Lecture One: Introduction to Managerial Economics Lecturer: Jack Wu NCCU

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 economics is based on microeconomics.

CASE: BOEING AND AIRBUS Until 2001, Airbus was established under French law as a “Groupe d’Intérêt Economique” . However, Airbus corporatized in 2001. Boeing: Listed company April 2004: Boeing launches 787 Dreamliner with 50 orders from All Nippon Airways of Japan December 2004: Airbus launches A350 Airbus Chief Commercial Officer John Leahy remarks that A350 would “put a hole in Boeing’s Christmas stocking”.

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

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) Samsung Electronics is vertically integrated electronics manufacturer manufactures and markets semiconductors, LCDs, mobile phones, computers, TVs

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

Another 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

Another 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

Competitive market Benchmark for managerial economics Extremely competitive market many buyers and many sellers no room for managerial strategizing Achieves economic efficiency Competitive market is the basic starting point of managerial economics -- where capitalist system performs best demand supply market equilibrium

Competitive market Model: demand supply market equilibrium Model analyzes and explains systematic effect of prices and other economic variables on household choice and business decisions interaction of households and businesses

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