Intro to Managerial Economics - Unit I PDF

MANAGERIAL ECONOMICS ERICSON R. PAMBID CBEA-Economics department  recall Economics is a branch of ________ that deals with the study of the allocation of ________ resources for production, distribution and consumption of ________ and services to satisfy the unlimited...

MANAGERIAL ECONOMICS ERICSON R. PAMBID CBEA-Economics department  recall Economics is a branch of ________ that deals with the study of the allocation of ________ resources for production, distribution and consumption of ________ and services to satisfy the unlimited ________ and wants of people. Economics is the study of ________. Social Science limited goods needs choices  Budgeting Purchasing IMPORTANCE OF Public Policy ECONOMICS Employment Globalization Investment IMPORTANCE OF ECONOMICS Budgeting Understanding economics helps individuals and households to make informed decisions about their budgets, including how much to save, spend, and invest. IMPORTANCE OF ECONOMICS Purchasing Economics influences the prices of goods and services we purchase, including supply and demand, inflation, and taxes. IMPORTANCE OF ECONOMICS Employment Economics affects employment opportunities, including job growth, wages, and benefits. It also helps individuals to understand how to navigate the job market. IMPORTANCE OF ECONOMICS Investment Economics provides individuals with the tools to make informed investment decisions, such as understanding how financial markets work and the risks and returns associated with different types of investments. IMPORTANCE OF ECONOMICS Globalization Economics helps individuals to understand the impact of globalization, including the effects of international trade, migration, and the global economy on their daily lives. IMPORTANCE OF ECONOMICS Public Policy Economics is also important in shaping public policy, including decisions about taxes, government spending, and regulations that affect individuals and businesses. Basic concepts OF ECONOMICS SCARCITY Insufficiency of resources to meet the wants of consumers and insufficiency of resources for producers that hamper enough production of goods and services. It is a condition where there are insufficient resources to satisfy all the needs and wants of a population. Basic concepts OF ECONOMICS SCARCITY Relative scarcity is when a good is scarce compared to its demand. Example: Coconuts are abundant in the Philippines since the plant easily grows in our soil and climate. However, coconuts become scarce when the supply is not sufficient to meet the needs of the people. Absolute scarcity is when supply is limited. Example: Oil is absolutely scarce in the country since we have no oil wells from which we can source out our petroleum needs. Basic concepts OF ECONOMICS Choice and decision-making Because of the presence of scarcity, there is a need for a man to make decisions in choosing how to maximize the use of scarce resources to satisfy as many wants as possible. Opportunity cost refers to the value of the best forgone alternative. Basic concepts OF ECONOMICS Examples of opportunity cost A land is devoted exclusively to the cultivation of rice, we give up an output of banana and mangoes that we could have planted on that land area. A producer who decides to transform all his leather into shoes, gives up the chance to produce bags with the leather. A teacher who could have worked in a bank, gives up the salary that she would have earned as a bank employee Basic concepts OF ECONOMICS incentives It refers to the factor that influences the consumer in the decision-making process. Two types of incentives are intrinsic and extrinsic incentives. Intrinsic incentives originated in the consumer without any outside pressure, whereas extrinsic incentives developed due to external rewards. For example, the decrease in the price of a discretionary item is an incentive to purchase that item. Basic concepts OF ECONOMICS Demand & Supply Demand indicates the number of goods and services consumers are willing and able to purchase. According to the law of demand, as price increases, demand decreases, and vice versa. Supply refers to the number of goods and services available for consumers. The law of supply states that as price increases, also supply increases and vice versa. Basic concepts OF ECONOMICS Factors of production / Economic resources Land. These are soil and natural resources that are found in nature and are not man-made. Owners of lands receive a payment known as rent. Labor. These are physical and human effort exerted in production. It covers manual workers like construction workers, machine operators and production workers as well as professionals like nurses, lawyers and doctors. The income received by labors is referred to us as wage Capital. Man-made resources are used in the production of goods and services, which include machineries and equipment. The owner of capital earns an income called interest. Entrepreneurship. It is a combination of the other three factors. Entrepreneurs use land, labor, and capital to produce a good or service for consumers. Basic concepts OF ECONOMICS Production possibility frontier In economics, the production possibility frontier is a curve in which each point represents the combination of two goods that can be produced using the given finite resources. For example, a farmer can produce 20,000 apples and 30,000 apricots on his fixed land so that the trees are placed to have adequate space to develop a healthy root system and receive enough sunlight. However, if he intends to produce 40,000 apricots, he will make only 10,000 apples on his farm. Basic concepts OF ECONOMICS Marginal analysis The marginal analysis compares the additional cost incurred and the corresponding additional benefit obtained from an activity. Usually, companies planning to expand their business by adding another production line or increasing volumes perform this analysis. For example, if a company has enough capacity to increase production but improves the warehouse facility, a marginal analysis indicates that expanding the warehouse capacity will not affect the marginal benefit. In other words, the ability to produce more products outweighs the increase in cost. Basic concepts OF ECONOMICS Circular flow The circular flow model in economics primarily portrays how money flows through different units in an economy. It connects the sources and sinks of factors of production, consumer & producer expenditures, and goods & services. For example, resources move from household to firm, and goods and services flow from firms to households. Circular flow model Fundamental economic questions 1. What to produce and how much Society must decide what goods and services should be produced in the economy. 2. How to produce It is a question on the production method that will be used to produce the goods and services. 3. For whom to produce It is about the market for the goods. For whom will the goods and services be produced? scenario Imagine yourself as an owner and manager of a restaurant. You have competitors of the same type of business. The prices of his is also the same with yours. You have the same set of menu. You relatively share with your target market. What will you do as the owner of the restaurant to avoid losing customers on the following situations? 1. A customer complains of bad customer service on one of your crew. 2. Your competitor lowers down its prices as a promo during weekends. 3. Another restaurant opened near your location. What is manager  manager A manager is a person who directs resources to achieve a stated goal. This definition includes all who: 1. direct the efforts of others, including those who delegate tasks within an organization such as firm family or a club; 2. purchase inputs to be used in the production of goods and services such as the output or a firm, food for the needy, or shelter for he homeless; or 3. are in charge of making other decisions, such as product price or quality. A manager generally has responsibility for his or her own actions as well as for the actions of individuals, machines, and other inputs under the manager’s control.  MANAGERIAL ECONOMICS Managerial economics, therefore, it the study of how t o direct scarce resources in the way that most efficiently achieves a managerial goal. It is a very broad discipline in that it describes methods useful for directing everything from the resources of a household to maximize welfare to the resources of a firm to maximize profits. MANAGERIAL ECONOMICS Managerial economics is a branch of Economics and a stream of management studies which emphasizes solving business problems and decision-making by applying the theories and principles of Economics. It is a specialized stream dealing with the organization’s internal issues by using various economic theories. Economics is an inevitable part of any business. All the business assumptions, forecasting and investments are based on this one single concept. principles of MANAGERIAL ECONOMICS Principles of How People Make Decisions To understand how the decision making takes place in real life, let us go through the following principles: People Face Tradeoffs To make decisions, people must make choices where they have to select among the various options available. Opportunity Cost Every decision involves an opportunity cost which the cost of those options which we let go while selecting the most appropriate one. Rational People Think at the Margin People usually think about the margin or the profit they will earn before investing their money or resources at a particular project or person. People Respond to Incentives Decisions making highly depends upon the incentives associated with a product, service or activity. Negative incentives discourage people, whereas positive incentives motivate them. Principles of How People Interact Communication and market affect business operations. To justify the statement, let us see the following related principles: Trade Can Make Everyone Better off This principle says that trade is a medium of exchange among people. Everyone gets a chance to offer those products or services which they are good at making. And purchase those products or services too, which others are good at manufacturing. Markets Are Usually A Good Way to Organize Economic Activity Markets mostly act as a medium of interaction among the consumers and the producers. The consumers express their needs and requirement (demands) whereas the producers decide whether to produce goods or services required or not. Governments Can Sometimes Improve Market Outcomes Government intervenes business operations at the time of unfavorable market conditions or for the welfare of society. One such example is when the government decides minimum wages for labor welfare. Principles of How Economy Works As A Whole The following principle explains the role of the economy in the functioning of an organization: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services For the growth of the economy of a country, the organizations must be efficient enough to produce goods and services. It ultimately meets the consumer’s demand and improves GDP to raise the country’s standard of living. Prices Rise When the Government Prints Too Much Money If there are surplus money available with people, their spending capacity increases, ultimately leading to a rise in demand. When the producers are unable to meet the consumer’s demand, inflation takes place. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment To reduce unemployment, the government brings in various economic policies into action. These policies aim at boosting the economy in the short run. Such practices lead to inflation.  SCOPE of MANAGERIAL ECONOMICS Managerial economics is widely applied in organizations to deal with different business issues. Both the micro and macroeconomics equally impact the business and its functioning. Micro-Economics Applied to Operational Issues To resolve the organization’s internal issues arising in business operations, the various theories or principles of microeconomics applied are as follows: Theory of Demand: The demand theory emphasizes on the consumer’s behavior towards a product or service. It takes into consideration the needs, wants, preferences and requirement of the consumers to enhance the production process. Theory of Production and Production Decisions: This theory is majorly concerned with the volume of production, process, capital and labor required, cost involved, etc. It aims at maximizing the output to meet the customer’s demand. Pricing Theory and Analysis of Market Structure: It focuses on the price determination of a product keeping in mind the competitors, market conditions, cost of production, maximizing sales volume, etc. Profit Analysis and Management: The organizations work for a profit. Therefore, they always aim at profit maximization. It depends upon the market demand, cost of input, competition level, etc. Theory of Capital and Investment Decisions: Capital is the most critical factor of business. This theory prevails the proper allocation of the organization’s capital and making investments in profitable projects or venture to improve organizational efficiency. Macro-Economics Applied to Business Environment Any organization is much affected by the environment it operates in. The business environment can be classified as follows: Economic Environment: The economic conditions of a country, GDP, economic policies, etc. indirectly impacts the business and its operations. Social Environment: The society in which the organizational functions also affect it like employment conditions, trade unions, consumer cooperatives, etc. Political Environment: The political structure of a country, whether authoritarian or democratic; political stability; and attitude towards the private sector, influence organizational growth and development. Managerial economics provides an essential tool for determining the business goals and targets, the actual position of the organization, and what the management should do fill the gap between the two. Firms and managerial objectives The main objectives of firms are: 1. Profit maximization 2. Sales maximization 3. Increased market share/market dominance 4. Long run profit maximization 5. Social/environmental concerns 6. Co-operatives  Firms and managerial objectives 1. Profit maximization Usually, in economics, we assume firms are concerned with maximizing profit. Higher profit means: Higher dividends for shareholders. More profit can be used to finance research and development. Higher profit makes the firm less vulnerable to takeover. Higher profit enables higher salaries for workers Firms and managerial objectives What word/s can you think of that is associated with DIVIDEND? Firms and managerial objectives If you are manager of a firm, would you like to allocate a budget to finance your R&D for your product/s? Why? Firms and managerial objectives What do you think is the effect to a company if salaries will increase?  Firms and managerial objectives 2. Sales maximization Firms often seek to increase their market share – even if it means less profit. This could occur for various reasons: Increased market share increases monopoly power and may enable the firm to put up prices and make more profit in the long run. Managers prefer to work for bigger companies as it leads to greater prestige and higher salaries. Increasing market share may force rivals out of business. E.g. the growth of supermarkets have lead to the demise of many local shops. Some firms may actually engage in predatory pricing which involves making a loss to force a rival out of business. Firms and managerial objectives What word/s can you think of that is associated with the word MONOPOLY? Firms and managerial objectives What happens if you can monopolize the market with your product/s?  Firms and managerial objectives 3. Growth maximization/Increase Market Share This is similar to sales maximization and may involve mergers and takeovers. With this objective, the firm may be willing to make lower levels of profit to increase in size and gain more market share. More market share increases its monopoly power and ability to be a price setter.  Firms and managerial objectives 4. Long run profit maximization In some cases, firms may sacrifice profits in the short term to increase profits in the long run. For example, by investing heavily in new capacity, firms may make a loss in the short run but enable higher profits in the future. Firms and managerial objectives If you are a manager of a gadget company, how or where will you invest for you to have a long run profit?  Firms and managerial objectives 5. Social/environmental concerns A firm may incur extra expense to choose products which don’t harm the environment or products not tested on animals. Alternatively, firms may be concerned about local community / charitable concerns. Some firms may adopt social/environmental concerns as part of their branding. This can ultimately help profitability as the brand becomes more attractive to consumers. Some firms may adopt social/environmental concerns on principal alone – even if it does little to improve sales/brand image. Firms and managerial objectives If you are a manager, what product or project can you think of that will help the community or environment?  Firms and managerial objectives 6. Co-operatives A co-operative is run to maximise the welfare of all stakeholders – especially workers. Any profit the co-operative makes will be shared amongst all members. Firms and managerial objectives What development programs can you propose to the company in consideration to the welfare of the employees? Economic analysis It is the process of directing economic relationships by examining economic behavior and events, and determining the causal relationships among the data and activities observed. Tools of A student in economics who attempts to analyze Economic relationships among economic variables must learn to analysis draw conclusions from the particular to the general (inductive reasoning) or through deductive reasoning, which draws conclusions from the general to particular. This tool is called Logic. The economic analysis uses statistics to quantitatively describe economic behavior and therefore serves as a basis in hypothesis testing. A hypothesis becomes a principle or theory one empirically validated. The third tool is the use of mathematics which enables the analyst to conceptualize and quantify a hypothesis for empirical validation. purposes of Economic analysis 1. Economic analysis is an aid in understanding how an economy operates because it explains how economic variables are related to one another. 2. It permits prediction of the results of changes in the economic variables. 3. It serves as basis of policy formulation. Economic model Economics models are composed of a series of statement of assumptions or given and statements or implications or deductions. The statements described the essential features of an item or process and the interrelationships between the factors or variables in the model. Economic model Demand and Supply Model The most popular economic model. These situations developed and explained in economics text that are examples of economic models. Their relationships could be express in three different forms: a. Verbal (or logical); b. Mathematical; and c. Graphical. Economic a. Verbal model The Law of Supply can be expressed in the following words: ✓ Supply is a schedule of prices and quantities that a supplier/s would be willing to offer for sale at each price per period. Price =  Qty. supplied More or higher profit Price =  Qty. supplied Less or lower profit Economic b. Mathematical model Mathematical expressions are merely shortcut representations of verbal explanations. Example: Qs = 500P It means that if the price (P) is, say, 1 peso, quantity supplied (Qs) would be P500 (500x1=500); if the price is P3, Qs is P1,500 (500x3=1,500); and so on. Thus, we see that there is a direct relationship between P and Qs. Economic c. Graphical model If we compute the supply schedule as expressed in the equation, Qs = 500P, we will have the following table: 6 Price Quantity Supplied 5 1 500 4 2 1,000 3 1,500 3 4 2,000 5 2,500 2 6 3,000 1 0 500 1,000 1,500 2,000 2,500 3,000