MANAGERIAL ECONOMICS

Lecture 1: Managers and Economics

by

Angeline Chivapathy

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Why should managers study economics?

o To develop the economic insight necessary to identify your business’ competitive advantage.

o To identify how the ups and downs in economy-wide economic activity will impact your business.

o To improve your business’ profitability.

Microeconomics and Macroeconomics

Microeconomics is the branch of economics that analyzes the decisions that individual consumers, firms and industries make as they produce, buy and sell goods and services.

Macroeconomics is the branch of economics that focuses on the overall level of economic activity, changes in the price level, and the amount of unemployment by analyzing group or aggregate behavior in different sectors of the economy.

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Microeconomics

Corporate News: Gasoline Sales Show Life; Valero Is Among Refiners Gaining From Falling Energy Prices

World News: EU Hits Cartel Operator With $1.12 Billion Fine

Small Firms Shiver as Health Premiums Rise

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Macroeconomics World News: Japan Enters Recession; Demand

Falls

Labor Data Show Pain Across Economy

Stable Money Is the Key to Recovery

Stimulate Car Buyers, Not Car Makers

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Microeconomic Influences on Managers

How consumer behavior affects their revenue. How production technology and input prices

affect their costs. How the market and regulatory environment in

which managers operate influences their ability to set prices and to respond to the strategies of their competitors.

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Market Demand

Demand is the number of units of a good or service that buyers are willing and able to buy at various prices, when other factors, like, buyers incomes, tastes and preferences and the prices of goods related in consumption are held constant.

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Market Supply

Market supply is the number of units of a good or service that businesses are willing and able to produce at various prices, when other factors, like, resource prices, production technology and prices of goods related in production are held constant.

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Market Equilibrium

In efficient markets with flexible prices, the market price fluctuates to eliminate shortages (an excess of quantity demanded over quantity supplied) and surpluses (an excess of quantity supplied over quantity demanded).

Market Structure

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Large Number of Firms

PerfectCompetition

MonopolisticCompetition Oligopoly Monopoly

Single Firm

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Perfect Competition

Large number of firms Each firm produces an

identical good or service Easy for new firms to

enter the market Complete information to

all buyers and sellers in the market

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Monopolistic Competition

Large number of firms Each firm produces a

good or service that, in some significant way, is different

Relatively easy for new firms to enter the market

Imperfect information

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Oligopoly

Few large, mutually interdependent, firms

Firms may produce similar or highly differentiated products

Significant barriers to new entry

Imperfect information

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Monopoly

One firm producing a good or service with no good substitutes

New entry is blockaded Imperfect information

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Understanding Microeconomics

Helps managers develop competitive advantage and increase profitability by:– Understanding how consumer behavior affects their

revenues.– Understanding how production technologies and

input prices affect their costs.– Understanding how the market and regulatory

environment influences their ability to set prices and implement competitive strategies.

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Macroeconomic Influences on Managers

Domestic business cycle fluctuations Global economic conditions Inflation Interest rate fluctuations Technological change

Circular Flow of Economic Activity

Personal consumption expenditures (C) Gross private domestic investment spending (I) Government consumption expenditures and gross

investment (G) Net export spending (X-M)

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The Circular Flow of Economic Activity

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Foreign Sector

Domestic Market for currentlyProduced goods and services

Government Sector

Financial Markets

Resource Markets

Firm SectorHousehold Sector

XM

Borrowing

G

Revenue

ExpensesIncome, Wages,Rent, Interest,Profit

CI

TB

TP

Borrowing

Borrowing

S

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Personal Consumption Expenditures

Spending by households on durable goods, nondurable goods, and services [C].

Largely determined by consumer income but also influenced by such factors as consumer wealth and confidence.

Real Personal Consumption Expenditures

-4

-3

-2

-1

0

1

2

3

4

5 % change from preceeding period

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Gross Private Domestic Investment

Real Gross Private Domestic Investment

-20

-15

-10

-5

0

5

10

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Spending by households and firms on nonresidential structures, equipment, software, residential structures and inventories (I).

Largely determined by market interest rates but also influenced by business confidence.

% change from preceeding period

Government Spending and Gross Investment

Real Government Spending and Gross Investment

-3

-2

-1

0

1

2

3

4

5

6

7

Federal, state and local government consumption spending and gross investment (G).

Largely determined within the political process but may be used to try to manage macroeconomic activity.

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% change from preceeding period

Net Export Spending

Real Net Export Spending

-20

-15

-10

-5

0

5

10

Net exports are the difference between the value of US exports and US imports (X-M).

Net exports are primarily determined by currency exchange rates, relative prosperity and relative interest rates.

% change from preceeding period

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Real Gross Domestic Product

Real Gross Domestic Product

-1

0

1

2

3

4

5

6

200

4-III

200

5-I

200

5-III

200

6-I

200

6-III

200

7-I

200

7-III

200

8-I

200

8-III

Real gross domestic product is the market value of all final goods and services produced in the economy.

GDP = C+I+G+(X-M)

% change from preceeding period

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Understanding Macroeconomics Macroeconomic factors like, inflation,

exchange rates, interest rates, and economic growth rates around the world are largely beyond a managers control.

Knowledge of these factors and how they affect your business is a key factor in the development of a businesses competitive strategies.

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