L ECTURE O NE : I NTRODUCTION IMBA NCCU Managerial Economics Lecturer: Jack Wu

D EFINING M ANAGERIAL E CONOMICS 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

S COPE OF M ANAGERIAL E CONOMICS 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

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.

O LD /N EW E CONOMY Differences between “ New ” and “ Old ” economy: (1) role of network effects in demand **network effects – benefit/cost depends on total number of other users example: Internet (2) importance of economies of scale and scope example: Information in Yahoo is scalable

M ETHODOLOGY economic model – concise description of behavior and outcomes marginal vis- à -vis average stock vis- à -vis flow other things equal ( Ceteris Paribus ) Timing static model – single point in time dynamic model – focus on sequence of actions and payments

O RGANIZATION 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)

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

M ARKET 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

M ARKET : CONTINUED Competitive Markets Market Power Imperfect Markets

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

C OMPETITIVE MARKET Model: demand supply market equilibrium

M ARKET 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

I MPERFECT MARKET Definition: where one party directly conveys a benefit or cost to others (Externality), or one party has better information than others (Asymmetric Information)