider legal and other constraints Select the best possible solution Implement the decision THE BASIC PROCESS OF DECISION MAKING

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Definitions of Profit Business Profit: Total revenue minus the explicit or accounting costs of production.   = TR – TC  e.g.  TR = , TC =   =  Economic Profit: Total revenue minus the explicit and implicit costs of production.  Suppose the owner works as the manager and takes the profit as a reward. But he could manage another company for He can lend his capital to another firm for

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University  the economic profit = TR - ( TC + Opportunity costs of factors owned by the firm )   = ( ) = Note: the economic profit is more relevant.

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Theories of Profit  Risk-Bearing Theories of Profit  Frictional Theory of Profit  Monopoly Theory of Profit  Innovation Theory of Profit  Managerial Efficiency Theory of Profit

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Function of Profit  Profit is a signal that guides the allocation of society’s resources.  High profits in an industry are a signal that buyers want more of what the industry produces.  Low (or negative) profits in an industry are a signal that buyers want less of what the industry produces.

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Business Ethics  Identifies types of behavior that businesses and their employees should not engage in.  Source of guidance that goes beyond enforceable laws.

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University The Changing Environment of Managerial Economics  Globalization of Economic Activity  Goods and Services  Capital  Technology  Skilled Labor  Technological Change  Telecommunications Advances  The Internet and the World Wide Web

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Chapter 1: Appendix The Basics of Demand, Supply, and Equilibrium Prepared by, Ph.D.

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Law of Demand  A decrease in the price of a good, all other things held constant, will cause an increase in the quantity demanded of the good.  An increase in the price of a good, all other things held constant, will cause a decrease in the quantity demanded of the good.

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Change in Quantity Demanded Quantity Price P0P0 Q0Q0 P1P1 Q1Q1 An increase in price causes a decrease in quantity demanded.

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Change in Quantity Demanded Quantity Price P0P0 Q0Q0 P1P1 Q1Q1 A decrease in price causes an increase in quantity demanded. A movement from one point to another a b

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Changes in Demand  Change in Buyers’ Tastes  Change in Buyers’ Incomes  Normal Goods  Inferior Goods  Change in the Number of Buyers  Change in the Price of Related Goods  Substitute Goods  Complementary Goods

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Change in Demand Quantity Price P0P0 Q0Q0 Q1Q1 An increase in demand refers to a rightward shift in the market demand curve.

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Change in Demand Quantity Price P0P0 Q1Q1 Q0Q0 A decrease in demand refers to a leftward shift in the market demand curve.

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Law of Supply  A decrease in the price of a good, all other things held constant, will cause a decrease in the quantity supplied of the good.  An increase in the price of a good, all other things held constant, will cause an increase in the quantity supplied of the good.

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Change in Quantity Supplied Quantity Price P1P1 Q1Q1 P0P0 Q0Q0 A decrease in price causes a decrease in quantity supplied.

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Change in Quantity Supplied Quantity Price P0P0 Q0Q0 P1P1 Q1Q1 An increase in price causes an increase in quantity supplied. A movement from one point to another a b

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Changes in Supply  Change in Production Technology  Change in Input Prices  Change in the Number of Sellers

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Change in Supply Quantity Price P0P0 Q1Q1 Q0Q0 An increase in supply refers to a rightward shift in the market supply curve.

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Change in Supply Quantity Price P0P0 Q1Q1 Q0Q0 A decrease in supply refers to a leftward shift in the market supply curve.

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Market Equilibrium  Market equilibrium is determined at the intersection of the market demand curve and the market supply curve.  The equilibrium price causes quantity demanded to be equal to quantity supplied.

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Market Equilibrium Quantity Price P Q D S Equilibrium price Equilibrium quantity

Managerial Economics Prof. M. El-Sakka CBA. Kuwait University Market Equilibrium Quantity Price P0P0 Q0Q0 D0D0 S0S0 Q1Q1 P1P1 D1D1 An increase in demand will cause the market equilibrium price and quantity to increase.