Managerial Economics & Business Strategy
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Transcript Managerial Economics & Business Strategy
Managerial Economics &
Business Strategy
Chapter 1
The Fundamentals of Managerial
Economics
Opportunity Cost
• Accounting Costs
The explicit costs of the resources needed to produce
produce goods or services.
Reported on the firm’s income statement.
• Opportunity Cost
The cost of the explicit and implicit resources that are
foregone when a decision is made.
• Economic Profits
Total revenue minus total opportunity cost.
Why use opportunity cost?
• Situation: You are able to open a pizza shop in a building
that you own. During the year Uncle Vinnie offers you a job
with his pizza shop (he wants to eliminate the competition)
which will pay $30,000 and Aunt Judy offers you $100,000
to rent the building for a year for her new hair salon. You
decide to continue with your pizza shop. At the end of the
year you calculate the following on your income statement.
Revenue = $100,000
Cost of Supplies = $20,000
• Did you make a good decision???
Did you???
• Accounting profit
100,000 - 20,000 = 80,000
Looks like you did!!!
• Economic profit
100,000 – 20,000 – 30,000 – 100,000 = -$50,000
You could have done better by taking them up on their offers
The Five Forces Framework
Entry Costs
Speed of Adjustment
Sunk Costs
Economies of Scale
Entry
Power of
Input Suppliers
Power of
Buyers
Supplier Concentration
Price/Productivity of
Alternative Inputs
Relationship-Specific
Investments
Supplier Switching Costs
Government Restraints
Sustainabl
e Industry
Profits
Industry Rivalry
Concentration
Price, Quantity, Quality, or
Service Competition
Degree of Differentiation
Network Effects
Reputation
Switching Costs
Government Restraints
Switching Costs
Timing of Decisions
Information
Government Restraints
Buyer Concentration
Price/Value of Substitute
Products or Services
Relationship-Specific
Investments
Customer Switching Costs
Government Restraints
Substitutes & Complements
Price/Value of Surrogate Products
or Services
Price/Value of Complementary
Products or Services
Network Effects
Government
Restraints
Market Interactions
• Consumer-Producer Rivalry
Consumers attempt to locate low prices, while producers attempt to
charge high prices.
• Consumer-Consumer Rivalry
Scarcity of goods reduces the negotiating power of consumers as
they compete for the right to those goods.
• Out-bid or under-bid
• Producer-Producer Rivalry
Scarcity of consumers causes producers to compete with one
another for the right to service customers.
• Better customer service, higher quality, perks…
• The Role of Government
Disciplines the market process.
Firms “tell on each other” to try to get the government to intervene
In order to make decisions in the
future you need to know what the
future holds….
Is a dollar today worth the same as a
dollar in three years??
The Time Value of Money
• How much do I have to invest today to have $1,000 in three
years if the interest rate is 10%??
• Present value (PV) of a lump-sum amount (FV) to be
received at the end of “n” periods when the per-period
interest rate is “i”:
PV
• Example:
FV
1 i
n
Lotto winner choosing between a single lump-sum payout of $104
million or $198 million over 25 years.
How much do I have to invest
then??
1000
PV
751.32
3
(1 .10)
So…
• Present Value is the difference between the Future
Value and the Opportunity Cost of waiting
PV = FV – OCW
i
OCW
PV
Present Value of a Series
• What if you are “promised” different amounts every
year??
• Present value of a stream of future amounts (FVt)
received at the end of each period for “n” periods:
PV
FV1
1 i
1
FV2
1 i
2
...
FVn
1 i
n