1. ECW2731 Managerial Economics

2. ECW2731 Week 1-2 Subject Adviser Dr Gennadi KAZAKEVITCH Berwick campus, Room 129. Phone: (03) 9904 7135. Fax: (03)9907 4100 Office contact hours: Monday 5-6 PM and Wednesday 4-5 PM. E-mail: Gennadi.Kazakevitch@monash.edu.au http://www-personal.buseco.monash.edu.au/~gennadik/gkazwww.htm

3. ECW2731 Week 1-2 Lecture 1 Lecture 1 Subject Information Introduction to Managerial Economics

4. ECW2731 Week 1-2 Subject Information Aims, Questions Assessment Assignment Examination Reading Structure

5. ECW2731 Week 1-2 Aims This unit reviews the contemporary economic principles in the context most relevant to business people: –Market processes, –demand patterns, cost structures, –market conditions –pricing policies, and –the impact of regulation on business decisions Cases and problems illustrate how economic concepts can be applied to specific industries to the problems of formulating rational managerial decisions, corporate and marketing strategies.

6. ECW2731 Week 1-2 Questions How do markets work? How do customers value products? What are the relevant production and cost measures for decision making? How does competition affect business decisions in different market structures? What prices should be set? What would be the impact of changes in interest rates on costs, accounting, or capital budgeting? How important to managerial and marketing decisions are changes, in foreign exchange rates, in technology, in incomes, in government regulations, in sources of energy, in the balance of payments? ?????

7. ECW2731 Week 1-2 Assessment Assignment 4000 words - 40%. Two-hour written examination - 60 % To pass the unit you must: (a) complete all the required work, and (b) obtain an overall grade of at lease 50% of the total marks, and (c) obtain at least a 50% grade for the examination.

8. ECW2731 Week 1-2 Assignment Due date: 5 p.m., 20 April 2006 Automatically extended until 4:45 PM Monday, 24 April 2006 We will talk about the assignment later on

9. ECW2731 Week 1-2 Examination Two hours, Section A 4 concise essay style questions on theoretical issues of and (or) analytical technique - 60%. You will be informed about narrow topics in the end of semester. Section B Research Question You will be informed about narrow topics in the middle of semester.

10. ECW2731 Week 1-2 Reading E. Mansfield, Managerial Economics, Sixth Edition, 2006 Any other text in Managerial Economics Library search for the research question Media

11. ECW2731 Week 1-2 Weeks 7-8 Competition, market structures and business decisions Weeks 7-8 Competition, market structures and business decisions Structure Managerial Economics Managerial Economics Weeks 5 - 6 Production and Costs, technological changes and industrial innovations Weeks 5 - 6 Production and Costs, technological changes and industrial innovations Weeks 1-2 Introduction. The nature of managerial economic decision making Weeks 1-2 Introduction. The nature of managerial economic decision making Week 9 Pricing strategies and practices Week 9 Pricing strategies and practices Week 10 Business and Government. Week 10 Business and Government. Week 11 Capital budgeting Week 11 Capital budgeting Week. 12 Research question Business and current economic situation. Week. 12 Research question Business and current economic situation. Weeks 3-4 Demand analysis and estimation Weeks 3-4 Demand analysis and estimation

12. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making Economic optimisation The value of firm Economic constraints The basic economic variables Demand Supply Costs Revenue Profit The role of managerial economics in managerial decision making Managerial economic as an economics discipline

13. ECW2731 Week 1-2 Demand analysis and estimation Price, cross-price, and income elasticity of demand Normal versus inferior good Implication: optimal pricing policy Implication: optimal level of advertising Market demand Market supply Market equilibrium

14. ECW2731 Week 1-2 Production and Costs Production functions Factors of production Total, marginal and average product, revenue and costs Return to factors versus return to scale Firm and plant size Economies and diseconomies of scale Optimal level of single input and optimal combination of multiple inputs Fixed and variable costs Explicit and implicit costs Short run versus long run in cost analysis

15. ECW2731 Week 1-2 Competition, market structures and business decisions Competition, market structures and business decisions How does competition affect business decisions in different market structures? Perfect competition; monopoly; oligopoly; monopolistic competition, Monopoly/monopsony confrontation Competitive strategies. Measurement of market structures Market strategies in different market structures. Non-price competition. Multinational companies. Vertical and horizontal coordination.

16. ECW2731 Week 1-2 Pricing strategies and practices What prices should be set? Mark-up pricing Competitive strategies. Price discrimination. Bundle pricing Multiple and joint product pricing. Transfer pricing

17. ECW2731 Week 1-2 Business and Government The impact of regulation, deregulation and taxation policy on decision making, competitiveness and efficiency. Reasons for regulation. Regulatory response to incentive and structural failures. Reasons for regulation. Regulatory response to incentive and structural failures. Taxes and subsidies Anti-Trust Policies. Problems with regulation

18. ECW2731 Week 1-2 Capital budgeting Decision rules Capital budgeting process Cash flow estimation Alternative projects Optimal capital budgeting Cost of capital.

19. ECW2731 Week 1-2 Business and current economic situation Research topic Business and current economic situation Research topic How important, to managerial and marketing decisions, are changes in foreign exchange rates, in interest rates, in incomes, in the balance of payments, liberalisation of trade, etc How important, to managerial and marketing decisions, are changes in foreign exchange rates, in interest rates, in incomes, in the balance of payments, liberalisation of trade, etc What would be the impact of high/low interest rates on costs or capital budgeting?

20. ECW2731 Week 1-2 Topic 1. Introduction: The nature of managerial economic decision making

21. ECW2731 Week 1-2 Weeks 7-8 Competition, market structures and business decisions Weeks 7-8 Competition, market structures and business decisions Managerial Economics Managerial Economics Weeks 5 - 6 Production and Costs, technological changes and industrial innovations Weeks 5 - 6 Production and Costs, technological changes and industrial innovations Weeks 1-2 Introduction. The nature of managerial economic decision making Weeks 1-2 Introduction. The nature of managerial economic decision making Week 9 Pricing strategies and practices Week 9 Pricing strategies and practices Week 10 Business and Government. Week 10 Business and Government. Week 11 Capital budgeting Week 11 Capital budgeting Week. 12 Research question Business and current economic situation. Week. 12 Research question Business and current economic situation. Weeks 3-4 Demand analysis and estimation Weeks 3-4 Demand analysis and estimation

22. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making Economic optimisation The value of firm Economic constraints The basic economic variables Demand Supply Costs Revenue Profit The role of managerial economics in managerial decision making Managerial economic as an economics discipline

23. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making Learning objectives This topic is deals with the nature and the scope of Managerial Economics as a whole. The place of Managerial economics in the Economics discipline. How do managers make their decisions? The elements of the economic theory of firm that we need to understand nature of managerial economic decision making are: Economic optimisation; The value of firm; Economic constraints; The basic economic variables, including demand supply, costs, revenue and profit.

24. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making Reading Mansfield, Chapter 1.

25. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making Managerial economic as an economics discipline Macroeconomics Economics Microeconomics International Economics Regional Economics Money, finance, banking “Sector” economics Labor economics Economics of IT and EC Managerial economics Economic Development

26. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making The role of managerial economics in managerial decision making Managerial decision problems Product price and output Make or buy Production technique Internet strategy Advertising media and intensity Investment and financing Managerial decision problems Product price and output Make or buy Production technique Internet strategy Advertising media and intensity Investment and financing Economic concepts Theory of consumer behaviour Theory of firm Theory of market structures and pricing Economic concepts Theory of consumer behaviour Theory of firm Theory of market structures and pricing Decision making tools Numerical analysis Statistical analysis Forecasting Game theory Optimisation Decision making tools Numerical analysis Statistical analysis Forecasting Game theory Optimisation Managerial Economics Use of economics concepts and decision making tools to solve managerial decision problems Managerial Economics Use of economics concepts and decision making tools to solve managerial decision problems Optimal solutions

27. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making The Process of decision-making  Identify objectives  Define the problem  Identify possible solutions  Select the best possible solution  Implement the decision The role of managerial economics in managerial decision making

28. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making Theory of the firm ¶A theory indicating how a firm behaves and what its goals are The role of managerial economics in managerial decision making

29. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making Economic optimisation Functional relationships Q = f (P) for example Q = 200 - 5P

30. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making Economic optimisation Marginal value The marginal value of a dependent variable is the change in this dependent variable associated with a 1-unit change in a particular independent variable

31. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making Economic optimisation CENTRAL POINT The dependent variable is maximized when its marginal value shifts from positive to negative

32. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making Economic optimisation Relationship between output and profit -- Roland Corporation

33. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making Economic optimisation Total, marginal, and average profit -- Roland Corporation

34. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making Economic optimisation Choose alternative that produces a result the most consistent with managerial objective Choose alternative that produces a result the most consistent with managerial objective What is the primary managerial objective? It depends upon the ownership structure Profit maximisation? Sales/revenue maximisation? The value of firm maximisation? Profit per employee maximisation?

35. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making The value of firm N – firm’s life time I - discount rate - current value of the profit earned in t years time N – firm’s life time I - discount rate - current value of the profit earned in t years time The present value of the firm’s expected future cash flows

36. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making The value of firm

37. ECW2731 Week 1-2 Introduction. The nature of managerial economic decision making Economic constraints Limited resourses Labour Capital Finance Raw materials Environment Limited resourses Labour Capital Finance Raw materials Environment Limited capacity of market Demand Limited capacity of market Demand Choice/Opportunity cost