Managerial Economics

The Economic Problem

 Group 1

Fadli Zulkarnain
Puji Lestari
Al Ghaziano Nuzaro
Bernadetha Apriany Esteria
 Scope of Presentation :
• Definition & explanation of Economic Problem
• Markets
• Demand (exclude price elasticity demand)
• Supply (exclude price elasticity supply)
• Cost, Revenue, Profit
• Productivity
• Growth of Firm
• Economies and diseconomies of scale
• Rewards for Labor
• Study Case
1.1 What is Economic Problem?
The central purpose of economic activity is to
combine resources in order to produce output that
will meet our needs and wants. You will learn that
resources are scarce, and wants are infinite. So we
have a problem – the basic economic problem
Key t e r m s :
Needs – something essential to survival – food,
water, warmth, clothing and shelter.
Wants – something you would like to have, but
is not essential to survival – for example cars,
mobile phones and chocolate.
Resources – something used to produce output.
(Consist of Land, Labor, Capital, Enterprise)
 1.2 Scarcity, Choice and Opportunity Cost
Production of goods and services
Goods are items that you can touch (tangible) – you can take them home and use them. An example of a
good is a pen or a packet of crisps.
A service is something that someone provides for you; you cannot touch it (intangible). Examples include
tourism and banking.
sector Description examples
Where the extraction of raw materials
Primary Mining, farming, fishing, oil extraction
takes place
Car manufacturing, furniture
Where raw materials are
secondary manufacturing, manufacture of electronic
manufactured into goods
goods e.g. computers, mobile phones
tertiary The service sector Banking, tourism, education

Opportunity cost – the next best alternative foregone when making a choice – what we give up when we
make a choice.
 1.3 Approaches to the economic problem
Market – where buyers and sellers meet to exchange goods and services. This does not have to mean a
face-to-face meeting.
Market economy – an economy where all resources are allocated by private individuals and groups.
Mixed economy – an economy where some resources are allocated by the government, and other
resources are allocated by private individuals and groups.

Public sector – the government sector of the economy, where organizations are owned and run by the
government.
Private sector – the sector of the economy where firms are owned and run by private individuals and
groups – their main aim is profit maximization.
 1.4 What is specialization?
Specialization can occur on a number of levels. As individuals, we specialize in what we are best
at. We specialize in something we are skilled at and will become better at, and so we will be able
to produce more of that good or service. If I had to produce all my own food and clothing, and
therefore be self- sufficient, I could only produce what I needed.
The costs and benefits of specialization :
Specialization will create benefits for both the firm and the workers. The table shows potential
benefits to both the firm and the workers.
Benefits to the firm Benefits to the workers
Workers become quicker at producing goods (more Specialised workers tend to get higher pay
productive)
Because of increased productivity, production becomes Workers’ specific skills will be improved
cheaper per good (lower average costs)
Production levels are increased More motivation from job satisfaction

Costs to the firm Costs to the worker

Greater cost of training workers
Quality may suffer if workers become bored by the lack of
variety in their job
More expensive workers
Boredom for the worker as they do the same job every
day
Workers’ skills may suffer as they are only doing one job
Workers may eventually be replaced by machinery
 The Function of
Money

Method of
Medium of
Share of value Unit of account deferred
exchange
account
 2.1 Markets
Competitive market – a market situation in which there are a large number of buyers (demand)
and sellers (supply).
Being in a competitive market means that:
• there are a large number of firms in the market
• new firms can set up easily in the market
• firms know what their competitors are doing.
 2.2 Monopoly and monopoly power
When a market is not competitive, we can say that it is not working well and is unfair to the
consumer. An uncompetitive market will have a small number of firms holding all the power. When
firms have this monopoly power, there is an inefficient allocation of resources by the price
mechanism (forces of demand and supply).
Pure monopoly – a situation where there is only one firm selling in a market. For example, before
2003 Royal Mail was a monopoly, being the only firm to provide the service of letter delivery.
Legal monopoly – when a firm has more than 25% of the market share. Tesco has a legal
monopoly in the supermarket industry, it holds approximately 30% of the market share (see Unit
2.1). This means that 30% of all supermarket sales happen at Tesco.
How do firms achieve monopoly power?
A. Merger & Takeover
B. Statutory Monopoly
C. Internal Expansion
D. Branding
 2.2 Monopoly and monopoly power
Monopoly can be good or bad.
Why a monopoly is bad?
• High prices
• Poor Quality
Why monopoly is good?
• Research and development
• International competitiveness
• Exploitation of economics scale
 2.3 Demand
Demand – the quantity a buyer is willing
and able to buy at a given price in a given
period of time.
Effective demand – for demand to be
effective a consumer must be both willing
and able to buy the good or service.
‘Willing’ means they want it; ‘able’ means
they have the money to buy it. An example
of effective demand would be if I want a
bike that costs £500 and I have £500 to
spend.
Presenter 2
 2.4 The demand curve – rise or fall?
Factors that cause the demand curve to shift
You have already discussed in pairs what you think might increase or
decrease demand for a good or service. How many of the following did
you get?
• Population
• Advertising
• substitutes (price of)
• Income
• Fashion and trends
• Interest rates
• Complements (price of)
 Supply
Supply – the quantity a producer is willing and able to
produce at a given price in a given period of time.
Movements along the supply curve :
As with the demand curve, a movement along the supply
curve is caused only by a change in price of that good.
Shifts in the supply curve :
A shift in the supply curve works in very much the same way
as for the demand curve. The main difference is in the slope
of the curve.
 Supply
The diagram shows that:
• when the supply curve shifts to the right,
there is
more supply
• when the supply curve shifts to the left,
there is
less supply.
What causes the supply curve to shift?
• Productivity
• Indirect taxes
• Number of firm entering the market
• Technology
• Subsidies
• Weather
• Cost of production
 Costs, revenues and profit
Business objectives
An objective is a target that a business sets itself. Targets may be
short-term or long-term. The main objective for most firms is profit
maximization.
Business objectives might include:
• to break even
• to increase market share
• to survive
• to make returns to shareholders (dividends)
• to increase sales
• to provide a good service.
 Costs, revenues and profit
Cost
When firms produce goods and services, they use resources
(factors of production – land, labour, capital and enterprise).
Firms must buy these resources.
• Fixed cost
• Variable cost
• Total Cost
• Average cost
 Costs, revenues and profit
Revenue
When a firm produces a good or a service, the aim is to sell it. They
set the price and consumers buy it.
When a firm calculates the total amount of money it has received
from selling a product, this is called total revenue.
“total revenue = price  quantity sold”
Total Revenue : the amount a firm receives from selling its product.
Profit
Profit is the total amount of money a firm makes after it has paid all
its costs.
profit = total revenue – total costs
Presenter 3
 Productivity
Productivity and production
Productivity and production are two very
different concepts. Production is the
process of combining scarce resources to
produce an output (good or service).
Productivity is measured by output per
input per period of time:
“productivity = output/hours worked”
We generally measure productivity in
terms of labor – so the input would be a
worker (output per person per period of
time)
 Productivity
Specialization involves individuals, firms, or countries producing only a limited range of goods or
services. For example, your teacher has specialized in teaching Economics; Apple has specialized
in producing electronic goods. The UK could be said to have specialized in financial services.
By specializing in producing one product, a firm or individual can become better at producing that
product, and so become more productive.
There are both advantages and disadvantages of specialization.

Advantages Disadvantages
Workers can be given jobs they are more suited to Higher cost of training
workers
Increased productivity Boredom because workers are doing the same job
every day
Lower average costs Quality may suffer if workers become bored
Each worker can concentrate on what they are Workers’ skills may suffer
best at and build up expertise
Higher pay for Workers may eventually be replaced by machinery
specialised workers
 Growth of firms
Firms can grow in size both internally and externally.
• Internal growth is generated through increasing sales. To do this, a firm
needs to buy new equipment or outlets or factories, buy in more labour,
or market its products in a more effective way.
• External growth is achieved through a merger or takeover. This is
where one firm joins together with another.
Key terms :
Merger – agreed coming together of two firms
Takeover – when one firm seeks to take control of another (this can be
either friendly or hostile).
Integration – this occurs when two firms come together through either a
merger or a takeover.
 Growth of firms
External growth can take the form of vertical, horizontal or
conglomerate integration.
 Growth of firms
What are the costs and benefits of growth?
Benefits include:
• increased profits
• increased market share
• new ideas gained from the other business
• no competition with the other business
• gain from economies of scale
•the new business may not need all the workers. Costs include:
• two sets of managers may not be able to agree
• the businesses may have different objectives and targets
• it costs a lot of money to merge with or take over another business
• possibly less choice for customers in the market
• possibly higher prices to pay
• possible job losses and job insecurity.
 Economies and diseconomies of scale
Economies of scale
As a firm grows larger in size (increases the number of products it
produces), the long-run average costs fall.
Internal economies of scale occur when one firm grows in size.

There are six different types of internal economy of scale :

• Risk bearing
• Financial
• Marketing
• Technical
• Managerial
• Purchasing
 Economies and diseconomies of scale
Internal economies of scale – when one firm grow in size (increases output) and so benefits
from lower average costs.
external economies of scale – when a whole industry grows in size, so a firm within that
industry benefits from lower costs. This may be because transport and communication links
are improved, or local training and education opportunities become more focused on that
industry.

Diseconomies of scale may occur for the following reasons.

• Loss of control – as a firm grows larger, it becomes more difficult to monitor all of its
workers.
• Lack of co-ordination – it becomes more difficult to co-ordinate all aspects of the production
process when a firm grows larger, especially if production spans a number of factories.
• Lack of co-operation – when a firm becomes larger, workers can feel alienated and lose
motivation.
 Rewards for labor
Wage and salary
A wage is an individual payment, usually for a week’s work. It tends to be given as an amount per hour.
A salary is an individual payment, usually for a month’s work. It tends to be given as an amount per year,
divided into 12 equal payments.

Gross and net income

Gross income is the amount a person receives before all deductions and additions are taken into account.
Deductions include taxes such as income tax and national insurance, pension contributions and student loan
repayments. Additions are any benefits received that go into a person’s wages.
Net income is a person’s take-home pay.
net income = gross income – deductions + additions

Nominal and real income

Nominal income is the income paid to labour unadjusted for the effects of inflation (increases in prices).
real income is the income paid to labour adjusted for the effects of inflation.
Presenter 4
 Study Case
STARBUCKS
The Managerial Economic & Its
Uniqueness
Uniqueness Experience
• Soft music, comfortable
chairs and sofas.
• Wireless hotspot for
working or surfing the net.
• Handmade specialty drink.
• Fresh ground coffee after
every pot.
• Strong core competencies
 Markets
Core area of competitions:
• Branding
• Quality
• Innovations
 Demand vs Price

With higher discount in starbucks (lower

price), demand quantity significantly
increase. It’s happen so many times while in
Go Food & Grab Food there is a demand in
starbucks “Elastic”
 Demand vs Price

Several products in starbucks “exclusive

products” / “special products” there will be
no impact from the price change and
demand keep growing even prices has been
increased
 Cost, Revenue, Profits
Fixed Cost :
Rent cost, Labor cost, Electricity, General
& Administration
Variable Cost :
Material (Raw & Pack), Promotion,
Equipment cost
Revenue :
Depend on the sales volume (continuously
growth globally)

Profits :
High margin due to exclusive price
Cost, Revenue, Profits
Cost, Revenue, Profits
Reward for Labor
• Direct Labor lost is the
highest cost
• Higher than packaging
materials
• Higher than raw materials
 Strategy
• Stick to the core business
• Different flavors, blends,
styles to keep exclusiveness
• Larger stores to get more
sales
• Upgrade technology to
reduce labor cost
• Productivity by
standardization of process