INTRODUCTION TO BUSINESS ADMINISTRATION: ECONOMICS (MANAGERIAL ECONOMICS, Part I)

Lecturer: Ekaterina Vladimirovna Sokolova

(Public Administration Department)

E-mail: sokolova@som.pu.ru

Course Structure (Economics or Managerial Economics, Part I)

Topic 1. Basics of economic analysis Topic 2. Demand and supply

Topic 2.1. Individual consumer demand Topic 2.2. Market demand and supply

Topic 3. Production analysis and cost analysis

Topic 3.1. Production policy Topic 3.2. Theory of cost

Topic 4. Market structure analysis

Topic 4.1. Perfect competition and monopoly Topic 4.2. Monopolistic competition and oligopoly

Grading Policy
MIB (Economics) 70% - mid-term (or final) exam 30% - individual in-class assignments
MITIM (Managerial Economics) 2 grades 1st : 70% - mid-term (final for MIB) exam 30% - individual in-class assignments 2nd : 70% - final exam (Winter session, Managerial Economics, Part II) 30% - individual in-class assignments (Managerial Economics, Part II) Final grade = 1st *1/3 + 2nd * 2/3

Economics (Managerial Economics, Part I), Final Evaluation (Mid-term or final exam)
35 points
for written mid-term exam (for MITIM students) or final exam (for MIB students)

Economics (Managerial Economics, Part I),

Current Evaluation

15 points for 3 in-class assignments (5 points each)

after the end of the corresponding group of topics each assignment includes 5 multiple choice questions
The student can receive 5 points for each group of topics and these points will be considered in final mark

respectively the individual assignment can give 15 points

Economics (Managerial Economics, Part I), Individual In-class Assignments

Three individual assignments (after the end of the corresponding group of topics)
Each assignment includes 3 tasks
The student can receive 3 points for each group of topics and these points will be considered in final mark

Respectively the individual assignments give 12 points for final mark

In-class Group Work

In-class group work will take place at seminars

Discussion of cases and answering given questions Doesnt give any points for final mark

Literature
Microeconomics: Optimization, Experiments, and Behaviour. Burkett, John P. 2006. Oxford Univ. Press., Source: http://site.ebrary.com/ Microeconomics Demystified. Depken, Craig. 2005. The McGraw-Hill Companies., Source: http://site.ebrary.com/ Baye M. Managerial Economics and Business Strategy [Text] / M. Baye. McGraw-Hill, 2006. 620 p.

Topic 1. Basics of economic analysis

Economics the science of making decisions in the presence of scarce resources

Managerial Economics vs. Microeconomics: Common and Different

Computer Manufacturer (e.g.: IBM) Similar concepts Microeconomics Managerial Economics

In which way were the prices set?

How should the prices be set?

Opportunity Cost
Def #1: the cost of the explicit and implicit resources that are forgone when a decision is made

Def #2: the value of the other products that the

resources used in its production could have produced instead
The opportunity cost of using a resource includes both the explicit (or accounting) cost of the resource and the implicit cost of giving up the next-best alternative use of the resource

Economic vs. Accounting Profits

Def : Accounting profit the total amount of money taken in from sales (total revenue, or prices times quantity sold) minus the money cost of producing goods or services
Def : Economic profit the difference between total revenue (TR) and total opportunity cost (TC)

Reasons for the Existence of Profit

Innovation Risk Monopoly power

The Five Forces Framework and Industry Profitability

Entry
Power of input suppliers Industry (market) rivalry Substitutes and complements. Power of buyers

Incentives
Def: Incentives affect how resources are used and how hard employees work
E.g.: A manager should be doing a good job mistake
But!: the effect of a per hour salary for workers to increase output

Markets
Consumer-producer rivalry
Consumer-consumer rivalry Producer-producer rivalry Government and the market

Managerial Interests and Sales Maximization

Separation of ownership from control in large corporations Sales represent a measure of managements success, especially since many observers focus attention on a firms share of the market as an indicator of its performance

Economic Optimization Process

Economic Optimization Process

Choices involve benefits and costs
Optimal decision choice alternative that produces a result most consistent with managerial objectives

Profit Maximization
Maximizing profit means maximizing the value of the firm, which is the present value of current and future profits

The Role of Constraints

Value of firm equals
Limited by Input, legal, and other constraints

TRt TC t t 1 i t 1
n

The value of i depends on:

1. Riskiness of firm 2. Conditions in capital market

Values of TRt depend on:

1. Demand and forecasting 2. Pricing 3. New product developing

Values of TCt depend on:

1. Production techniques 2. Cost functions 3. Process development

Expressing Economic Relations

spreadsheet table of electronically stored data graph visual representation of data equation analytical expression of functional relationship
dependent variable Y variable determined by X values independent variable X variable determined separately from the Y variable

Total, Average, and Marginal Relations (1)

Marginal change in the dependent variable caused by a 1-unit change in an independent variable
Marginal revenue Marginal cost

Marginal profit

Total, Average, and Marginal Relations (2)

Units of output, Total profits, Marginal profits, Average Q profits,
0 1 2 3 4 5 6 7 8 0 19 52 93 136 175 210 217 208 0 19 33 41 43 39 35 7 -9 19 26 31 34 35 35 31 26

Graphing Total, Marginal, and Average Relations

Marginal profit is the slope of the total profit curve
Total profit is maximized when the marginal profit equals zero Average profit rises (falls) when marginal profit is greater (less) than average profit

Marginal Analysis in Decision Making

Finding maximums or minimums
Distinguishing maximums from minimums Maximizing the difference between two functions

Multivariate Optimization
The marginal effect of each independent variable on the dependent variable
holding constant the effect of all other independent variables

Partial derivatives
The unchanged variables are treated as constants in the differentiation process

Incremental Concept in Economic Analysis

Marginal relations measure only the effect associated with unitary changes in variables
The incremental concept is often used as the practical equivalent of marginal analysis Def: Incremental change is the total change resulting from a decision
E.g.: Incremental profit is the profit gain or loss associated with a given decision