INTRODUCTION TO BUSINESS

ADMINISTRATION: ECONOMICS
Course Structure
(Economics or Managerial Economics, Part I)
• Topic 1. Basics of economic analysis

• Topic 2. Demand and supply

– Topic 2.1. Individual consumer demand
– Topic 2.2. Market demand and supply

• Topic 3. Production analysis and cost analysis

– Topic 3.1. Production policy
– Topic 3.2. Theory of cost

• Topic 4. Market structure analysis

– Topic 4.1. Perfect competition and monopoly
– Topic 4.2. Monopolistic competition and oligopoly
Grading Policy
• 75% - final exam (30 points)
• 25% - individual in-class assignments (10
points)
Individual In-class Assignments

• Two individual assignments (after the end of the

corresponding group of topics)

• Each assignment includes 5 multiple choice

questions

– The student can receive 5 points for each group of

topics and these points will be considered in final mark

• Respectively the individual assignments give 10

points for final mark
Schedule of Classes

• September, 2
• September, 8
• September, 16 – in-class#1
• September, 22
• September, 24 – in-class#2

• September, 30, 10-45 a.m. – test

Literature
• Baye M. Managerial Economics and Business
Strategy [Text] / M. Baye. – McGraw-Hill,
2006. – 620 p.

• Microeconomics: Optimization, Experiments,

and Behaviour.  Burkett, John P.  2006.  Oxford
Univ. Press., Source: http://site.ebrary.com/

• Microeconomics Demystified.  Depken, Craig. 

2005.  The McGraw-Hill Companies., Source:
http://site.ebrary.com/
Topic 1.
Basics of economic analysis
• Economics – the science of making
decisions in the presence of scarce
resources
Managerial Economics vs. Microeconomics:
Common and Different

Computer Manufacturer (e.g.: IBM)

Similar concepts

Microeconomics Managerial Economics

In which way How should the prices

were the prices be set?
set?
Opportunity Cost
• Def #1: the cost of the explicit and implicit resources
that are forgone when a decision is made

• Def #2: the value of the other products that the

resources used in its production could have produced
instead

• The opportunity cost of using a resource includes

both the explicit (or accounting) cost of the resource
and the implicit cost of giving up the next-best
alternative use of the resource
Economic vs. Accounting Profits

• Def : Accounting profit – the total amount of money

taken in from sales (total revenue, or prices times
quantity sold) minus the money cost of producing
goods or services

• Def : Economic profit – the difference between total

revenue (TR) and total opportunity cost (TC)
Reasons for the Existence of Profit

• Innovation

• Risk

• Monopoly power
The Five Forces Framework and
Industry Profitability
• Entry

• Power of input suppliers

• Industry (market) rivalry

• Substitutes and complements.

• Power of buyers
Incentives

• Def: Incentives – affect how resources are

used and how hard employees work

– E.g.: “A manager should be doing a good job” –

mistake
• But!: the effect of a per hour salary for workers to
increase output
Markets
• Consumer-producer rivalry

• Consumer-consumer rivalry

• Producer-producer rivalry

• Government and the market

Managerial Interests and Sales
Maximization
• Separation of ownership from control in large
corporations

• Sales represent a measure of management’s

success, especially since many observers focus
attention on a firm’s share of the market as an
indicator of its performance
Economic Optimization Process
Economic Optimization Process

• Choices involve benefits and costs

• Optimal decision – choice alternative that produces a

result most consistent with managerial objectives
Profit Maximization

• Maximizing profit means maximizing the value of the

firm, which is the present value of current and future
profits
 The Role of Constraints
Value of firm Limited by Input, legal, and
other constraints
equals
n
TRt  TCt

t 1 1  i  t

The value of i Values of TRt Values of TCt

depends on: depend on: depend on:

1. Riskiness of firm 1. Demand and forecasting 1. Production techniques

2. Conditions in 2. Pricing 2. Cost functions

capital market
3. Process development
3. New product developing
Expressing Economic Relations
• spreadsheet – table of electronically stored data
• graph – visual representation of data
• equation – analytical expression of functional
relationship

• dependent variable – Y variable determined by X

values
• independent variable – X variable determined
separately from the Y variable
Total, Average, and Marginal Relations
(1)
• Marginal – change in the dependent variable caused
by a 1-unit change in an independent variable

– Marginal revenue

– Marginal cost

– Marginal profit
Total, Average, and Marginal Relations
(2)
Units of output, Total profits,  Marginal profits, Average
Q  profits, 
0 0 0 -
1 19 19 19
2 52 33 26
3 93 41 31
4 136 43 34
5 175 39 35
6 210 35 35
7 217 7 31
8 208 -9 26
Graphing Total, Marginal, and Average
Relations
• Marginal profit is the slope of the total profit curve

• Total profit is maximized when the marginal profit

equals zero

• Average profit rises (falls) when marginal profit is

greater (less) than average profit
Marginal Analysis in Decision Making

• Finding maximums or minimums

• Distinguishing maximums from minimums

• Maximizing the difference between two functions

Multivariate Optimization

• The marginal effect of each independent variable on

the dependent variable
– holding constant the effect of all other independent variables

• Partial derivatives
– The unchanged variables are treated as constants in the
differentiation process
Incremental Concept in Economic
Analysis
• Marginal relations measure only the effect associated
with unitary changes in variables

• The incremental concept is often used as the

practical equivalent of marginal analysis

• Def: Incremental change is the total change resulting

from a decision
– E.g.: Incremental profit is the profit gain or loss associated
with a given decision