ECW2731

Managerial Economics

ECW2731
Week 1-2

Subject Adviser
Dr Gennadi KAZAKEVITCH

Berwick campus, Room 129.

Phone: (03) 9904 7135.
Fax: (03)9907 4100
Office contact hours:
Thursday

3-5 PM.

E-mail: Gennadi.Kazakevitch@monash.edu.au
http://www-personal.buseco.monash.edu.au/~gennadik/gkazwww.htm

ECW2731
Week 1-2

Lecture 1
Subject
Information
Introduction to
Managerial
Economics

ECW2731
Week 1-2

Subject Information
Aims, Questions
Assessment
Assignment
Examination
Reading
Structure

ECW2731
Week 1-2

Aims

This unit reviews contemporary economic

principles in the context most relevant to business
people:
Market processes,
demand patterns, cost structures,
market conditions
pricing policies, and
the impact of regulation on business decisions

Cases and problems illustrate how economic concepts can

be applied in specific industries to the problems of
formulating rational managerial decisions, corporate
and marketing strategies.

?????
?????

ECW2731
Week 1-2

Questions
How do markets work?
How do customers value products?
What are the relevant production and cost measures for decision
making?
How does competition affect business decisions in different market
structures?
What prices should be set?
What would be the impact of changes in interest rates on costs,
accounting, or capital budgeting?
How important to managerial and marketing decisions are changes in:
foreign exchange rates, technology, incomes, government regulations,
sources of energy, and the balance of payments?

ECW2731
Week 1-2

Assessment
Assignment - 30%.
Two-hour written examination - 70 %
To pass the unit you must:
(a) complete all the required work, and
(b) obtain an overall grade of at lease 50% of the total marks, and
(c) obtain at least a 50% grade for the examination.

ECW2731
Week 1-2

Assignment
Due date: 4:45 p.m., 12 September 2007
Consists of 5 simple practical problems based
on both the theories discussed in the lectures
and problems attempted in tutorials.
Attend lectures, tutorials and visit the MUSO
site.
Exercise
Dont hesitate to ask questions!

ECW2731
Week 1-2

Examination
Two hours,
Section A
4 concise essay style questions on theoretical issues and (or) analytical technique
You will be informed about narrow topics towards the end of semester.
Section B
Research Question
You will be informed about narrow topics in the middle of semester.
Attend lectures and tutorials
Attempt revision questions at the end of each chapter in the text
Dont hesitate to ask questions!

ECW2731
Week 1-2

Reading

Mark Hirschey, Walter Nicholson, Christopher

Snyder, Managerial Economics for Monash
University Bachelor of Business and Commerce
Students, compiled by Gennadi Kazakevitch,
Thomson, 2007
Any other text in Managerial Economics
Library search for the research question
Media

Structure

ECW2731
Week 1-2

Weeks
Weeks7-8
7-8
Competition,
Competition,
market
marketstructures
structuresand
and
business
decisions
business decisions

Week
Week99
Pricing
Pricingstrategies
strategiesand
and
practices
practices
Week
Week10
10
Business
Businessand
andGovernment.
Government.

Weeks
Weeks55- -66
Production
Productionand
andCosts,
Costs,

technological
technologicalchanges
changes
and
andindustrial
industrialinnovations
innovations
Weeks
Weeks3-4
3-4
Demand
Demandanalysis
analysis
and
estimation
and estimation

Weeks
Weeks1-2
1-2
Introduction.
Introduction.The
Thenature
natureof
of
managerial
economic
managerial economic
decision
decisionmaking
making

Managerial
Managerial
Economics
Economics

Week
Week11
11
Business,
Business,industry
industryand
andeconomy:
economy:
basics
of
the
general
economic
basics of the general economic
equilibrium
equilibrium
Week.
Week.12
12
Research
Researchquestion
question
Business
Businessand
andcurrent
current
economic
situation.
economic situation.

ECW2731
Week 1-2

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerial
economic
decision
making
(weeks
economic decision making (weeks1-2)
1-2)
Managerial
Managerial
economics
economicsas
asan
an
economics
discipline
economics discipline

The
Therole
roleof
ofmanagerial
managerial
economics
economicsinin
managerial
managerialdecision
decision
making
making
Economic
Economic
optimisation
optimisation
The
Thevalue
valueof
ofthe
thefirm
firm
Economic
Economicconstraints
constraints

ECW2731
Week 1-2

Demand
Demandanalysis
analysisand
andestimation
estimation
(weeks
3-4)
(weeks 3-4)
Market
Marketdemand
demand
Market
Marketsupply
supply
Market
Marketequilibrium
equilibrium

Price,
Price,cross-price,
cross-price,and
andincome
income
elasticity
of
demand
elasticity of demand

Normal
Normalversus
versusinferior
inferiorgood
good
Implication:
Implication:optimal
optimalpricing
pricingpolicy
policy
Implication:
Implication:optimal
optimallevel
levelof
of
advertising
advertising

ECW2731
Week 1-2

Production
Productionand
andCosts
Costs (weeks
(weeks5-6)
5-6)
Production
Productionfunctions
functions
Factors
Factorsof
ofproduction
production
Total,
Total,marginal
marginaland
andaverage
average
product,
revenue
and
product, revenue andcosts
costs
Return
Returnto
tofactors
factorsversus
versusreturn
returnto
to
scale
scale
Firm
Firmand
andplant
plantsize
size
Economies
Economiesand
anddiseconomies
diseconomiesof
of
scale
scale
Optimal
Optimallevel
levelof
ofaasingle
singleinput
inputand
and
optimal
combination
of
multiple
optimal combination of multiple
inputs
inputs
Fixed
Fixedand
andvariable
variablecosts
costs
Explicit
Explicitand
andimplicit
implicitcosts
costs
Short
Shortrun
runversus
versuslong
longrun
runinincost
cost
analysis
analysis

ECW2731
Week 1-2

Competition,
Competition,market
marketstructures
structuresand
and
business
decisions
(weeks
7-8)
business decisions (weeks 7-8)
How
Howdoes
doescompetition
competitionaffect
affect
business
decisions
in
different
business decisions in different
market
marketstructures?
structures?
Perfect
Perfectcompetition,
competition,monopoly,
monopoly,
oligopoly,
monopolistic
oligopoly, monopolistic
competition,
competition,monopoly/monopsony
monopoly/monopsony
confrontation
confrontation
Competitive
Competitivestrategies.
strategies.
Game
theory
Game theory
Non-price
Non-pricecompetition.
competition.
Measurement
Measurementof
ofmarket
marketstructures
structures

Multinational
Multinationalcompanies.
companies.Vertical
Vertical
and
horizontal
coordination.
and horizontal coordination.

ECW2731
Week 1-2

Pricing
Pricingstrategies
strategiesand
andpractices
practices(week
(week9)9)
What
Whatprices
pricesshould
shouldbe
beset?
set?
Mark-up
Mark-uppricing
pricing

Price
Pricediscrimination.
discrimination.

Bundle
Bundlepricing
pricing
Multiple
Multipleand
andjoint
jointproduct
productpricing.
pricing.
Transfer
Transferpricing
pricing

ECW2731
Week 1-2

Business
Businessand
andGovernment
Government
(week
(week10)
10)

The
Theimpact
impactof
ofregulation,
regulation,
deregulation
and
taxation
deregulation and taxationpolicy
policyon
on
decision
making,
competitiveness
decision making, competitiveness
and
andefficiency.
efficiency.
Reasons
Reasonsfor
forregulation.
regulation. Regulatory
Regulatory
response
to
incentive
response to incentiveand
and
structural
failures.
structural failures.
Taxes
Taxesand
andsubsidies
subsidies
Anti-Trust
Anti-TrustPolicies.
Policies.
Problems
Problemswith
withregulation
regulation

ECW2731
Week 1-2

Business,
Business,industry
industryand
andeconomy:
economy:
basics
of
the
general
economic
basics of the general economic
equilibrium
equilibrium(week
(week11)
11)
Competition
Competitionfor
forconsumers
consumers
purchasing
power
purchasing power

Introduction
Introductionto
tothe
thegeneral
general
equilibrium
theory
equilibrium theory

ECW2731
Week 1-2

Business
Businessand
andcurrent
currenteconomic
economic
situation
situation
Research
Researchtopic
topic(week
(week12)
12)

What
Whatwould
wouldbe
bethe
theimpact
impactof
of
high/low
interest
rates
on
costs
high/low interest rates on costsor
or
capital
budgeting?
capital budgeting?

How
Howimportant,
important,to
tomanagerial
managerialand
and
marketing
decisions,
are
changes
marketing decisions, are changes
inin
foreign
foreignexchange
exchangerates,
rates,inininterest
interest
rates,
in
incomes,
in
the
balance
rates, in incomes, in the balanceof
of
payments,
liberalisation
of
trade,
payments, liberalisation of trade,
etc
etc

ECW2731
Week 1-2

Topic 1.
Introduction: The nature of
managerial economic decision
making

ECW2731
Week 1-2

Weeks
Weeks7-8
7-8
Competition,
Competition,
market
marketstructures
structuresand
and
business
decisions
business decisions

Week
Week99
Pricing
Pricingstrategies
strategiesand
and
practices
practices
Week
Week10
10
Business
Businessand
andGovernment.
Government.

Weeks
Weeks55- -66
Production
Productionand
andCosts,
Costs,

technological
technologicalchanges
changes
and
andindustrial
industrialinnovations
innovations
Weeks
Weeks3-4
3-4
Demand
Demandanalysis
analysis
and
estimation
and estimation

Weeks
Weeks1-2
1-2
Introduction.
Introduction.The
Thenature
nature
of
managerial
economic
of managerial economic
decision
decisionmaking
making

Managerial
Managerial
Economics
Economics

Week
Week11
11
Business,
Business,industry
industryand
andeconomy:
economy:
basics
of
the
general
economic
basics of the general economic
equilibrium
equilibrium
Week.
Week.12
12
Research
Researchquestion
question
Business
Businessand
andcurrent
current
economic
situation.
economic situation.

ECW2731
Week 1-2

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerial
economic
decision
making
economic decision making
Managerial
Managerial
economics
economicsas
asan
an
economics
discipline
economics discipline

The
Therole
roleof
ofmanagerial
managerial
economics
economicsinin
managerial
managerialdecision
decision
making
making
Economic
Economic
optimisation
optimisation
The
Thevalue
valueof
ofthe
thefirm
firm
Economic
Economicconstraints
constraints

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
Learning
Learningobjectives
objectives

ECW2731
Week 1-2

This topic deals with:

The nature and scope of Managerial Economics as a
whole.
The place of Managerial economics in the Economics
discipline.
How do managers make their decisions?
The elements of economic theory of the firm that we need
to know to understand the nature of managerial
economic decision making are:
Economic optimisation;
The value of firm;
Economic constraints;
The basic economic variables, including demand
supply, costs, revenue and profit.

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731
Week 1-2

Reading
Reading

Hirschey,Chapters1,2&3

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731
Week 1-2

Managerial
Managerialeconomics
economicsas
asan
aneconomics
economics
discipline
discipline

Economics
Macroeconomics
Money, finance, banking

Microeconomics
Sector economics
Labor economics
Economics of IT and
EC
Managerial economics

International Economics
Regional Economics
Economic Development

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731
Week 1-2

The
Therole
roleofofmanagerial
managerialeconomics
economicsininmanagerial
managerialdecision
decisionmaking
making
Managerial
Managerialdecision
decisionproblems
problems
Product
price
and
output
Product price and output
Make
Makeor
orbuy
buy
Production
technique
Production technique

Internet
Internetstrategy
strategy
Advertising
Advertisingmedia
mediaand
andintensity
intensity
Investment
Investmentand
andfinancing
financing

Economic
Economicconcepts
concepts
Theory
Theoryofofconsumer
consumerbehaviour
behaviour

Decision
Decisionmaking
makingtools
tools
Numerical
Numericalanalysis
analysis

Theory
Theoryofoffirm
firm
Theory
Theoryofofmarket
marketstructures
structuresand
and
pricing
pricing

Statistical
Statisticalanalysis
analysis
Forecasting
Forecasting
Game
Gametheory
theory
Optimisation
Optimisation

Managerial
ManagerialEconomics
Economics
Use
of
economics
Use of economicsconcepts
conceptsand
and
decision
making
tools
to
solve
decision making tools to solve
managerial
managerialdecision
decisionproblems
problems
Optimal
Optimalsolutions
solutions

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731
Week 1-2

The
Therole
roleofofmanagerial
managerialeconomics
economicsininmanagerial
managerialdecision
decisionmaking
making

The Process of decision-making

Identify objectives
Define the problem
Identify possible solutions
Select the best possible solution
Implement the decision

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731
Week 1-2

The
Therole
roleofofmanagerial
managerialeconomics
economicsininmanagerial
managerialdecision
decisionmaking
making

Theory of the firm

A theory indicating how a firm
behaves and what its goals are

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731
Week 1-2

The
Therole
roleofofmanagerial
managerialeconomics
economicsininmanagerial
managerialdecision
decisionmaking
making

Theory of the Firm

Expected Value Maximization

Constraints and the Theory of the Firm

Owner-managers maximize short-run profits.

Primary goal is long-term expected value
maximization.
Resource constraints.
Social constraints

Limitations of the Theory of the Firm

Alternative theory adds perspective.

Competition forces efficiency.
Hostile takeovers threaten inefficient managers.

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731
Week 1-2

The
Therole
roleofofmanagerial
managerialeconomics
economicsininmanagerial
managerialdecision
decisionmaking
making

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731
Week 1-2

The
Therole
roleofofmanagerial
managerialeconomics
economicsininmanagerial
managerialdecision
decisionmaking
making

Profit Measurement

Business Versus Economic Profit

Business (accounting) profit reflects explicit

costs and revenues.
Economic profit.
Profit above a risk-adjusted normal return.
Considers cash and non-cash items.

Variability of Business Profits

Business profits vary widely.

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731
Week 1-2

The
Therole
roleofofmanagerial
managerialeconomics
economicsininmanagerial
managerialdecision
decisionmaking
making

Role of Business in Society

Why Firms Exist

Business is useful in satisfying consumer

wants.
Business contributes to social welfare

Social Responsibility of Business

Serve customers.
Provide employment opportunities.
Obey laws and regulations.

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731
Week 1-2

The
Therole
roleofofmanagerial
managerialeconomics
economicsininmanagerial
managerialdecision
decisionmaking
making

ECW2731
Week 1-2

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
Economic
Economic
optimisation
optimisation

Functional relationships
Q=f(P)forexampleQ=2005P
CHERRY CORPORATION
DAILY
SALES
150
100
50
0

PER UNIT
PRICE
10
20
30
40

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
Economic
Economic
optimisation
optimisation

Expressing Economic
Relations

ECW2731
Week 1-2

Tables and Equations

Simple graphs and tables are useful.

Complex relations require equations.

Total, Average, and Marginal Relations

Total increases when marginal is positive.

ECW2731
Week 1-2

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
Economic
Economic
optimisation
optimisation

Marginal value

The marginal value of a dependent

variable is the change in this
dependent variable associated with a
1-unit change in a particular
independent variable

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
Economic
Economic
optimisation
optimisation

Maximization occurs when

marginal switches from positive to
negative.

ECW2731
Week 1-2

If marginal is above average, average is

rising.
If marginal is below average, average is
falling.
Graphing Total, Marginal, and Average
Relations

Deriving Totals from Marginal and Average

Curves
Total is the sum of marginals.

ECW2731
Week 1-2

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
Economic
Economic
optimisation
optimisation

CENTRAL POINT

The
The dependent
dependent variable
variable is
is maximized
maximized when
when its
its
marginal
marginal value
value shifts
shifts from
from positive
positive to
to negative
negative

ECW2731
Week 1-2

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
Economic
Economic
optimisation
optimisation

Relationship between output and profit

-- Roland Corporation

OUTPUT
PER DAY
0
1
2
3
4
5
6
7
8
9
10

TOTAL MARGINAL AVERAGE

PROFIT
PROFIT
PROFIT
0
100
100
100.0
250
150
125.0
600
350
200.0
1000
400
250.0
1350
350
270.0
1500
150
250.0
1550
50
221.4
1500
-50
187.5
1400
-100
155.6
1200
-200
120.0

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
Economic
Economic
optimisation
optimisation

Total, marginal, and average profit -- Roland

Corporation
ECW2731
Week 1-2

2000
TOTAL
PROFIT

PROFIT

1500
1000

MARGINAL
PROFIT

500
0
-500 0

10

OUTPUT PER DAY

15

AVERAGE
PROFIT

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
Economic
Economic
optimisation
optimisation

Incremental Concept in Economic

Analysis

ECW2731
Week 1-2

Marginal v. Incremental Concept

Incremental Profits

Marginal relates to one unit of output.

Incremental relates to one managerial
decision.
Multiple units of output is possible.
Profits tied to a managerial decision.

Incremental Concept Example

ECW2731
Week 1-2

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
Economic
Economic
optimisation
optimisation

Choose
Choosethe
thealternative
alternative
that
thatproduces
producesaaresult
resultmost
mostconsistent
consistent
with
withmanagerial
managerialobjective
objective

What is the primary

managerial objective?
It depends upon the ownership structure
Profit maximisation?
Sales/revenue maximisation?
The value of the firm
maximisation?
Profit per employee
maximisation?

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
Economic
Economic
optimisation
optimisation

ECW2731
Week 1-2

Optimal Decisions

Best decision helps achieve objectives most

efficiently.

Maximizing the Value of the Firm

Value maximization requires serving customers

efficiently.
What do customers want?
How can customers best be served?

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
The
Thevalue
valueof
offirm
firm

ECW2731
Week 1-2

The present value of the firms

expected future cash flows

Profitt N Total revenue Total cos tt

Value

t
t
(1 i )
t 1 (1 i )
t 1
N

NN
firms
firmslife
lifetime
time
Profit
t
II
--discount
discountrate
rate
t
(1 i )
--current
currentvalue
valueof
ofthe
the
profit
profitearned
earnedininttyears
years
time
time

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731
Week 1-2

The
Thevalue
valueof
offirm
firm

Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731
Week 1-2

Economic
Economicconstraints
constraints

Limited
Limitedresourses
resourses
Labour
Labour
Capital
Capital
Finance
Finance
Raw
Rawmaterials
materials
Environment
Environment

Limited
Limitedcapacity
capacityof
ofmarket
market
Demand
Demand

Choice/Opportunity
Choice/Opportunitycost
cost