Chapter One Cation, Inc. Publishing As Prentice Hall. 1

Chapter 1
Introduction
Chapter One
Copyright 2009 Pearson Edu

cation, Inc. Publishing as
Overview
Economics and managerial
decision making
Economics of a business
Review of economic terms
Chapter One

Learning objectives
define managerial economics
cite important types of resource
allocation decisions
illustrate how economic changes affect a
firms ability to earn an acceptable return
apply to an individual firm the three basic
questions faced by a country
Chapter One


decision making
Economics
The study of the behavior of human
beings in producing, distributing and
consuming material goods and
services in a world of scarce
resources
Chapter One


decision making
Management
The science of organizing and allocating a
firms scarce resources to achieve its
desired objectives
Chapter One


decision making
Managerial economics
The use of economic analysis to make
business decisions involving the best use
(allocation) of an organizations scarce
resources
Chapter One


decision making
Relationship to other business disciplines

Marketing: demand, price elasticity
Finance: capital budgeting, breakeven
analysis, opportunity cost, value added
Management science: linear
programming, regression analysis,
forecasting
Chapter One


decision making
Relationship to other business disciplines

Strategy: types of competition,
structure-conduct-performance
analysis
Managerial accounting: relevant
cost, breakeven analysis, incremental
cost analysis, opportunity cost
Chapter One


decision making
Questions that managers must answer:
What are the economic conditions in our

particular market?
market structure?
supply and demand?
technology?
Chapter One


decision making
What are the economic conditions in our

particular market?
government regulations?
international dimensions?
future conditions?
macroeconomic factors?
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10

decision making
Should our firm be in this business?

if so, at what price?
and at what output level?
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11

decision making
How can we maintain a competitive

advantage over other firms?
cost-leader?
product differentiation?
market niche?
outsourcing, alliances, mergers?
international perspective?
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12

decision making
What are the risks involved?

shifts in demand/supply conditions?
technological changes?
the effect of competition?
changing interest rates and inflation
rates?
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decision making
What are the risks involved?

exchange rates (for companies in
international trade)?
political risk (for firms with foreign
operations)?
Risk is the chance that actual future

outcomes will differ from those expected
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14
The economics of a business refers to

the key factors that affect the firms ability
to earn an acceptable rate of return on its
owners investment
The most important of these factors are
competition
technology
customers
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15
Change: the four-stage model
Stage I (the good old days)

market dominance
high profit margin
cost plus pricing
changes in technology, competition,
customers force firm into Stage II ..
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16
Stage II (crisis)
cost management
downsizing
restructuring
re-engineering to deal with changes
and move firm into Stage III ..
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Stage III (reform)

revenue management
cost cutting has limited benefit
focus on top-line growth ..
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Stage IV (recovery)
revenue plus
revenue grows profitably
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19
Example: Avon
well established company, in stage I

until late 1970s
found itself in Stage II during 1980s
since mid 1990s, entered stage III
expanded into emerging markets and
updated its image
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20
Example: Sears, Kmart
Wal-Mart effect
Sears pushed down to number three
in late 1980s repositioned itself as
a clothing store
Kmart filed for bankruptcy in 2002
plan to acquire Sears
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21
Example: Kodak
struggled to transition from

chemical-based film to digital
imaging
responded by developing strong cash
flows in new product range
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22
Microeconomics is the study of individual

consumers and producers in specific
markets, especially:
supply and demand
pricing of output
production process
cost structure
distribution of income
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Macroeconomics is the study of the

aggregate economy, especially:
national output (GDP)
unemployment
inflation
fiscal and monetary policies
trade and finance among nations
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Resources are inputs (factors) of

production, notably:
land
labor
capital
entrepreneurship
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25
Scarcity is the condition in which

resources are not available to satisfy all
the needs and wants of a specified group
of people
Opportunity cost is the amount (or

subjective value) that must be sacrificed in
choosing one activity over the next best
alternative
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26
Allocation decisions must be made

because of scarcity. Three choices:
What should be produced?
How should it be produced?
For whom should be produced?
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Economic decisions of the Firm
What - begin or stop providing

goods/services (production)
How - hiring, staffing, capital budgeting
(resourcing)
For whom target the customers most
likely to purchase (marketing)
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Entrepreneurship is the willingness to

take certain risks in the pursuit of goals
Management is the ability to organize

resources and administer tasks to achieve
objectives
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Global application
Example: Western Union
began over 100 years ago

huge changes in technology
to survive, the company branched
out
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30
Global application
Example: VNU
Dutch publishing company

transformed itself into a global
provider of marketing and media
information
Chapter One

31

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Chapter 1

Copyright 2009 Pearson Edu

Copyright 2009 Pearson Edu

Copyright 2009 Pearson Edu

Economics and managerial

Copyright 2009 Pearson Edu

Economics and managerial

Copyright 2009 Pearson Edu

Economics and managerial

Copyright 2009 Pearson Edu

Economics and managerial

Relationship to other business disciplines

Copyright 2009 Pearson Edu

Economics and managerial

Relationship to other business disciplines

Copyright 2009 Pearson Edu

Economics and managerial

Questions that managers must answer:

What are the economic conditions in our

Copyright 2009 Pearson Edu

Economics and managerial

Questions that managers must answer:

What are the economic conditions in our

Copyright 2009 Pearson Edu

Economics and managerial

Questions that managers must answer:

Should our firm be in this business?

Copyright 2009 Pearson Edu

Economics and managerial

Questions that managers must answer:

How can we maintain a competitive

Copyright 2009 Pearson Edu

Economics and managerial

Questions that managers must answer:

What are the risks involved?

Copyright 2009 Pearson Edu

Economics and managerial

Questions that managers must answer:

What are the risks involved?

Risk is the chance that actual future

Copyright 2009 Pearson Edu

The economics of a business refers to

Copyright 2009 Pearson Edu

Change: the four-stage model

Stage I (the good old days)

Copyright 2009 Pearson Edu

Change: the four-stage model

Copyright 2009 Pearson Edu

Change: the four-stage model

Stage III (reform)

Copyright 2009 Pearson Edu

Change: the four-stage model

Copyright 2009 Pearson Edu

well established company, in stage I

Copyright 2009 Pearson Edu

Example: Sears, Kmart

Copyright 2009 Pearson Edu

struggled to transition from

Copyright 2009 Pearson Edu

Review of economic terms

Microeconomics is the study of individual

Copyright 2009 Pearson Edu

Review of economic terms