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5/27/2018 5edCh01
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Managerial Economics: EconomicTools for Todays Decision Makers 5/eBy Paul Keat and Philip Young
ChapterIntroduction
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Introduction
Economics and Managerial Decision
Making
The Economics of a Business
Review of Economic Terms
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Learning Objectives
Define managerial economics
Relationship to microeconomics and related fields
Cite important types of decisions regardingallocation of scarce resources
Provide examples of how changes affectcompanys ability to earn an acceptable return
Cite and compare the three basic economicquestions from the standpoint of a country and acompany
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Economics and Managerial
Decision Making
Economicsis the study of the
behavior of human beings in
producing, distributing and consuming
material goods and services in a world
of scarce resources. (McConnell,
1993)
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Economics and Managerial
Decision Making
Managementis the discipline of
organizing and allocating a firms
scarce resources to achieve its desired
objectives. Involves the ability to
organize and administer various tasks
in pursuit of certain objectives.
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Economics and Managerial
Decision Making
Managerial economicsis the use of
economic analysis to make business
decisions involving the best use
(allocation) of an organizations scarce
resources.
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Economics and Managerial
Decision Making
Relationship to other business disciplines
Marketing: Demand, Price Elasticity
Finance: Capital Budgeting, Break-Even Analysis,Opportunity Cost, Economic Value Added
Management Science: Linear Programming,Regression Analysis, Forecasting
Strategy: Types of Competition, Structure-Conduct-
Performance Analysis Managerial Accounting: Relevant Cost, Break-Even
Analysis, Incremental Cost Analysis, Opportunity Cost
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Economics and Managerial
Decision Making
Questions that managers must answer: What are the economic conditions in a
particular market? Market Structure?
Supply and Demand Conditions?
Technology?
Government Regulations?
International Dimensions? Future Conditions?
Macroeconomic Factors?
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Economics and Managerial
Decision Making
Questions that managers must answer:
Should our firm be in this business?
If so, what price and output levels
achieve our goals?
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Economics and Managerial
Decision Making
Questions that managers must answer:
How can we maintain a competitive advantage
over our competitors? Cost-leader?
Product Differentiation?
Market Niche?
Outsourcing, alliances, mergers, acquisitions?
International Dimensions?
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Economics and Managerial
Decision Making
Questions that managers must answer:
What are the risks involved?
Riskis the chance or possibility that
actual future outcomes will differ from
those expected today.
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Economics and Managerial
Decision Making
Types of risk
Changes in demand and supply conditions
Technological changes and the effect ofcompetition
Changes in interest rates and inflation rates
Exchange rates for companies engaged ininternational trade
Political risk for companies with foreignoperations
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
The Economics of a Business
Economics of a business refers to the keyfactors that affect the ability of a firm to
earn an acceptable rate of return on itsowners investment.
The most important of these factors are
competition
technology
customers
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
The Economics of a Business
Four Stage Model of Change
Stage I
The good old days
Market Dominance
High Profit Margins
Cost Plus Pricing Changes in Technology, Competition,
Customers forced into Stage II
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
The Economics of a Business
Four Stage Model of Change
Stage II
Cost management
Cost Cutting
Downsizing
Restructuring
Reengineering to deal with changes
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The Economics of a Business
Four Stage Model of Change
Stage III
Revenue Management
Cost cutting has limited benefit
Focus on top-line growth
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The Economics of a Business
Four Stage Model of Change
Stage IV
Revenue Plus
Grow revenues profitably
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2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Review of Economic Terms
Microeconomicsis the study of individualconsumers and producers in specific
markets. Supply and demand
Pricing of output
Production processes
Cost structure
Distribution of income and output
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Review of Economic Terms
Macroeconomicsis the study of the
aggregate economy.
National Income Analysis (GDP)
Unemployment
Inflation
Fiscal and Monetary policy
Trade and Financial relationships among
nations
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Review of Economic Terms
Scarcityis the condition in which
resources are not available to satisfy all
the needs and wants of a specified
group of people.
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Review of Economic Terms
Resources are factors of production or
inputs.
Examples:
Land
Labor
Capital
Entrepreneurship
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Review of Economic Terms
Opportunity costis the amount or
subjective value that must be sacrificed
in choosing one activity over the next
best alternative.
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Review of Economic Terms
Because of scarcity, an allocation decisionmust be made. The allocation decision is
comprised of three separate choices: Whatand how many goods and services should
be produced?
Howshould these goods and services be
produced? For whomshould these goods and services be
produced?
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Review of Economic Terms
Economic Decisions for the Firm
What: The product decisionbegin or
stop providing goods and/or services. How: The hiring, staffing, procurement,
and capital budgeting decisions.
For whom: The market segmentationdecisiontargeting the customers mostlikely to purchase.
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Review of Economic Terms
Three processesto answer what, how,and for whom
Market Process: use of supply, demand,and material incentives
Command Process: use of government
or central authority, usually indirect Traditional Process: use of customs and
traditions
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Review of Economic Terms
Entrepreneurshipis the willingness
to take certain risks in the pursuit of
goals.