LECTURE ONE:

INTRODUCTION
IMBA NCCU
Managerial Economics
Lecturer: Jack Wu
DEFINING MANAGERIAL ECONOMICS
Managerial economics: Science of directing scarce
resources to manage more effectively
 resources – financial, human, physical

 management of customers, suppliers, competitors,

internal organization
 organizations – business, nonprofit, household
SCOPE OF MANAGERIAL ECONOMICS
 Managerial econ is based on microeconomics.
 Microeconomics
 Microeconomics is the study of how individual households
and firms make decisions and how they interact with one
another in markets.
 Macroeconomics
 Macroeconomics is the study of the economy as a whole.
EXAMPLE: INCREASE IN OIL PRICE
 Micro effect: vehicle users, electronic power generators
 Macro effect: inflation, unemployment
NEW ECONOMY: INTERNET
 Managerial Economics also applies to the new economy.
 Example: In pricing, Airlines use online auctions to
segment their market between business and leisure
travelers.

OLD/NEW ECONOMY
 Differences between “New” and “Old” economy:
(1) role of network effects in demand
**network effects – benefit/cost depends on total number
of other users
example: Internet

(2) importance of economies of scale and scope

example: Information in Yahoo is scalable
ORGANIZATION
 Vertical boundaries – closer to or further from end user
 Samsung Electronics – vertical boundaries longer than
 Intel
– specializes in semiconductors (upstream)
 Motorola – specializes in mobile phones (downstream)
ORGANIZATION
 Horizontal boundaries – scale and scope of activities
 Samsung Electronics – horizontal boundaries broader
than
 LG.Philips LCD – specializes in LCD
 Motorola – specializes in mobile phones
MARKET
 Market: Buyers and sellers communicate with one
another for voluntary exchange
 market need not be physical

 industry -- businesses engaged in the production or

delivery of the same or similar items
MARKET: CONTINUED
 Competitive Markets
 Market Power

 Imperfect Markets
COMPETITIVE MARKET
 Benchmark for managerial economics
 Extremely competitive market
 many buyers and many sellers
 no room for managerial strategizing

 Achieves economic efficiency

COMPETITIVE MARKET
 Model:
 demand
 supply
 market equilibrium
MARKET POWER
 Definition – ability of a buyer or seller to influence
market conditions
 Seller with market power must manage
 costs
 pricing
 advertising expenditure
 R&D expenditure
 strategy toward competitors
IMPERFECT MARKET
 Definition: where
 one party directly conveys a benefit or cost to others
(Externality),
 or
 one party has better information than others (Asymmetric
Information)