Chapter One Ublishing As Prentice Hall. 1

Chapter 1
Introduction
Chapter One Copyright 2009 Pearson Education, Inc. P 1

ublishing as Prentice Hall.
Overview
Economics and managerial

decision making
Economics of a business
Review of economic terms

Learning objectives
define managerial economics
cite important types of resource

allocation decisions
illustrate how economic changes affect a

firm’s ability to earn an acceptable return
apply to an individual firm the three basic

questions faced by a country
Economics and managerial 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

making
 Management
The science of organizing and allocating a

firm’s scarce resources to achieve its
desired objectives

making
 Managerial economics
The use of economic analysis to make

business decisions involving the best use
(allocation) of an organization’s scarce
resources

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

particular market?
 market structure?
 supply and demand?
 technology?

making
 What are the economic conditions in our

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

making
 Should our firm be in this business?

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

making
 How can we maintain a competitive

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

making
 What are the risks involved?

 shifts in demand/supply conditions?
 technological changes?
 the effect of competition?
 changing interest rates and inflation
rates?

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
 The economics of a business refers to
the key factors that affect the firm’s ability
to earn an acceptable rate of return on its
owners’ investment
The most important of these factors are

 competition
 technology
 customers

 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 ..

 Stage II (crisis)
 cost management
 downsizing
 restructuring
… ‘re-engineering’ to deal with changes

and move firm into Stage III ..

 Stage III (reform)

 revenue management
 cost cutting has limited benefit
… focus on ‘top-line’ growth ..

 Stage IV (recovery)
 revenue plus
… revenue grows profitably

 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

 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

 Example: Kodak
 struggled to transition from

chemical-based film to digital
imaging
 responded by developing strong cash
flows in new product range

 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

 Macroeconomics is the study of the
aggregate economy, especially:
 national output (GDP)
 unemployment
 inflation
 fiscal and monetary policies
 trade and finance among nations

 Resources are inputs (factors) of
production, notably:
 land
 labor
 capital
 entrepreneurship

 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

 Allocation decisions must be made
because of scarcity. Three choices:
What should be produced?
How should it be produced?
For whom should be produced?

 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)

 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

Global application
 Example: Western Union
 began over 100 years ago

 huge changes in technology
 to survive, the company branched
out

Global application
 Example: VNU
 Dutch publishing company

 transformed itself into a global
provider of marketing and media
information


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Chapter 1

Chapter One Copyright 2009 Pearson Education, Inc. P 1

Economics and managerial

Review of economic terms

cite important types of resource

illustrate how economic changes affect a

apply to an individual firm the three basic

The study of the behavior of human

Chapter One Copyright 2009 Pearson Education, Inc. P 4

The science of organizing and allocating a

Chapter One Copyright 2009 Pearson Education, Inc. P 5

The use of economic analysis to make

Chapter One Copyright 2009 Pearson Education, Inc. P 6

Marketing: demand, price elasticity

Finance: capital budgeting, breakeven

Management science: linear

Strategy: types of competition,

Managerial accounting: relevant

 What are the economic conditions in our

 supply and demand?

Chapter One Copyright 2009 Pearson Education, Inc. P 9

 What are the economic conditions in our

Chapter One Copyright 2009 Pearson Education, Inc. P 10

 Should our firm be in this business?

 and at what output level?

Chapter One Copyright 2009 Pearson Education, Inc. P 11

 How can we maintain a competitive

 outsourcing, alliances, mergers?

Chapter One Copyright 2009 Pearson Education, Inc. P 12

 What are the risks involved?

 the effect of competition?

 changing interest rates and inflation

Chapter One Copyright 2009 Pearson Education, Inc. P 13

 What are the risks involved?

Risk is the chance that actual future

The most important of these factors are

Chapter One Copyright 2009 Pearson Education, Inc. P 15

 Stage I (the ‘good old days’)

 high profit margin

 cost plus pricing

… changes in technology, competition,

Chapter One Copyright 2009 Pearson Education, Inc. P 16

… ‘re-engineering’ to deal with changes

Chapter One Copyright 2009 Pearson Education, Inc. P 17

 Stage III (reform)

 cost cutting has limited benefit

… focus on ‘top-line’ growth ..

Chapter One Copyright 2009 Pearson Education, Inc. P 18

… revenue grows profitably

Chapter One Copyright 2009 Pearson Education, Inc. P 19

 well established company, in stage I

Chapter One Copyright 2009 Pearson Education, Inc. P 20

Chapter One Copyright 2009 Pearson Education, Inc. P 21

 struggled to transition from

Chapter One Copyright 2009 Pearson Education, Inc. P 22

Chapter One Copyright 2009 Pearson Education, Inc. P 23

 fiscal and monetary policies

 trade and finance among nations

Chapter One Copyright 2009 Pearson Education, Inc. P 24

Chapter One Copyright 2009 Pearson Education, Inc. P 25

 Opportunity cost is the amount (or

Chapter One Copyright 2009 Pearson Education, Inc. P 26

What should be produced?