ECW2731

Managerial Economics
ECW2731

Subject Adviser
Week 1-2

Dr Gennadi KAZAKEVITCH

Berwick campus, Room 129.

Phone: (03) 9904 7135.
Fax: (03)9907 4100
Office contact hours:
Monday5-6 PM and Wednesday 4-5 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 the 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 to 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, in technology, in incomes, in government
regulations, in sources of energy, in the balance of payments?
ECW2731
Week 1-2

Assessment
Assignment 4000 words - 40%.
Two-hour written examination - 60 %

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: 5 p.m., 20 April 2006
Automatically extended until 4:45 PM
Monday, 24 April 2006

We will talk about the assignment later on

ECW2731
Week 1-2

Two hours,
Examination
Section A
4 concise essay style questions on theoretical issues of and (or) analytical
technique - 60%.

You will be informed about narrow topics in the end of semester.

Section B
Research Question

You will be informed about narrow topics in the middle of semester.

ECW2731

Reading
Week 1-2

• E. Mansfield, Managerial Economics, Sixth Edition,

2006
• Any other text in Managerial Economics
• Library search for the research question
• Media
ECW2731
Week 1-2
Structure
Weeks
Weeks7-8
7-8
Competition, Week
Week99
Competition,
market Pricing
Pricingstrategies
strategiesand
marketstructures
structuresand
and and
business decisions practices
practices
business decisions

Week
Week10
10
Weeks
Weeks55- -66 Business
Businessand
andGovernment.
Government.
Production
ProductionandandCosts,
Costs,
technological
technologicalchanges
changesand
and
industrial
industrialinnovations
innovations Week
Week1111
Capital
Capitalbudgeting
budgeting
Weeks Managerial
Managerial
Weeks3-4
3-4
Demand
Demandanalysis
analysis Economics
Economics
and estimation Week.
and estimation Week.12
12
Research
Researchquestion
question
Business
Businessand
andcurrent
current
Weeks
Weeks1-2
1-2 economic situation.
economic situation.
Introduction.
Introduction.The
Thenature
nature
of managerial economic
of managerial economic
decision
decisionmaking
making
 Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerial
ECW2731 economic decision making
economic decision making
Week 1-2

Managerial
Managerialeconomic
economic
as an economics
as an economics
discipline
discipline

The
Therole
roleof
ofmanagerial
managerial
economics
economicsinin
managerial
managerialdecision
decision
making
making

Economic
Economic
optimisation
optimisation
The
Thevalue
valueof
offirm
firm

Economic
Economicconstraints
constraints
Demand
Demand
The
Thebasic
basiceconomic
economic Supply
Supply
variables
variables
Costs
Costs
Revenue
Revenue
Profit
Profit
ECW2731 Demand
Week 1-2 Demandanalysis
analysisand
andestimation
estimation

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

Production
Productionfunctions
functions

Factors
Factorsof
ofproduction
production
Total,
Total,marginal
marginaland
andaverage
average
product,
product, revenue andcosts
revenue and 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
ofsingle
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 Competition,
Week 1-2 Competition,market
marketstructures
structuresand
and
business decisions
business decisions

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.

Measurement
Measurementof
ofmarket
marketstructures
structures

Market
Marketstrategies
strategiesinindifferent
different
market structures.
market structures.

Non-price
Non-pricecompetition.
competition.

Multinational
Multinationalcompanies.
companies.Vertical
Vertical
and horizontal coordination.
and horizontal coordination.
ECW2731 Pricing
Week 1-2 Pricingstrategies
strategiesand
andpractices
practices

What
Whatprices
pricesshould
shouldbe
beset?
set?

Mark-up
Mark-uppricing
pricing

Competitive
Competitivestrategies.
strategies.

Price
Pricediscrimination.
discrimination.

Bundle
Bundlepricing
pricing

Multiple
Multipleand
andjoint
jointproduct
productpricing.
pricing.

Transfer
Transferpricing
pricing
ECW2731
Week 1-2 Business
Businessand
andGovernment
Government

The
Theimpact
impactofofregulation,
regulation,
deregulation
deregulation and taxationpolicy
and taxation policyon
on
decision making, competitiveness
decision making, competitiveness
and
andefficiency.
efficiency.

Reasons
Reasonsfor
forregulation.
regulation. Regulatory
Regulatory
response
response to incentiveand
to incentive and
structural failures.
structural failures.
Taxes
Taxesand
andsubsidies
subsidies
Anti-Trust
Anti-TrustPolicies.
Policies.
Problems
Problemswith
withregulation
regulation
ECW2731
Week 1-2 Capital
Capitalbudgeting
budgeting

Capital
Capitalbudgeting
budgetingprocess
process

Cash
Cashflow
flowestimation
estimation

Decision
Decisionrules
rules

Alternative
Alternativeprojects
projects

Cost
Costof
ofcapital.
capital.

Optimal
Optimalcapital
capitalbudgeting
budgeting
ECW2731
Week 1-2 Business
Businessand
andcurrent
currenteconomic
economic
situation
situation
Research
Researchtopic
topic

What
Whatwould
wouldbebethe
theimpact
impactof
of
high/low
high/low interest rates on costsor
interest rates on costs 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,
rates, in incomes, in the balanceof
in incomes, in the balance 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, Week
Week99
Competition,
market Pricing
Pricingstrategies
strategiesand
marketstructures
structuresand
and and
business decisions practices
practices
business decisions

Week
Week10
10
Weeks
Weeks55- -66 Business
Businessand
andGovernment.
Government.
Production
ProductionandandCosts,
Costs,
technological
technologicalchanges
changesand
and
industrial
industrialinnovations
innovations Week
Week1111
Capital
Capitalbudgeting
budgeting
Weeks Managerial
Managerial
Weeks3-4
3-4
Demand
Demandanalysis
analysis Economics
Economics
and estimation Week.
and estimation Week.12
12
Research
Researchquestion
question
Business
Businessand
andcurrent
current
Weeks
Weeks1-2
1-2 economic situation.
economic situation.
Introduction.
Introduction.The
Thenature
nature
of managerial economic
of managerial economic
decision
decisionmaking
making
 Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerial
ECW2731 economic decision making
economic decision making
Week 1-2

Managerial
Managerialeconomic
economic
as an economics
as an economics
discipline
discipline

The
Therole
roleof
ofmanagerial
managerial
economics
economicsinin
managerial
managerialdecision
decision
making
making

Economic
Economic
optimisation
optimisation
The
Thevalue
valueof
offirm
firm

Economic
Economicconstraints
constraints
Demand
Demand
The
Thebasic
basiceconomic
economic Supply
Supply
variables
variables
Costs
Costs
Revenue
Revenue
Profit
Profit
 Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731 Learning
Learningobjectives
objectives
Week 1-2

This topic is deals with the nature and the 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 the economic theory of firm that we need
to understand 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 Reading
Reading
Week 1-2

Mansfield, Chapter 1.
 Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731 Managerial
Managerialeconomic
economicas
asan
aneconomics
economicsdiscipline
discipline
Week 1-2

Economics

Macroeconomics Microeconomics

Money, finance, banking “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 The
Week 1-2 Therole
roleofofmanagerial
managerialeconomics
economicsininmanagerial
managerialdecision
decisionmaking
making

Managerial
Managerialdecision
decisionproblems
problems
Product price and output
Product price and output
Make
Makeororbuy
buy
Production technique
Production technique
Internet
Internetstrategy
strategy
Advertising
Advertisingmedia
mediaand
andintensity
intensity
Investment
Investmentand
andfinancing
financing

Economic
Economicconcepts
concepts Decision
Decisionmaking
makingtools
tools
Theory
Theoryofofconsumer
consumerbehaviour
behaviour Numerical
Numericalanalysis
analysis
Theory
Theoryofoffirm
firm Statistical
Statisticalanalysis
analysis
Theory
Theoryofofmarket
marketstructures
structuresand
and Forecasting
Forecasting
pricing Game
pricing Gametheory
theory
Optimisation
Optimisation

Managerial
ManagerialEconomics
Economics
Use
Use of economicsconcepts
of economics 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 The
Week 1-2 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 The
Week 1-2 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 Economic
Economic
Week 1-2
optimisation
optimisation

Functional relationships
Q = f (P) for example Q = 200 - 5P
CHERRY CORPORATION

DAILY PER UNIT

SALES PRICE
150 10
100 20
50 30
0 40
 Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731 Economic
Economic
Week 1-2
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
ECW2731 Economic
Economic
Week 1-2
optimisation
optimisation

CENTRAL POINT
The dependent variable is maximized when
its marginal value shifts from positive to
negative
 Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731 Economic
Economic
Week 1-2
optimisation
optimisation
Relationship between output and profit
-- Roland Corporation
OUTPUT TOTAL MARGINAL AVERAGE
PER DAY PROFIT PROFIT PROFIT
0 0
1 100 100 100.0
2 250 150 125.0
3 600 350 200.0
4 1000 400 250.0
5 1350 350 270.0
6 1500 150 250.0
7 1550 50 221.4
8 1500 -50 187.5
9 1400 -100 155.6
10 1200 -200 120.0
 Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731 Economic
Economic
Week 1-2
optimisation
optimisation
Total, marginal, and average profit -- Roland Corporation

2000
TOTAL
1500
PROFIT
1000
PROFIT

MARGINAL
500 PROFIT
0 AVERAGE
PROFIT
-500 0 5 10 15

OUTPUT PER DAY

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

Choose
Choosealternative
alternative
that
thatproduces
producesaaresult
resultthe
themost
most
consistent
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 firm
maximisation?

Profit per employee

maximisation?
 Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731 The
Thevalue
valueof
offirm
firm
Week 1-2

The present value of the firm’s

expected future cash flows
N
Profitt N Total revenue  Total cos t t
Value   
t 1 (1  i ) (1  i )
t t
t 1

NN ––firm’s
firm’slife
lifetime
time
Profit
II --discount
t
discountraterate
(1  i ) t

--current
currentvalue
valueof
ofthe
the
profit
profitearned
earnedininttyears
years
time
time
 Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731 The
Thevalue
valueof
offirm
firm
Week 1-2
 Introduction.
Introduction.The
Thenature
natureof
ofmanagerial
managerialeconomic
economicdecision
decisionmaking
making
ECW2731 Economic
Economicconstraints
constraints
Week 1-2

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