Transcript Lecture One

Lecture One: Introduction
Managerial Economics
Lecturer: Jack Wu
Managerial Economics
Managerial economics: Science of directing
scarce resources to manage more
effectively
 resources – financial, human, physical
 management of customers, suppliers,
competitors, internal organization
 organizations – business, nonprofit,
household
Managerial econ is based on microeconomics.
Examples of Managerial
Economic Questions
Coke and Pepsi:
1997-99: price war (cut price)
 Nov. ‘99


Pepsi raised prices and advertising
Coke followed
Question: How did they end price war?
Examples of Managerial
Economic Questions: Continued

University: Should it expand into
distance education? Should it open a
medical school? Should it shut down
PhD program?
Examples of Managerial
Economic Questions: Continued

Household – Should we engage maid
service (out-sourcing)? Should we buy
a bigger car and incur higher fuel
consumption?
Examples of Managerial
Economic Questions: Continued
Fujitsu: DRAM production
Why did Fujitsu shut Durham, UK plant
while continuing production at
Gresham, OR?
Examples of Managerial
Economic Questions: Continued
Disney:
Why did Disney Co. buy property around
Disneyland before commencing new
investment?
Organizational Boundaries


Vertical boundaries delineate activities
closer to or further from the end user
Horizontal boundaries define the scale
and scope of an organization’s
operations
Example of vertical boundaries:
internet



vertical chain: provision of content,
internet access, telephone or cable
service
Case: America Online merged with
Time Warner => become a provider of
entire vertical chain
Case: Google provides internet
content, but neither telephone or cable
service
Example of Horizontal boundaries:
sale of personal computer




Scale: the rate of production
Scope: the range of different items
produced
In terms of scale: HP and Lenovo
have wider horizontal boundaries than
small businesses producing generic
machines.
In terms of scope: HP has wider
horizontal boundaries than Lenovo
Market



Market: Buyers and sellers
communicate with one another for
voluntary exchange
market need not be physical
industry -- businesses engaged in the
production or delivery of the same or
similar items
Market: continued



Competitive Markets
Market Power
Imperfect Markets
The firm’s goal: profit
maximization

The firm’s profit analysis is based on:
_ customers
_ suppliers
_ competitors
_ government
_ uncertainty
_ internal organization management
Customers and Suppliers

Customers
_ demand analysis and forecasting

Suppliers:
_ cost analysis
_ supply analysis
Competitors and Government

Competitors:
_competitive analysis and market structure
_ economic efficiency
_pricing policy
_strategic thinking

Government:
_ externality and public goods
_ regulation
Decision Making under
Uncertainty

Asymmetric information
_ adverse selection
_ moral hazard
Internal Organization


Incentive Schemes
Organizational Architecture
Old/New Economy
Differences between “New” and “Old”
economy:
_ role of network effects in demand
**network effects – benefit/cost depends on
total number of other users
example: Internt

_ importance of economies of scale and scope
example: Information in Yahoo is scalable