Chapter 1 : Introduction to Managerial Economics
Managerial economics is the science of directing scarce resources to manage cost effectively in a business or any other organization.
The most obvious difference between the old and the new economy is the essential role of network effects in demand – where the benefit provided to any user depends onthe total amount of other users. Another distinctive feature of the new economy is the importance of scalability – the degree to which the scale and scope of a business can be increased without a corresponding increase in costs (e.g. the information on Google is eminently scalable; the same information can serve 100 as well as 100 million users). In economic language it is a public good: a goodfor which one person’s consumption does not reduce the quantity available to others.
Microeconomics is the study of individual economic behaviour where resources are costly. It addresses issues such as how consumers respond to changes in prices and income and how businesses decide on employment and sales, how voters choose between political parties and how governments should set taxes.Managerial economics is the application of microeconomics to managerial issues.
Macroeconomics is the study of aggregate economic variables and addresses issues such as how the depreciation of a specific currency will affect unemployment, exports and imports...
The fundamental premise of managerial economics is that individuals share common motivation that leads them to behave systematically inmaking economic choices. An economic model is a concise description of behaviour and outcomes.
The marginal value of a variable is the change in the variable associated with a unit increase in a driver.
The average value of a variable is the total value of the variable divided by the total quantity of a driver.
If the marginal value of a variable is less than / equal to / greater than theaverage value, the average value is decreasing / constant / increasing.
Stock: quantity of a given item at a specific point in time (measured in units of the item).
Flow: the change in stock over a period of time (measured in units per time period).
A balance sheet represents the financial status of a company at a given point in time =>stocks.
The income statement reports changes in the financialstatus of a company =>flows.
Ceteris paribus: Holding other things equal is the assumption that all other relevant factors do not change.
Two types of models are used in managerial economics:
- static models describe behaviour at a single point in time
- dynamic models focus explicitly on the timing and sequences of actions and payments
In order to account correctly for theimportance of time for managerial decisions, it is necessary to discount future values so that they can be compared with the present. Discounting is a procedure used to transform future dollars/Euros into an equivalent number of present dollars/Euros.
NPV: the Net Present Value is the sum of the discounted values of a series of inflows (benefits) and outflows (costs) over time. If the NPV ispositive / negative then the inflows / outflows exceed the outflows / inflows.
An organization may be a business, non-profit or a household. Managers of all these organizations face the same issue of how to effectively manage costly resources. The activities of an organization are subject to two sets of boundaries:
• Vertical boundaries: delineate activities further from or closer to theend-user.
• Horizontal boundaries are defined by the scale and scope of an organization’s operations. Scale refers to the rate of production or delivery of a good or service, while scope refers to the rate of different items or services produced or delivered.
Firms are assumed to maximize profit. The standard assumption in managerial economics is that individuals (managers) behave and act...