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Introduction to Managerial Economics. Plan for this week. Course introduction Course: scope, goals, and topics Preliminaries: background concepts. Who am I?. Name: Pascal Courty Nationality: French PhD in Economics from University of Chicago

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plan for this week
Plan for this week
  • Course introduction
  • Course: scope, goals, and topics
  • Preliminaries: background concepts
who am i
Who am I?
  • Name: Pascal Courty
  • Nationality: French
  • PhD in Economics from University of Chicago
  • Research: pricing policies (industrial organization), incentive compensation (personnel economics)
  • You want to learn more about me
    • http://web.uvic.ca/~pcourty/
course description
Course description
  • This is a course in applied microeconomics with a primary focus on the needs of managers
  • We study firms and markets, how they operate and how the market mechanism works
  • The goal is to provide a range of economic tools and concepts to analyze market outcomes, and then help understand how to apply them in practice
course content

Microeconomics

Tool Kit

Strategy

Tool Kit

Course Content

1. Introduction

2. Demand

3. Elasticity

4. Supply

5. Competitive Mkts

6. Economic Efficiency

8. Monopoly

9. Pricing Policy

10. Strategic Thinking

11. Oligopoly

course requirements
Course requirements
  • Problem sets (top 3 grades out of 5 problem sets) based on a real world case study and formal exercises (30%)
  • Midterm exam on November 9th (40%)
  • Industry project (30%)
what does microeconomics brings to management education
What does microeconomics brings to management education?
  • Formal models (= Stylised descriptions)
    • Role of assumptions is to abstract from irrelevant details
    • Models provide an explicit analysis using a transparent and logical method
  • Useful frameworks to discuss management problems
    • Language to discuss business situations
    • One of the intellectual foundation for management education
slide8

Source: Airbus

Reproduced with permission

airbus vs boeing
Airbus vs Boeing
  • Airbus: Until 2001, established under French law as a “Groupe d’Intérêt Economique”
  • Boeing: Listed company

April 2004

Dec. 2004

Dec. 2005

June 2006

Boeing launches 787

Airbus launches A350

2005 sales Airbus: 1111 Boeing: 1029

Airbus delays A380; shares fall 26%

airbus vs boeing1
Airbus vs Boeing
  • Why did Airbus corporatize in 2001? What are benefits from corporatization?
  • Why did Airbus Chief Commercial Officer John Leahy remark that A350 would “put a hole in Boeing’s Christmas stocking”?
  • How should Boeing respond?
managerial economics
Managerial economics
  • Science of directing scarce resources
    • resources – financial, human, physical
    • management of customers, suppliers, competitors, internal organization
    • setting – business, nonprofit, household
old new economy
Old/new economy
  • Network effects – benefit/cost depends on total number of other users
  • Scaleability – economies of scale and scope
preliminaries
Preliminaries
  • Scope and methodology
  • Timing
  • Organization
  • Market
  • Globalization
preliminaries scope
Preliminaries: Scope
  • Managerial economics based on microeconomics
    • micro – individual economic behavior
    • macro – aggregate economic behavior
    • Example: increase in oil price
      • micro effects – vehicle users, electric power generators
      • macro effects – inflation, unemployment
preliminaries methodology
Preliminaries: Methodology
  • Economic model – concise abstraction of behavior and outcomes
  • Marginal vis-à-vis average
  • Stock vis-à-vis flow
  • Other things equal
preliminaries methodology1
Preliminaries: Methodology
  • Timing
    • static model – single point in time
    • dynamic model – focus on sequence of actions and payments
preliminaries1
Preliminaries
  • Scope and methodology
  • Timing
  • Organization
  • Market
  • Globalization
timing
Timing
  • Discount future values to be comparable with present values
  • If discount rate = 10%,
    • $1 next year worth 1/1.10 = 91 cents now
    • $1 two years worth about 83 cents now
timing1
Timing
  • Net present value: sum of discounted values of inflows and outflows over time
  • Example:
    • Month 1: gain of $3 million
    • Months 2 and 3: loss of $2 million
    • Net present value:
preliminaries2
Preliminaries
  • Scope and methodology
  • Timing
  • Organization
  • Market
  • Globalization
organization
Organization
  • Vertical boundaries – closer to or further from end user
  • Samsung Electronics – vertical boundaries longer than
    • Intel – specializes in semiconductors (upstream)
    • Motorola – specializes in mobile phones (downstream)
organization1
Organization
  • Horizontal boundaries – scale and scope of activities
  • Samsung Electronics – horizontal boundaries broader than
    • LG.Philips LCD – specializes in LCD
    • Motorola – specializes in mobile phones
individual behavior
Individual behavior
  • Bounded rationality: individuals have limited cognitive abilities and cannot fully exercise self-control
    • Separate accounting for different categories of benefits and costs
    • Lack self-control: addictive behavior and difficulty postponing immediate gratification for longer-term benefits
    • More sensitive to losses than to gains
    • Decisions may depend on how choices are “framed”
preliminaries3
Preliminaries
  • Scope and methodology
  • Timing
  • Organization
  • Market
  • Globalization
market
Market
  • Definition: 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
competitive market
Competitive market
  • Benchmark for managerial economics
    • Extremely competitive market
      • many buyers and many sellers
      • no room for managerial strategizing
    • Achieves economic efficiency
competitive market1
Competitive market
  • Model:
    • demand
    • supply
    • market equilibrium
market power
Market power
  • Definition – ability of a buyer or seller to influence market conditions
  • Seller with market power must manage
    • costs
    • pricing
    • advertising expenditure
    • R&D expenditure
    • strategy toward competitors
market power prozac
Market power:Prozac
  • August 2001: US Court of Appeals limited Prozac patent
    • Lilly market value dropped $36 billion
    • Barr market value rose $1.1 billion
  • Huge discrepancy in impact – why?
imperfect market
Imperfect market
  • Definition: where
    • one party directly conveys a benefit or cost to others, or
    • one party has better information than others
imperfect market disneyland hong kong
Imperfect market:Disneyland Hong Kong
  • Disney insisted on rights to adjoining property before commencing new investment.
  • Why?
preliminaries4
Preliminaries
  • Scope and methodology
  • Timing
  • Organization
  • Market
  • Globalization
globalization why
Globalization: Why?
  • Growth of cross-border trade and investment
    • falling trade barriers
    • falling financial barriers
    • falling communications costs
globalization trade system
Globalization: Trade system
  • World Trade Organization
  • Regional free trade areas
    • European Union
    • North American Free Trade Agreement
    • ASEAN
    • ASEAN-China, ASEAN-India
globalization communications
Globalization: Communications
  • Transport
    • air transport liberalization
    • containerization of surface transport
  • Telecommunications
    • de-regulation
    • scale economies in bandwidth
globalization outsourcing
Globalization: Outsourcing

tele-radiology

transcription

increasing bandwith

outgoing call center,

eg, telemarketing

record-keeping

incoming call center,

eg, customer service

globalization e commerce
Globalization: e-commerce
  • Extends geographical reach –Google, eBay, Yahoo, Amazon
  • Limitations
    • payments system
    • trade barriers
    • shipment costs
summary
Summary
  • Scope and methodology
  • Timing
  • Organization
  • Market
  • Globalization