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LECTURE ONE: INTRODUCTIONIMBA NCCU
Managerial Economics
Lecturer: Jack Wu
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
CASE: BOEING AND AIRBUS Airbus: Until 2001, established under French
law as a “Groupe d’Intérêt Economique” Boeing: Listed company April 2004: Boeing launches 787 December 2004: Airbus launches A350
QUESTIONS OF MANAGERIAL ECONOMICS RELATED TO THE CASE
Why did Airbus corporatize in 2001? What are benefits from corporatization?
Why did Airbus Chief Commercial Officer John Leahy remark that A350 would “put a hole in Boeing’s Christmas stocking”?
How should Boeing respond?
HOW SHOULD BOEING RESPOND?
Should Boeing proceed with its plan to develop the Dreamliner or should it alter its development plans?
Should Boeing respond by changing its pricing for its new jet??
How much would development and manufacturer cost, and how do these costs depend on sales volume?
Did Airbus respond correctly to Boeing’s Dreamliner?
APPLICATION OF MANAGERIAL ECONOMICS
Boeing has limited resources. Boeing managers seek to maximize the
financial return from these limited resources. They should apply managerial economics to
develop pricing and R&D strategies, design their organizations, and so on.
The same is true of Airbus.
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.
Example: In competitive strategy, Google competes fiercely with Yahoo.
OLD/NEW ECONOMY
Differences between “New” and “Old” economy:
_ role of network effects in demand **network effects – benefit/cost depends on
total number of other users example: Internt _ importance of economies of scale and scope example: Information in Yahoo is scalable
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
METHODOLOGY
economic model – concise description of behavior and outcomes
marginal vis-à-vis average stock vis-à-vis flow other things equal
METHODOLOGY
Timing static model – single point in time dynamic model – focus on sequence of actions
and payments
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, or one party has better information than others