Lecture One: Introduction IMBA NCCU 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

CASE: BOEING AND AIRBUS Airbus: Until 2001, established under French law as a “Groupe d’Intérêt Economique” Boeing: Listed company April 2004: Boeing launches 787 December 2004: Airbus launches A350

Questions of Managerial Economics Related to the Case Why did Airbus corporatize in 2001? What are benefits from corporatization? Why did Airbus Chief Commercial Officer John Leahy remark that A350 would “put a hole in Boeing’s Christmas stocking”? How should Boeing respond?

HOW SHOULD BOEING RESPOND? Should Boeing proceed with its plan to develop the Dreamliner or should it alter its development plans? Should Boeing respond by changing its pricing for its new jet?? How much would development and manufacturer cost, and how do these costs depend on sales volume? Did Airbus respond correctly to Boeing’s Dreamliner?

APPLICATION OF MANAGERIAL ECONOMICS Boeing has limited resources. Boeing managers seek to maximize the financial return from these limited resources. They should apply managerial economics to develop pricing and R&D strategies, design their organizations, and so on. The same is true of Airbus.

NEW ECONOMY: INTERNET Managerial Economics also applies to the new economy. Example: In pricing, Airlines use online auctions to segment their market between business and leisure travelers. Example: In competitive strategy, Google competes fiercely with Yahoo.

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

Scope of Managerial Economics Managerial econ is based on microeconomics. Microeconomics Microeconomics is the study of how individual households and firms make decisions and how they interact with one another in markets. Macroeconomics Macroeconomics is the study of the economy as a whole.

EXAMPLE: INCREASE IN OIL PRICE Micro effect: vehicle users, electronic power generators Macro effect: inflation, unemployment

Methodology economic model – concise description of behavior and outcomes marginal vis-à-vis average stock vis-à-vis flow other things equal

Methodology Timing static model – single point in time dynamic model – focus on sequence of actions and payments

Organization Vertical boundaries – closer to or further from end user Samsung Electronics – vertical boundaries longer than Intel – specializes in semiconductors (upstream) Motorola – specializes in mobile phones (downstream)

Organization Horizontal boundaries – scale and scope of activities Samsung Electronics – horizontal boundaries broader than LG.Philips LCD – specializes in LCD Motorola – specializes in mobile phones

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

Competitive market Benchmark for managerial economics Extremely competitive market many buyers and many sellers no room for managerial strategizing Achieves economic efficiency

Competitive market Model: demand supply market equilibrium

Market power Definition – ability of a buyer or seller to influence market conditions Seller with market power must manage costs pricing advertising expenditure R&D expenditure strategy toward competitors

Imperfect market Definition: where one party directly conveys a benefit or cost to others, or one party has better information than others