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Managerial Economics in a Global Economy

Managerial Economics in a Global Economy. Chapter 1 B. SCOPE OF THE COURSE:

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Managerial Economics in a Global Economy

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  1. Managerial Economicsin a Global Economy Chapter 1 B

  2. 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..   • 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.   

  3. 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  

  4. 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.

  5. - 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.

  6. Managerial Decision Problems Economic theoryMicroeconomicsMacroeconomics Decision SciencesMathematical EconomicsEconometrics MANAGERIAL ECONOMICSApplication of economic theoryand decision science tools to solvemanagerial decision problems OPTIMAL SOLUTIONS TOMANAGERIAL DECISION PROBLEMS

  7. THE BASIC PROCESS OF DECISION MAKING Establish Objectives Define the Problem Identify Possible Solutions Consider input constraints Consider legal and other constraints Select the best possible solution Implement the decision

  8. Business Profit: Total revenue minus the explicit or accounting costs of production. •  = TR – TC • e.g. • TR = 100 000, TC = 60 000 •  = 40 000 • 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 30000. He can lend his capital to another firm for 20000. Definitions of Profit

  9. the economic profit = TR - ( TC + Opportunity costs of factors owned by the firm ) •  = 100 000 - ( 60 000 + 30000 + 20000 ) = - 10000 Note: the economic profit is more relevant.

  10. Risk-Bearing Theories of Profit • Frictional Theory of Profit • Monopoly Theory of Profit • Innovation Theory of Profit • Managerial Efficiency Theory of Profit Theories of Profit

  11. 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. Function of Profit

  12. Identifies types of behavior that businesses and their employees should not engage in. • Source of guidance that goes beyond enforceable laws. Business Ethics

  13. Globalization of Economic Activity • Goods and Services • Capital • Technology • Skilled Labor • Technological Change • Telecommunications Advances • The Internet and the World Wide Web The Changing Environment of Managerial Economics

  14. Chapter 1: Appendix The Basics of Demand, Supply, and Equilibrium Prepared by, Ph.D.

  15. 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. Law of Demand

  16. Change in Quantity Demanded Price An increase in price causes a decrease in quantity demanded. P1 P0 Quantity Q1 Q0

  17. Change in Quantity Demanded A decrease in price causes an increase in quantity demanded. A movement from one point to another Price a P0 b P1 Quantity Q0 Q1

  18. 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 Changes in Demand

  19. Change in Demand An increase in demand refers to a rightward shift in the market demand curve. Price P0 Quantity Q0 Q1

  20. Change in Demand A decrease in demand refers to a leftward shift in the market demand curve. Price P0 Quantity Q1 Q0

  21. 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. Law of Supply

  22. Change in Quantity Supplied Price P0 A decrease in price causes a decrease in quantity supplied. P1 Quantity Q1 Q0

  23. Change in Quantity Supplied An increase in price causes an increase in quantity supplied. A movement from one point to another Price P1 b P0 a Quantity Q0 Q1

  24. Change in Production Technology • Change in Input Prices • Change in the Number of Sellers Changes in Supply

  25. Change in Supply An increase in supply refers to a rightward shift in the market supply curve. Price P0 Quantity Q0 Q1

  26. Change in Supply A decrease in supply refers to a leftward shift in the market supply curve. Price P0 Quantity Q1 Q0

  27. 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. Market Equilibrium

  28. Market Equilibrium Price D S P Equilibrium price Quantity Q Equilibrium quantity

  29. D1 P1 Q1 Market Equilibrium Price D0 S0 An increase in demand will cause the market equilibrium price and quantity to increase. P0 Quantity Q0

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