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.

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

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