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

Managerial Economics Managerial Economics Prof. M. El-Sakka Prof. M. El-Sakka CBA. Kuwait University CBA. Kuwait University

Managerial EconomicsManagerial Economics in a Global Economyin a Global Economy

Chapter 1Chapter 1

BB


SCOPE OF THE COURSE:SCOPE OF THE COURSE:This course emphasizes the practical application of This course emphasizes the practical application of economic theory to managerial decision-making and economic theory to managerial decision-making and problem solving. A primary focus of the course is to problem solving. A primary focus of the course is to use the tools of microeconomics together with use the tools of microeconomics together with quantitative and statistical methods to understand, quantitative and statistical methods to understand, analyze, and predict the behavior of consumers and analyze, and predict the behavior of consumers and business firms.. business firms..

COURSE REQUIREMENTS:COURSE REQUIREMENTS: Prior knowledge of microeconomic & macroeconomics Prior knowledge of microeconomic & macroeconomics

analysis and statistics is crucial. Student may need to analysis and statistics is crucial. Student may need to learn “Internet Searching” for some case studies and learn “Internet Searching” for some case studies and other related assignments. other related assignments.


COURSE CONTENTS:COURSE CONTENTS:· Introduction: (scope of managerial economics, tools of analysis · Introduction: (scope of managerial economics, tools of analysis

& optimization).& optimization).· Demand, markets, and elasticity.· Demand, markets, and elasticity.· Regression analysis, diagnostic statistics, curve fitting, and · Regression analysis, diagnostic statistics, curve fitting, and

violations.violations.· Estimating structural demand functions.· Estimating structural demand functions.· Forecasting: (Structural demand equations, simple time series · Forecasting: (Structural demand equations, simple time series

models, & qualitative forecasting).models, & qualitative forecasting).· Production, Costs and profitability analysis (short and long run).· Production, Costs and profitability analysis (short and long run).· Market Structure and Globalization: perfect competition, · Market Structure and Globalization: perfect competition,

monopolistic competition, oligopoly, & monopoly, market power monopolistic competition, oligopoly, & monopoly, market power and market domination including; cartels, local and international and market domination including; cartels, local and international dominating firms, and pricing practices (price discrimination, dominating firms, and pricing practices (price discrimination, action reaction pricing policies, and non profit pricing).action reaction pricing policies, and non profit pricing).

· Capital Budgeting and investment decisions· Capital Budgeting and investment decisions· Risk analysis.· Risk analysis.· Linear Programming.· Linear Programming.· Government and Business · Government and Business


Managerial economics: Managerial economics:

provides a wide variety of practical techniques that we can provides a wide variety of practical techniques that we can use to use to reduce costs and eliminate wastes and maximize profits.reduce costs and eliminate wastes and maximize profits.

Managerial economics provides a link between Managerial economics provides a link between economic economic theorytheory and the and the decision sciencesdecision sciences in the analysis of managerial in the analysis of managerial decision making. decision making.

Economic theory:Economic theory:

- - MICROECONOMICSMICROECONOMICS: focus on individual consumers, : focus on individual consumers, firms, and industries. Its role is relatively important. firms, and industries. Its role is relatively important. Managerial economics draws Managerial economics draws heavily from microeconomicsheavily from microeconomics. . However, managerial economics is quite different.However, managerial economics is quite different.


- - MACROECONOMICSMACROECONOMICS: focus on aggregate output, : focus on aggregate output, income, and employmentincome, and employment

There is a relationship between managerial economics and There is a relationship between managerial economics and decision sciences decision sciences

Managerial economics has arisen from a complex mixture of Managerial economics has arisen from a complex mixture of various parts of economics and the decision sciences various parts of economics and the decision sciences including statisticsincluding statistics..


Managerial Decision ProblemsManagerial Decision Problems

Economic theoryMicroeconomicsMacroeconomics

Decision SciencesMathematical Economics

Econometrics

MANAGERIAL ECONOMICSApplication of economic theory

and decision science tools to solvemanagerial decision problems

OPTIMAL SOLUTIONS TOOPTIMAL SOLUTIONS TOMANAGERIAL DECISION PROBLEMSMANAGERIAL DECISION PROBLEMS


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


Definitions of ProfitDefinitions of Profit

Business Profit:Business Profit: Total revenue minus the Total revenue minus the explicit or accounting explicit or accounting costscosts of production. of production.

= TR – TC= TR – TC e.g.e.g. TR = 100 000, TC = 60 000TR = 100 000, TC = 60 000 = 40 000= 40 000

Economic Profit:Economic Profit: Total revenue minus the Total revenue minus the explicit and implicit explicit and implicit costscosts of production. of production.

Suppose the owner works as the manager and takes the profit Suppose the owner works as the manager and takes the profit as a reward. But he could manage another company for as a reward. But he could manage another company for 30000. He can lend his capital to another firm for 20000.30000. He can lend his capital to another firm for 20000.


the economic profit = TR - ( TC + Opportunity costs of the economic profit = TR - ( TC + Opportunity costs of factors owned by the firm )factors owned by the firm )

= 100 000 - ( 60 000 + 30000 + 20000 ) = - 10000= 100 000 - ( 60 000 + 30000 + 20000 ) = - 10000

Note: the economic profit is more relevant.Note: the economic profit is more relevant.


Theories of ProfitTheories of Profit

Risk-Bearing Theories of ProfitRisk-Bearing Theories of Profit

Frictional Theory of ProfitFrictional Theory of Profit

Monopoly Theory of ProfitMonopoly Theory of Profit

Innovation Theory of ProfitInnovation Theory of Profit

Managerial Efficiency Theory of ProfitManagerial Efficiency Theory of Profit


Function of ProfitFunction of Profit

Profit is a Profit is a signalsignal that guides the allocation of society’s that guides the allocation of society’s resources.resources.

High profits in an industry are a signal that buyers High profits in an industry are a signal that buyers want more of what the industry produces.want more of what the industry produces.

Low (or negative) profits in an industry are a signal Low (or negative) profits in an industry are a signal that buyers want less of what the industry producesthat buyers want less of what the industry produces..


Business EthicsBusiness Ethics

Identifies types of behavior that businesses and Identifies types of behavior that businesses and their employees should not engage in.their employees should not engage in.

Source of guidance that goes beyond enforceable Source of guidance that goes beyond enforceable lawslaws..


The Changing Environment of Managerial The Changing Environment of Managerial EconomicsEconomics

Globalization of Economic ActivityGlobalization of Economic Activity Goods and ServicesGoods and Services CapitalCapital TechnologyTechnology Skilled LaborSkilled Labor

Technological ChangeTechnological Change Telecommunications AdvancesTelecommunications Advances The Internet and the World Wide WebThe Internet and the World Wide Web


Chapter 1: AppendixChapter 1: Appendix

The Basics of Demand,The Basics of Demand, Supply, and Equilibrium Supply, and Equilibrium

Prepared by , Ph.D.


Law of DemandLaw of Demand

A decrease in the price of a good, all other things A decrease in the price of a good, all other things held constant, will cause an increase in the quantity held constant, will cause an increase in the quantity demanded of the good.demanded of the good.

An increase in the price of a good, all other things An increase in the price of a good, all other things held constant, will cause a decrease in the quantity held constant, will cause a decrease in the quantity demanded of the good.demanded of the good.


Change in Quantity DemandedChange in Quantity Demanded

Quantity

Price

P0

Q0

P1

Q1

An increase in price An increase in price causes a decrease in causes a decrease in quantity demanded.quantity demanded.


Change in Quantity DemandedChange in Quantity Demanded

Quantity

Price

P0

Q0

P1

Q1

A decrease in price causes an A decrease in price causes an increase in quantity demanded. A increase in quantity demanded. A movement from one point to anothermovement from one point to another

a

b


Changes in DemandChanges in Demand

Change in Buyers’ TastesChange in Buyers’ Tastes

Change in Buyers’ IncomesChange in Buyers’ Incomes Normal GoodsNormal Goods Inferior GoodsInferior Goods

Change in the Number of BuyersChange in the Number of Buyers

Change in the Price of Related GoodsChange in the Price of Related Goods Substitute GoodsSubstitute Goods Complementary GoodsComplementary Goods


Change in DemandChange in Demand

Quantity

Price

P0

Q0 Q1

An An increase in demandincrease in demand refers refers to a rightward shift in the to a rightward shift in the market demand curve.market demand curve.


Change in DemandChange in Demand

Quantity

Price

P0

Q1 Q0

A A decrease in demanddecrease in demand refers refers to a leftward shift in the to a leftward shift in the market demand curve.market demand curve.


Law of SupplyLaw of Supply

A decrease in the price of a good, all other things A decrease in the price of a good, all other things held constant, will cause a decrease in the quantity held constant, will cause a decrease in the quantity supplied of the good.supplied of the good.

An increase in the price of a good, all other things An increase in the price of a good, all other things held constant, will cause an increase in the quantity held constant, will cause an increase in the quantity supplied of the good.supplied of the good.


Change in Quantity SuppliedChange in Quantity Supplied

Quantity

Price

P1

Q1

P0

Q0

A decrease in price A decrease in price causes a decrease in causes a decrease in quantity supplied.quantity supplied.


Change in Quantity SuppliedChange in Quantity Supplied

Quantity

Price

P0

Q0

P1

Q1

An increase in price causes an increase in An increase in price causes an increase in quantity supplied. A movement from one quantity supplied. A movement from one point to anotherpoint to another

a

b


Changes in SupplyChanges in Supply

Change in Production TechnologyChange in Production Technology

Change in Input PricesChange in Input Prices

Change in the Number of SellersChange in the Number of Sellers


Change in SupplyChange in Supply

Quantity

Price

P0

Q1Q0

An An increase in supplyincrease in supply refers refers to a rightward shift in the to a rightward shift in the market supply curve.market supply curve.


Change in SupplyChange in Supply

Quantity

Price

P0

Q1 Q0

A A decrease in supplydecrease in supply refers refers to a leftward shift in the to a leftward shift in the market supply curve.market supply curve.


Market EquilibriumMarket Equilibrium

Market equilibriumMarket equilibrium is determined at the intersection of is determined at the intersection of the market demand curve and the market supply curve.the market demand curve and the market supply curve.

The The equilibrium priceequilibrium price causes quantity demanded to be causes quantity demanded to be equal to quantity supplied.equal to quantity supplied.



Quantity

Price

P

Q

D S

Equilibrium priceEquilibrium price

Equilibrium quantityEquilibrium quantity



Quantity

Price

P0

Q0

D0 S0

Q1

P1

D1

An An increase in demandincrease in demand will cause the market will cause the market equilibrium price and equilibrium price and quantity to increase.quantity to increase.

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