S A V

Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.1
SM1.21 Managerial Economics
B



Welcome to session 1
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.2
Introduction
B
Objectives
B
Evaluation
B
Course Outline
B
Course timetable
B
Methodology
B
Definitions
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.3
Objectives
B
To get to know each other
B
To understand the structure and
content of the course
B
To know what you are expected
to do and how to obtain good
grades
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.4
Course Objectives
B
To understand the basic of the
Economic Theory
B
B
To provide a foundation in managerial
economics and the application of
economic theory in industry and
technological based organizations
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.5
Evaluation of Course
B
B
2-3 graded Quizzes 20%
B
Presentation 20%
B
Participation 10%
B
Final Exam 50%
B
Self evaluation
B
Course evaluation
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.6
OCost Theory
OMarket Structure
OStrategies and
Pricing
OThe Role of the
Government
0Risk Analysis and

Capital Budgeting
CTutorial
Course Outline
0The Nature and
Scope of MECS
OOptimization
Techniques and
Management
Tools
ODemand Theory
ODemand Estimation
and Forecasting
OProduction and Cost
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.7
Course Timetable
Week 1
Introduction
Theory of the
Firm
Week 2
Optimization
Week 3
Demand and Theory of
the consumer
Week 4
Demand Estimation
Week 5
Production and Cost
Analysis
Week 6
Cost Theory and
Estimation
Week 7
Market Structure
Week 8
Strategies and Pricing
Week 9
The Role of the
Government
Week 10
Risk Analysis
Capital Budgeting
Week 11
Tutorial and
reserve
Week 12
Final Exam
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.8
Methodology
B
“lecturing”
B
Case Studies
B
Home study
B
Learning by discovery
B
Workshop
B
Project method
B
Q&A
The
best
way to
lear n is
to
teach
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.9
Definitions
B
Manager, Management
B
Economics
(Micro-Macro; Positive,Normative)
B
Goals of Economic Policy
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.10
The Scientific Approach
B
Observation
B
Economic Analysis
B
Statistical Analysis
B
Experiments
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.11
Pitfalls
B
Failing to Keep Other Things
Equal
B
The Post Hoc Fallacy
B
The Whole Is Not Always The Sum
Of The Parts
B
Subjectivity (“Is It a Bird”?)
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.12
Other Issues
B
Basic Problem of Economic
Organization:
- What commodities to produce
- How to produce them
- For Whom shall goods be
produced
B
Inputs and Outputs
B
Market, Command and Mixed
B
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.13
Market, Command and
Mixed Economy
B
Market Economy


Individuals and
private firms
take the
decision in the
market place
B
Command
Economy

The
government
takes all
decisions
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.14
Other issues
B
The Law of Scarcity
B
The Uses of Economics
B
How to read Graphics
B
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.15
How to read graphs
D e m a n d f o r c o r n
0
3
0 5 1 0
Q u a n t i t y
P
r
i
c
e
S e r i e s 1
De ma nd f o r c or n
0
3
0 1 0
Quant i t y
Ser i es1
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.16
Calculation of slope
B
Slope =

CD/BD=

s/1 =

s
B
Supply for corn
0
3
0 5 10
Quantity
P
r
i
c
e
D
B
C
A
.
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.17
Calculation of slope
B
By constructing a
tangent line we
can calculate
the slope at a
given point the
same way as
for a straight
line
B
Slope of a curve
= slope of
tangent
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.18
Discussion of five questions
B
Why are we concerned of What, How and for
Whom to produce?
B
One farmer earns more-all farmers earn less?
B
Define economic and free goods
B
Why are some people rich and others poor?
Should the lazy eat well?
B
Difference between command and market
economy?
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.19
Theory of the Firm
B
Production is organized in firms
because efficiency generally
requires large scale production,
the raising of significant
financial resources and the
careful management and
monitoring of ongoing activities
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.20
Objective and value
B
To maximize profits
or
B
To maximize the value of the firm
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.21
Theories of profit
B
Risk
B
Frictional Theory
B
Monopoly Theory
B
Innovation Theory
B
Managerial Efficiency Theory
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.22
Explicit and implicit Cost
B
Explicit costs comprise all
payments
B
Implicit costs include the
opportunity cost
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.23
Business profit vs. economic
profit
B
Business Profits (accounting
profits) are the firms total
revenue from the sale of it’s
outputs minus the firm’s explicit
cost
B
Economic profits are total
revenues minus explicit and
implicit costs
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.24
Example Business
vs.Economic
B
Firm A
B
Revenue: 100
B
Raw Material 30
B
Payroll 20
B
Rent of land 20
B
Interest on loan 10
B
B
Total cost 80
B
B
Profit 20
B
Firm B
B
Revenue 100
B
Raw Material 30
B
Payroll 20



B
Total Cost 50
B
Profit 50
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.25
Balance Sheet A and B
B
Fixed assets 30
B
Inventory 30
B
Cash 20

Total assets 80
B
Bank Loan 50
B
Equity 10
B
Profit 1996 20

Total Liabilities 80
B
Fixed assets 100
B
Inventory 30
B
Cash 50

Total assets 180
B
Equity 130
B
Profit 1996 50


Total Liabilities 180

S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.26
The nature of Profit
B
Profits as implicit returns
B
reward for risk and innovation
B
Monopoly returns
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.27
Function of Profit
B
Profits provide the crucial signals
for the reallocation of society’s
resources to reflect changes in
consumers’ tastes and demand
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.28
Constraints
B
Time
B
Human Resources
B
Technology
B
Capital
B
Raw Materials
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.29
Demand Theory
B
You can make even a parrot into
a learned economist; all it must
learn are the two words
“supply” and “demand”
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.30
Supply
B
The supply curve
relates quantity
supplied to
price
S u p p ly o f c o r n
0
1
2
3
4
5
6
0 1 0 2 0
Q ua nt it y
P
r
i
c
e
S u p p l y
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.31
The Demand Curve
B
The demand curve slopes
downward to the right
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.32
The Equilibrium
B
The Equilibrium is found at the
intersection of supply and
demand curve. It is also called
the market clearing price
because quantity demanded and
supplied equal at this price.
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.33
Behind the supply curve
B
Businesses supply commodities
for profit (not for charity)
B
The key is the cost of production
B
Cost of production are affected by
technological change and prices
of inputs
B
Prices of related goods
B
The market organization
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.34
Behind the demand curve
B
The good’s own price
B
The average income
B
Population
B
Prices of related goods
B
Tastes
B
Special Influences
S A V
Dr. H. Stoessel
Managerial Economics
1999
Managerial Economics - 1.35
The Market Game
B
The Auction

Managerial Economics - 1.2

Introduction
s

Objectives Outline timetable

sEvaluation sCourse sCourse

sMethodology sDefinitions S A V

Dr. H. Stoessel

Managerial Economics 1999

Managerial Economics - 1.3

Objectives
s s

To get to know each other To understand the structure and content of the course To know what you are expected to do and how to obtain good grades

s

Dr. H. Stoessel

S A V

Managerial Economics 1999

Managerial Economics .4 Course Objectives s To understand the basic of the Economic Theory To provide a foundation in managerial economics and the application of economic theory in industry and technological based organizations s s Dr. H. Stoessel S A V Managerial Economics 1999 .1.

Stoessel 20% 10% 50% S A V Managerial Economics 1999 .Managerial Economics .1. H.5 Evaluation of Course s s s s s s s 2-3 graded Quizzes 20% Presentation Participation Final Exam Self evaluation Course evaluation Dr.

6 Course Outline ‚ The Nature and Scope of MECS ƒ Optimization Techniques and Management Tools ‡ Cost Theory ˆ Market Structure ‰ Strategies and Pricing Š The Role of the Government „ Demand Theory … Demand Estimation and Forecasting ‹ Risk Analysis and  Capital Budgeting † Production and Cost Dr.1.Managerial Economics . H. Stoessel · Tutorial Managerial Economics 1999 S A V .

H. Stoessel S A V Managerial Economics 1999 .7 Course Timetable Week 1 Introduction Theory of the Firm Week 5 Production and Cost Analysis Week 2 Optimization Week 3 Demand and Theory of the consumer Week 4 Demand Estimation Week 6 Cost Theory and Estimation Week 7 Market Structure Week 8 Strategies and Pricing Week 9 The Role of the Government Week 10 Risk Analysis Capital Budgeting Week 11 Tutorial and reserve Week 12 Final Exam Dr.Managerial Economics .1.

1.Managerial Economics . Stoessel T he best way to lear n is to teach S A V Managerial Economics 1999 . H.8 Methodology s s s s s s s “lecturing” Case Studies Home study Learning by discovery Workshop Project method Q&A Dr.

Managerial Economics .9 Definitions s s Manager. Management Economics (Micro-Macro. Positive. Stoessel S A V Managerial Economics 1999 .Normative) Goals of Economic Policy s Dr.1. H.

H. Stoessel S A V Managerial Economics 1999 .1.Managerial Economics .10 The Scientific Approach s s s s Observation Economic Analysis Statistical Analysis Experiments Dr.

11 Pitfalls s Failing to Keep Other Things Equal The Post Hoc Fallacy The Whole Is Not Always The Sum Of The Parts Subjectivity (“Is It a Bird”?) s s s Dr. H.Managerial Economics . Stoessel S A V Managerial Economics 1999 .1.

How to produce them . Stoessel s s S A V Managerial Economics 1999 .12 Other Issues s Basic Problem of Economic Organization: .Managerial Economics . Command and Mixed Dr.What commodities to produce .1.For Whom shall goods be produced Inputs and Outputs Market. H.

Market.1. Command and Mixed Economy s Managerial Economics .13 Market Economy s Command Economy The government takes all decisions Individuals and private firms take the decision in the market place S A V Dr. Stoessel Managerial Economics 1999 . H.

Managerial Economics . Stoessel S A V Managerial Economics 1999 .1. H.14 Other issues s s s s The Law of Scarcity The Uses of Economics How to read Graphics Dr.

15 How to read graphs D e m a n d fo r c o rn 3 D emand f or c orn 3 Price S e rie s 1 0 0 5 Q u a n t it y 10 0 0 10 Q uanti ty Ser i es1 Dr.Managerial Economics .1. H. Stoessel S A V Managerial Economics 1999 .

Managerial Economics . 0 0 5 Quantity 10 s Dr.16 Calculation of slope s Slope = CD/BD= s/1 = s Price 3 C Supply for corn B A D .1. Stoessel S A V Managerial Economics 1999 . H.

1. Stoessel s Managerial Economics 1999 . H.17 Calculation of slope s By constructing a tangent line we can calculate the slope at a given point the same way as for a straight line Slope of a curve = slope of S A V Dr.Managerial Economics .

18 Discussion of five questions s Why are we concerned of What.1. How and for Whom to produce? One farmer earns more-all farmers earn less? Define economic and free goods Why are some people rich and others poor? Should the lazy eat well? Difference between command and market economy? s s s s Dr. H.Managerial Economics . Stoessel S A V Managerial Economics 1999 .

19 Theory of the Firm s Production is organized in firms because efficiency generally requires large scale production. Stoessel S A V Managerial Economics 1999 . the raising of significant financial resources and the careful management and monitoring of ongoing activities Dr.Managerial Economics .1. H.

H.1.Managerial Economics . Stoessel S A V Managerial Economics 1999 .20 Objective and value s To maximize profits or To maximize the value of the firm s Dr.

H.21 Theories of profit s s s s s Risk Frictional Theory Monopoly Theory Innovation Theory Managerial Efficiency Theory Dr.1. Stoessel S A V Managerial Economics 1999 .Managerial Economics .

1.Managerial Economics . H.22 Explicit and implicit Cost s Explicit costs comprise all payments Implicit costs include the opportunity cost s Dr. Stoessel S A V Managerial Economics 1999 .

H. economic profit s Managerial Economics .Business profit vs. Stoessel s S A V Managerial Economics 1999 .23 Business Profits (accounting profits) are the firms total revenue from the sale of it’s outputs minus the firm’s explicit cost Economic profits are total revenues minus explicit and implicit costs Dr.1.

Example Business vs. Stoessel s Total Cost 50 S A s V Economics ProfitManagerial50 1999 .Economic s s Managerial Economics . H.24 Firm A Revenue: 100 s s Firm B Revenue 100 s s s s s s s s Raw Material 30 Payroll 20 20 10 80 Rent of land s s Raw Material 30 Payroll 20 Interest on loan Total cost Profit 20 Dr.1.

25 Balance Sheet A and B s s s Fixed assets 30 Inventory Cash 20 80 30 s s s Fixed assets 100 Inventory Cash 50 180 30 Total assets Total assets s s s Bank Loan Equity 10 Profit 1996 50 20 80 s s Equity 130 50 Profit 1996 Total Liabilities Total Liabilities 180 Dr. H. Stoessel S A V Managerial Economics 1999 .1.Managerial Economics .

26 The nature of Profit s s s Profits as implicit returns reward for risk and innovation Monopoly returns Dr. H.1. Stoessel S A V Managerial Economics 1999 .Managerial Economics .

1.Managerial Economics . H.27 Function of Profit s Profits provide the crucial signals for the reallocation of society’s resources to reflect changes in consumers’ tastes and demand Dr. Stoessel S A V Managerial Economics 1999 .

Stoessel .1.Managerial Economics . H.28 Constraints s Time Resources sHuman sCapital sTechnology sRaw Materials S A V Managerial Economics 1999 Dr.

Managerial Economics . H.29 Demand Theory s You can make even a parrot into a learned economist. all it must learn are the two words “supply” and “demand” Dr.1. Stoessel S A V Managerial Economics 1999 .

Stoessel S A V Managerial Economics 1999 .30 Supply s Price The supply curve relates quantity supplied to price S u p p ly o f c o r n 6 5 4 3 2 1 0 0 10 Q u a n tity 20 S u p p ly Dr.Managerial Economics . H.1.

1. Stoessel S A V Managerial Economics 1999 .Managerial Economics .31 The Demand Curve s The demand curve slopes downward to the right Dr. H.

It is also called the market clearing price because quantity demanded and supplied equal at this price.Managerial Economics . Stoessel S A V Managerial Economics 1999 . H.32 The Equilibrium s The Equilibrium is found at the intersection of supply and demand curve.1. Dr.

Managerial Economics .33 Behind the supply curve s Businesses supply commodities for profit (not for charity) The key is the cost of production Cost of production are affected by technological change and prices of inputs Prices of related goods The market organization S A V Dr.1. H. Stoessel s s s s Managerial Economics 1999 .

1.Managerial Economics . Stoessel S A V Managerial Economics 1999 .34 Behind the demand curve s s s s s s The good’s own price The average income Population Prices of related goods Tastes Special Influences Dr. H.

1. Stoessel S A V Managerial Economics 1999 .Managerial Economics .35 The Market Game s The Auction Dr. H.