Download Chapter 15: Financial Markets and Expectations

Managerial Economics
in a Global Economy
Chapter 1
The Nature and Scope
of Managerial Economics
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
 SCOPE OF THE COURSE:
This course emphasizes the practical application of
economic theory to managerial decision-making and
problem solving. A primary focus of the course is to
use the tools of microeconomics together with
quantitative and statistical methods to understand,
analyze, and predict the behavior of consumers and
business firms. The use of computer econometric
software as an aid to decision making will be stressed
during the course.
 COURSE REQUIREMENTS:
Prior knowledge of microeconomic analysis and
statistics is crucial. Keyboard training and basic
instructions of Microsoft Windows operating system
are necessary for computer lab. sessions. Student
may need to learn “Internet Searching” for some case
studies and other related assignments.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
COURSE CONTENTS:
·
Introduction: (scope of managerial economics, tools of analysis
& optimization).
·
Demand, markets, and elasticity.
·
Regression analysis, diagnostic statistics, curve fitting, and
violations.
·
Estimating structural demand functions.
·
Forecasting: (Structural demand equations, simple time series
models, ARIMA, & qualitative forecasting).
·
Production, Costs and profitability analysis (short and long run).
·
Market Structure and Globalization: perfect competition,
monopolistic competition, oligopoly, & monopoly, market power
and market domination including; cartels, local and international
dominating firms, and pricing practices (price discrimination,
action reaction pricing policies, and non profit pricing).
·
Capital Budgeting and investment decisions
·
Risk analysis.
·
Linear Programming.
·
Government and Business
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
SUBJECT
TIME
Introduction (scope of managerial economics, tools of analysis &
optimization).
Demand, markets, and elasticity.
Regression analysis, diagnostic statistics, curve fitting, and
violations.
Estimating structural demand functions.
Demand forecasting (Structural demand equations, simple time
series models, ARIMA, & qualitative forecasting).
Production, Costs and profitability analysis (short and long run).
REFERENCES
W
1
H
3
Mansfield, [1999
2
3
3
3
Mansfield, [1999
Mansfield, [1999
3
3
Mansfield, [1999
Mansfield, [1999
4
5-6
7-8
6
Salvatore [1992]
Mansfield, [1999
Rabinovitch
[1996]
Market Structure and Globalization: perfect competition,
monopolistic competition, oligopoly, & monopoly, market power
and market domination including; cartels, local and international
dominating firms, and pricing practices (price discrimination,
action reaction pricing policies, and non profit pricing).
9-11
Capital Budgeting and investment decisions.
Risk analysis.
Linear Programming.
Government and Business.
12
13
14
15
9
Salvatore [2001]
Mansfield, [1999
Salvatore [2001]
3
3
3
3
Rabinovitch
[1996]
Salvatore [2001]
Salvatore [2001]
Mansfield, [1999
Mansfield, [1999
Salvatore [2001]
Final Exam.
Managerial Economics
16
Prof. M. El-Sakka
3
CBA. Kuwait University
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STUDENT EVALUATION
1st Mid-term
2nd Mid-term
Final exam
Homeworks and case studies
 Total
Managerial Economics
Prof. M. El-Sakka
20
20
50
10
_________
100
CBA. Kuwait University
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





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
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GRADING SYSTEM:
95+
90 - 94.5
87 - 89.5
83 - 86.5
80 - 82.5
77 - 79.5
73 - 76.5
70 - 72.5
65 -- 69.5
60 - 64.5
0 - 59.5
Managerial Economics
A
AB+
B
BC+
C
CD+
D
F
Prof. M. El-Sakka
CBA. Kuwait University
REFERENCES:
 Mansfield, E. [2004] “Managerial Economics”, 6th ed. W.W Norton
& Co. (Main text), (copies are available in the student bookshop,
Al-Shuwaikh Campus). (REQUIRED)
 Salvatore, D. [2004] “ Managerial Economics “ Harcourt College
Publishers
 Rabinovitch, R. [1996] “Managerial Economics: Theory and its
applications” KOLB Publishing Co. (one copy is available in the
college’s library).
COMPUTER SOFTWARE:
 Excel.
OFFICE HOURS
 Saturday, Monday, and Wednesday 11 – 12 am, or by a prior
arrangement with the secretary of the department. Telephone
calls are prohibited.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Managerial economics:
provides a wide variety of practical techniques that we can
use to reduce costs and eliminate wastes and maximize profits.
Managerial economics provides a link between economic
theory and the decision sciences in the analysis of managerial
decision making.
Economic theory:
- MICROECONOMICS: focus on individual consumers,
firms, and industries. Its role is relatively important.
Managerial economics draws heavily from microeconomics.
However, managerial economics is quite different.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Definition
 The application of economic theory and the
tools of decision science to examine how an
organization can achieve its aims or
objectives most efficiently.
 The Relationship Between Managerial Economics
and Related disciplines
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Managerial economics provides a wide variety of practical
techniques that we can use to reduce costs and eliminate
wastes and maximize profits.
Managerial economics provides a link between economic
theory and the decision sciences in the analysis of managerial
decision making.
Economic theory:
- MICROECONOMICS: focus on individual consumers,
firms, and industries. Its role is relatively important.
Managerial economics draws heavily from microeconomics.
However, managerial economics is quite different.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
- MACROECONOMICS: focus on aggregate output,
income, and employment
 There is a relationship between managerial economics and
decision sciences
 Managerial economics has arisen from a complex mixture of
various parts of economics and the decision sciences
including statistics.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Managerial Decision Problems
Economic theory
Microeconomics
Macroeconomics
Decision Sciences
Mathematical Economics
Econometrics
MANAGERIAL ECONOMICS
Application of economic theory
and decision science tools to solve
managerial decision problems
OPTIMAL SOLUTIONS TO
MANAGERIAL DECISION PROBLEMS
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
The basic process of decision making:
1 -Establish or identify the objectives: What are the
organization’s objectives (e.g. redesign your product ).
2 - Define the problem: determine exactly what is the problem
(e.g., increased foreign competition)
3 - Identify Possible solutions (e.g. effective production and
marketing of existing product; or redesign the product) taking
into account different constraints.
4 - Select the best possible solution: evaluate each option,
determine which is best given the objectives (redesign the
product)
5 - Implement the Decision.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
THE BASIC PROCESS OF DECISION MAKING
Establish Objectives
Define the Problem
Identify Possible Solutions
Consider input constraints
Consider legal and other constraints
Select the best possible solution
Implement the decision
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
The theory of the firm
 Combines and organizes resources for the purpose of producing
goods and/or services for sale.
 Internalizes transactions, reducing transactions costs.
 Traditionally the theory of the firm indicated that the goal of
the firm is to maximize its profits. This is not useful in many
circumstances.
 A richer version assumes that the goal of the firm is to
maximize the value of the firm ( or its wealth ).
 The value of the firm: the present value of expected future
cash flows
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Value of the Firm; The present value of all
expected future profits


n
1
2
PV  
 
;
n
1 i (1 i) 2
(1 i)
A Compact Version
n t
PV  
;
t
t 1(1 i)
An Interesting Version
n TRt  TCt
PV  
;
t 1 (1 i)t
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
The Value of the Firm
TRt  TCt

t
1  i 
t 1
n
i depends on:
TRt depends on:
TCt depends on:
1. Riskiness of firm
1. Demand and forecasting
1. Production techniques
2. Conditions in the
capital market
2. Pricing
2. Cost functions
3. New product developing
3. Process development
Note that all the Departments of the firm are involved in
maximizing the value of the firm
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Alternative Theories
 Sales maximization
Managers seek to maximize sales after adequate rate of
profit is achieved to satisfy share holders.
 Management utility maximization
Managers are interested in maximizing their utility (their
compensations), size of their staff, extent of control…etc.
than maximizing profits (Principle-agent problem)
 Satisficing behavior
Running modern firms is complicated by uncertainty, lack of
adequate data, etc. managers strive for a satisfactory
goal in terms of sales, profits, growth ..etc. Large firms are
satisficing rather than maximizing organizations
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
The Role of Constraints
Inputs:
 Skilled labor
 Essential materials
 Funds…. etc.
Legal:
 Minimum wage levels
 Pollution control
 Expatriates policy… etc.
Environmental:
 The Green house effect
 The Green parties
Constrained optimization
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Definitions of Profit
Business Profit: Total revenue minus the explicit or accounting
costs of production.




 = TR – TC
e.g.
TR = 100 000,
 = 40 000
TC = 60 000
 Economic Profit: Total revenue minus the explicit and implicit
costs of production.
 Suppose the owner works as the manager and takes the profit
as a reward. But he could manage another company for
30000. He can lend his capital to another firm for 20000.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
 the economic profit = TR - ( TC + Opportunity costs of
factors owned by the firm )
  = 100 000 - ( 60 000 + 30000 + 20000 ) = - 10000
Note: the economic profit is more relevant.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Theories of Profit
 Risk-Bearing Theories of Profit
 Frictional Theory of Profit
 Monopoly Theory of Profit
 Innovation Theory of Profit
 Managerial Efficiency Theory of Profit
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Function of Profit
 Profit is a signal that guides the allocation of society’s
resources.
 High profits in an industry are a signal that buyers
want more of what the industry produces.
 Low (or negative) profits in an industry are a signal
that buyers want less of what the industry produces.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Business Ethics
 Identifies types of behavior that businesses and
their employees should not engage in.
 Source of guidance that goes beyond enforceable
laws.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
The Changing Environment of Managerial
Economics
 Globalization of Economic Activity
 Goods and Services
 Capital
 Technology
 Skilled Labor
 Technological Change
 Telecommunications Advances
 The Internet and the World Wide Web
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Chapter 1: Appendix
(business graduates can bypass this section)
The Basics of Demand,
Supply, and Equilibrium
Prepared by Robert F. Brooker, Ph.D.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Law of Demand
 A decrease in the price of a good, all other things
held constant, will cause an increase in the quantity
demanded of the good.
 An increase in the price of a good, all other things
held constant, will cause a decrease in the quantity
demanded of the good.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Change in Quantity Demanded
Price
An increase in price
causes a decrease in
quantity demanded.
P1
P0
Q1
Managerial Economics
Q0
Prof. M. El-Sakka
Quantity
CBA. Kuwait University
Change in Quantity Demanded
Price
A decrease in price causes an
increase in quantity demanded. A
movement from one point to another
a
P0
b
P1
Q0
Managerial Economics
Q1
Prof. M. El-Sakka
Quantity
CBA. Kuwait University
Changes in Demand
 Change in Buyers’ Tastes
 Change in Buyers’ Incomes
 Normal Goods
 Inferior Goods
 Change in the Number of Buyers
 Change in the Price of Related Goods
 Substitute Goods
 Complementary Goods
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Change in Demand
An increase in demand refers
to a rightward shift in the
market demand curve.
Price
P0
Q0
Managerial Economics
Q1
Prof. M. El-Sakka
Quantity
CBA. Kuwait University
Change in Demand
A decrease in demand refers
to a leftward shift in the
market demand curve.
Price
P0
Q1
Managerial Economics
Q0
Prof. M. El-Sakka
Quantity
CBA. Kuwait University
Law of Supply
 A decrease in the price of a good, all other things
held constant, will cause a decrease in the quantity
supplied of the good.
 An increase in the price of a good, all other things
held constant, will cause an increase in the quantity
supplied of the good.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Change in Quantity Supplied
Price
P0
A decrease in price
causes a decrease in
quantity supplied.
P1
Q1
Managerial Economics
Q0
Prof. M. El-Sakka
Quantity
CBA. Kuwait University
Change in Quantity Supplied
An increase in price causes an increase in
quantity supplied. A movement from one
point to another
Price
P1
b
P0
a
Q0
Managerial Economics
Q1
Prof. M. El-Sakka
Quantity
CBA. Kuwait University
Changes in Supply
 Change in Production Technology
 Change in Input Prices
 Change in the Number of Sellers
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Change in Supply
An increase in supply refers
to a rightward shift in the
market supply curve.
Price
P0
Q0
Managerial Economics
Prof. M. El-Sakka
Q1
Quantity
CBA. Kuwait University
Change in Supply
A decrease in supply refers
to a leftward shift in the
market supply curve.
Price
P0
Q1
Managerial Economics
Prof. M. El-Sakka
Q0
Quantity
CBA. Kuwait University
Market Equilibrium
 Market equilibrium is determined at the intersection of
the market demand curve and the market supply curve.
 The equilibrium price causes quantity demanded to be
equal to quantity supplied.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Market Equilibrium
Price
D
S
P
Equilibrium price
Q
Managerial Economics
Quantity
Equilibrium quantity
Prof. M. El-Sakka
CBA. Kuwait University
Market Equilibrium
Price
D0
D1
An increase in demand
will cause the market
equilibrium price and
quantity to increase.
P1
P0
Q0 Q1
Managerial Economics
S0
Prof. M. El-Sakka
Quantity
CBA. Kuwait University
Key Terms
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Managerial economics
Value of the firm
Economic theory
Constrained optimization
Microeconomics
Principal-agent problem
Macroeconomics
Satisficing behavior
Model
Business profit
Mathematical economics
Explicit costs
Econometrics
Managerial Economics
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Prof. M. El-Sakka
Economic profit
Functional areas of business
Implicit costs
administration studies
Business ethics
Firm
Globalization of economic
activity
Transaction costs
Internet
Circular flow of economic
activity
Information superhighway
Theory of the firm
CBA. Kuwait University