MANAGERIAL ECONOMICS AND

BUSINESS THEORY (DBA521)

WEEK 1 - The Economic Way of Thinking

Presented By: Dr. Richard Oliver F. Cortez, DBA, FRIBA, AFBE

AMA Online Education
COURSE DESCRIPTION:

This is a core course aimed at presenting and developing a

microeconomic approach to business decisions. The concepts and
problems are analyzed from the perspective of the firm and the
managers' decisions. Emphasis is thus placed on the study of the
production process and the analysis of interactions in markets, both
with the customers and the rival firms.

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COURSE OBJECTIVES:

By the end of the semester, the student will be able to:

1. Use marginal analysis to make extent (how much) decisions.

2. Make investment decisions that increase firm value
3. Predict industry-level changes using demand/supply analysis.
4. Solve the problems caused by moral hazard and adverse selection.
5. Align individual incentives with the goals of the company.
6. Identify unconsummated wealth-creating transactions and devise
ways to profitably consummate them.

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TOPICS TO BE COVERED FOR WEEK 1:

The Economic Way of Thinking

• Markets and the Firm
• Agenda for 405
• Actors in the market
• Defining a market
• Supply and Demand Analysis
• Concept of Equilibrium

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LEARNING OUTCOMES:

Specifically, at the end of the lesson the student should be able to:
• Manage relationships between upstream suppliers or downstream
retailers
• Learn the characteristics of pure competition, pure monopoly,
monopolistic competition, and oligopoly
• Use the rational-actor paradigm to predict firm and individual
behavior.
• Advancement of knowledge in understanding economic analysis to a
wide array of business problems.
• Advancement of problem solving approach and economic tools
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Week 001: The Economic Way of Thinking

Economic way of thinking examines how people make choices

under conditions of scarcity and systems of production,
consumption, and distribution.

It provides a decision-making framework for individuals, firms and

policy-makers.

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Week 001: The Economic Way of Thinking

Three Basic Economic Questions

• Every society must answer three basic economic

questions because of scarcity.

• Societies answer these questions differently,

leading to a variety of economic systems.

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Week 001: The Economic Way of Thinking

Question 1: What Will Be Produced?

• Societies must decide on mix of goods

to produce. It depends on their natural
resources
• Some countries allow producers and
consumers to decide
• In other countries, governments decide
• Must also decide how much to produce;
choice depends on societies’ wants

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Week 001: The Economic Way of Thinking

Question 2: How Will It Be

Produced?

• Production decisions involve

using resources efficiently

• Societies adopt different

approaches

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Week 001: The Economic Way of Thinking

Question 3: For Whom Will It

Be Produced?

How goods and services are

distributed involves two questions
• how should each person’s
share be determined?
• how will goods and services
be delivered to people?

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Week 001: The Economic Way of Thinking

The Three Main Characteristics of the Firm

• Collectivity of people in an organization

• Action by superior-subordinate direction
• Continuity over time

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Week 001: The Economic Way of Thinking

Stakeholders in the Firm

• Owners/investors
• Employees
• Customers
• Suppliers
• Distributors
• Creditors/banks
• The government
• Public at large

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Week 001: The Economic Way of Thinking

Four Market Structures

The focus of this lecture is the four market structures. Students will
learn the characteristics of pure competition, pure monopoly,
monopolistic competition, and oligopoly.

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Week 001: The Economic Way of Thinking

Perfect Competition
Pure or perfect competition is rare in the real world, but the model is important because it helps
analyze industries with characteristics similar to pure competition. This model provides a context
in which to apply revenue and cost concepts. Examples of this model are stock market and
agricultural industries.

Characteristics
1. Many sellers: there are enough so that a single seller’s decision
has no impact on market price.
2. Homogenous or standardized products: each seller’s product is
identical to its competitors’.
3. Firms are price takers: individual firms must accept the market price
and can exert no influence on price.
4. Free entry and exit: no significant barriers prevent firms from
entering or leaving the industry.

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Week 001: The Economic Way of Thinking

Pure Monopoly
Pure monopoly exists when a single firm is the sole producer of a product
for which there are no close substitutes. Examples are public utilities and
professional sports leagues.

Characteristics
1. A single seller: the firm and industry are synonymous.
2. Unique product: no close substitutes for the firm’s product.
3. The firm is the price maker: the firm has considerable control
over the price because it can control the quantity supplied.
4. Entry or exit is blocked.

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Week 001: The Economic Way of Thinking

Monopolistic Competition
Monopolistic competition refers to a market situation with a relatively
large number of sellers offering similar but not identical products.
Examples are fast food restaurants and clothing stores.

Characteristics
1. A lot of firms: each has a small percentage of
the total market.
2. Variety of the product makes. This model is different from
pure competition model. Product differentiated in style,
brand name, location, advertisement, packaging, pricing strategies, etc.
3. Easy entry or exit.

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Week 001: The Economic Way of Thinking

Oligopoly
Oligopoly exits where few large firms producing a homogeneous or
differentiated product dominate a market. Examples are automobile and
gasoline industries.

Characteristics
1. Few large firms: each must consider its rivals’ reactions in
response to its decisions about prices, output, and advertising.
2. Standardized or differentiated products.
3. Entry is hard: economies of scale, huge capital investment may
be the barriers to enter.

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Week 001: The Economic Way of Thinking

Actors in the Market

The actors and forces influencing the company’s ability to

transact business effectively with it’s target market include:

• Micro environment - forces close to the company that affect

its ability to serve its customers.

• Macro environment - larger societal forces that affect the

whole microenvironment.

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Week 001: The Economic Way of Thinking

The Macro environment

Demographic

Political Economic

Company
Cultural Natural

Technological

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Week 001: The Economic Way of Thinking

The Microenvironment
Public

Company Suppliers
Forces affecting
a firm’s ability to
serve customers

Competitors Customers

Intermediaries

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Week 001: The Economic Way of Thinking

Market includes both place and region in which buyers and

sellers are in free competition with one another. The term
market refers not to a place, but to a commodity or
commodities and buyers and sellers who are in direct
competition with one another’

Market is a place where goods and services are

exchanged. Markets consist of buyers and sellers
with facilities to communicate each other for
transactions of goods and services.

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Week 001: The Economic Way of Thinking

Types of Market
1. Local

The area covered by the market is limited to some group of villages which are
nearby or close to each other. Perishable commodities like vegetable, fruits, fish,
milk are being transacted

E.g: Shandies and fairs Local markets are held occasionally or on special days
Cattle market, Sheep market
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Week 001: The Economic Way of Thinking

2. Regional market

The area of operation of the market is relatively larger

than that of local market.

This market covers 4-5 districts. E.g: Food grain markets/Fruits market
at state level. These markets are regular in conducting
business transactions in notified commodities.
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Week 001: The Economic Way of Thinking

3. National market

Area of operation of the market covers the entire country. The

national markets are found for the commodities which are have
demands over entire country.

E.g: Textile market, Jute market, Tea market

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Week 001: The Economic Way of Thinking

4. International Market

The commodities are sold in all the nations of the world. The
market area of operation is extended over the entire globe. The
involvement of buyers and sellers are beyond the boundaries of a
nation.

E.g: Cashew, Coffee, Tea, Spices, Gold, Silver, Diamond, Machinery

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Week 001: The Economic Way of Thinking

Supply Analysis

Supply is always expressed in commodity that the producer is

willing to sell in the market.

Supply is a flow because at at a given price, it is measured

over a period of time.
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Week 001: The Economic Way of Thinking

Law of Supply
The fundamental principle of Law of Supply is that supply of any commodity is
directly proportional to the Price of that commodity.

That means, as the price of a good increases, suppliers will attempt to maximize
profits by increasing the quantity of the product sold

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Week 001: The Economic Way of Thinking

Factors Affecting The Supply:

• Price of the commodity

• Price of related goods
• Goals of the firm
• Input price/ factor price
• State of technology
• No. of producers
• Future expectations regarding change in price
• Taxes & subsides
• Natural factors
• Means of transport & communication

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Week 001: The Economic Way of Thinking

Demand Analysis
Demand refers to the desire, backed by the necessary
ability to pay.

The demand for a good at a given price is the quantity of it that

can be bought per unit of time at a given price
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Week 001: The Economic Way of Thinking

Three Aspects of Demand

1. It is the quantity desired at a given price.

2. It is the demand at a price during a given time
3. It is the quantity demanded per unit of time

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Week 001: The Economic Way of Thinking

Important Determinants of Demands

• Price of the goods

• Income of the buyer
• Prices of Related Goods
• Tastes of the buyer
• Seasons prevailing at the
time of purchase
• Fashion
• Advertisement and Sales promotion

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Week 001: The Economic Way of Thinking

Law of Demand

Other things being equal the greater the amount to be sold, the
smaller must be the price at which it is offered in order that it may
find purchasers, or

In other words, the amount demanded increases with a fall in price

and diminishes with a rise in price

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Week 001: The Economic Way of Thinking

Exceptions to the Law of Demand

• Conspicuous goods
• Esteem goods
• Giffen goods
• Inferior Goods
• Future expectations about prices
• Irrational Consumers
• Ignorance or Unawareness of Price

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 CREDIT

goes to for the photos

used in the presentation

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Thank you very
much for
listening!

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