Managerial Economics Essay

Chapter 1 Introduction to palmrial Eco no.ics4. pass the importance of the other things equal assumption in managerial scotch analysis.5. Describe what constitutes a food market, distinguish competitive from non-competitive markets, and discuss imperfect markets.6. Emphasize the sphericalization of markets.NOTES1. Definition. managerial economics is the recognition of directing scarce resources to manage cost effectively.2. Application. managerial economics applies to(a) Businesses (such as decisions in relation to customers including determine and advertising suppliers competitors or the internal workings of the organization), nonprofit organizations, and households.(b) The old parsimoniousness and new economy in essentially the same way except for two distinctive aspects of the new economy the importance of net effectuate and scale and bea economies.i. network effects in demand the benefit set asided by a service depends on the total procedure of other users, e.g., w hen only superstar person had email, she had no one(a) to communicate with, but with vitamin C mm users on line, the demand for Internet services mushroomed.ii. scale and kitchen stove economies scaleability is the degree to which scale and circumstance of a business can be increased without a synonymous increase in be, e.g., the information in Yahoo is eminently scaleable (the same information can help oneself 100 as well as 100 mm users) and to serve a larger number of users, Yahoo needs only increase the capacity of its computers and links.iii. Note the term open technology (of the Internet) refers to the comparatively free admission of developers of content and applications. (c) Both global and local anaesthetic markets.3. Scope.(a) Microeconomics the study of individual economic air where resources atomic number 18 costly, e.g., how consumers respond to changes in prices and income, how businesses decide on employment and sales, voters behavior and setting of tax p olicy.(b) managerial economies the application of microeconomics to managerial issues (a scope more limited than microeconomics).(c) Macroeconomics the study of aggregate economic multivariates directly (as argue to the aggregation of individual consumers and businesses), e.g., issues relating to interest and exchange rates, inflation, unemployment, import and export policies.2Chapter 1 Introduction to Managerial economic science4. Methodology.(a) Fundamental premise economic behavior is systematic and therefore canbe studied. magisterial economic behavior means individuals share common motivations and behave systematically in making economic choices, i.e, a person who faces the same choices at two different times will behave in the same way both times.(b) Economic model a concise description of behavior and outcomes i. focuses on particular issues and key variables (e.g., price, salary), omits considerable information, hence un true to life(predicate) at timesii. constructe d by inductive concludeiii. to be tested with empirical data and revised as appropriate. 5. Basic concepts.(a) Margin vis a vis comely variables in managerial economics analyses. i. borderline evaluate of a variable the change in the variable associated with a unit increase in a driver, e.g., amount earned by working one more hourii. second-rate value of a variable the total value of the variable dual-lane by the total quantity of a driver, e.g., total pay divided by total no. of hours workediii. driver the independent variable, e.g., no. of hours worked iv. the marginal value of a variable may be little that, equal to, or greater than the ordinary value, depending on whether the marginal value is decreasing, constant or increase with respect to the driver v. if the marginal value of a variable is greater than its average value, the average value increases, and vice versa.(b) Stocks and flows.i. stock the quantity at a specific point in time, measured in units of the ite m, e.g., items on a balance sheet (assets and liabilities), the worlds anoint reserves in the ancestor of a yearii. Flow the change in stock over some period of time, measured in units per time period e.g., items on an income statement (receipts and expenses), the worlds current production of oil per day.(c) Holding other things equal the assumption that all other relevantfactors do not change, and is do so that changes due to the factor being studied may be examined independently of those other factors. Having analysed the effects of each factor, they can be put together for the complete picture. 6. Organizational boundaries.(a) Organizations include businesses, non-profits and households. (b) Vertical boundaries tie activities closer to or further from the end user. (c) Horizontal boundaries relate to economies of scale (rate of production or address of a good or service) and scope (range of different items produced or delivered).3Chapter 1 Introduction to Managerial Econ omics(d) Organizations which are members of the same industry may choose different vertical and horizontal boundaries.7. militant markets.(a) commercialises.i. a market consists of buyers and sellers that communicate with one another for voluntary exchange. It is not limited by physiologic structure. ii. in markets for consumer products, the buyers are households and sellers are businesses.iii. in markets for industrial products, both buyers and sellers are businesses.iv. in markets for human resources, buyers are businesses and sellers are households.v. Note an industry is made up of businesses engaged in the production or pitch shot of the same or similar items.(b) Competitive markets.i. markets with umteen buyers and many sellers, where buyers provide the demand and sellers provide the supply, e.g., the property market. ii. the demand-supply model basic starting point of managerial economics, the model describes the systematic effect of changes in prices and othereconomic v ariables on buyers and sellers, and the interaction of these choices.(c) Non-competitive markets a market in which market power exists. 8. Market power.(a) Market power the ability of a buyer or seller to influence market conditions. A seller with market power will have the freedom to choose suppliers, set prices and influence demand.(b) Businesses with market power, whether buyers or sellers, sedate need to understand and manage their costs.(c) In addition to managing costs, sellers with market power need to manage their demand through price, advertising, and policy toward competitors. 9. Imperfect Market.(a) Imperfect market where one ships company directly conveys a benefit or cost to others, or where one party has better information than others. (b) The challenge is to disband the imperfection and be cost-effective. (c) Imperfections can also arise within an organization, and hence, another issue in managerial economics is how to structure incentives and organizations. 10. Local vis a vis global markets.(a) Local markets owing to comparatively high costs of communication and trade, some markets are local, e.g., housing, groceries. The price in one local market is independent of prices in other local markets.4Chapter 1 Introduction to Managerial Economics(b) Global markets owing to relatively low costs of communication and trade, some markets are global, e.g., mining, shipping, financial services. The price of an item with a global market in one place will move together with the pries elsewhere.(c) Whether a market is local or global, the same managerial economic principles apply.(d) Note Falling costs of communication and trade are causing more markets to be more integrated across geographical border enabling the prospect to sell in new markets as well as global sourcing. Foreign sources may provide cheaper skilled labor, specialized resources, or superior quality, resulting in lower production costs and/or modify quality.ANSWERS TO PROGRESS CHE CKS1A. The managerial economics of the new economy is much the same as that of the old economy with two aspects being more important network effects in demand and scale and scope economies.1B. Vertical boundaries delineate activities closer to or further from the end user. Horizontal boundaries define the scale and scope of operations. ANSWERS TO REVIEW QUESTIONS1. Marketing over the Internet is a scaleable activity. Delivery through UPS is somewhat scaleable UPS already incurs the laid cost of an international collection and distribution network it may be willing to give virago bulk discounts for larger volumes of business.2. publication of cars in service January 2002 + production + imports exports scrappage during 2002 = Number of cars in service January 2003. Number of cars in service is stock other variables are flows.3. omitted.4. No, models must be less than completely realistic to be useful. 5. (a) Average price per minute = (210 + 120 x 4)/5 = 138 yen per minute. (b) P rice of marginal minute = 120 yen.6. (a) Flow (b) Stock (c) Stock.5Chapter 1 Introduction to Managerial Economics7. (a) The electrical energy market includes buyers and sellers. (b) industry consists of sellers only.Theelectricity8. (a) False. (b) False.9. omitted.10. If there are scale economies, the organization could product at a lower cost on a larger scale, which means wider horizontal boundaries and vice versa. 11. Yes. Horizontal boundaries how many product categories should it sell? Vertical boundaries should it operate its own warehouses and delivery service? 12. Intel has relatively more market power.13. (b).14. Both (a) and (b).15. Competitive markets have large numbers of buyers and sellers, none of which can influence market conditions. By contrast, a buyer or seller with market power can influence market conditions. A market is imperfect if one party directly conveys benefits or costs to others, or if one party has better information than another. WORKED ANSWER TO DISC USSION QUESTIONJupiter Car Rental offers two schemes for rental of a compact car. It charges $60 per day for an unlimited gas mileage blueprint, and $40 per day for a time-and-mileage plan with 100 free miles plus 20 cents a mile for mileage in excess of the free allowance. a. For a customer who plans to drive 50 miles, which is the cheaper plan. What are the average and marginal costs per mile of rental? (The marginal cost is the cost of an additional mile of usage.)b. For a customer who plans to drive 150 miles, which is the cheaper plan. What are the average and marginal costs per mile of rental?c. If Jupiter raises the basic charge for the time-and-mileage plan to $44 per day, how would that affect the average and marginal costs for a customer who drives 50 miles?6Chapter 1 Introduction to Managerial EconomicsAnswer(a) It is helpful to sketch the total rental cost as a function of the mileage (see figure below). The breakeven between the two plans is at 200 miles per day. For 50 miles, the time-and-mileage plan is cheaper. Average cost = $40/50 = 80 cents per mile. Marginal cost = 0.Total cost ($)time-and-mileage planunlimited mileage plan$60$400100200Quantity (miles per day)(b) For the 150 mile customer, the time-and-mileage plan is still cheaper. Average cost = $(40 + 0.2 x 50)/150 = 33 cents per mile marginal cost = 20 cents per mile.(c) by and by the increase in the basic charge, the average cost = $(44 + 0.2 x 50)/150 = 36 cents per mile, while marginal cost = 20 cents per mile. The increase in the basic charge doesnt affect the marginal cost.7