ECON582 Lecture 1. Introduction and Overview of Managerial Economics HBC608 HBC608HBC608 ECNE610 - MANAGERIAL ECONOMICS Lecture 1. Introduction and Overview of Managerial Economics Week1 Dr. Mazharul Islam Finance notes Finance NotesFinance notes 1

LESSON PLAN Introduction (Me and You)-15 minutes (5.30pm-5.45pm) ECON582 LESSON PLAN Introduction (Me and You)-15 minutes (5.30pm-5.45pm) Overview of the Course – 20 minutes (5.45pm-6.05pm) – Objectives – Learning methods – Assessment – Course materials – Recommendations Break (Salatul Magrib & Refreshment) - 20 minutes Attendance re-checking - 5 minutes Basic Terms and Concepts of Economics– 105 Minutes Dr. Mazharul Islam

INTRODUCTION • Me: – Personal – Education – Professional • Now you: ECON582 INTRODUCTION • Me: – Personal – Education – Professional • Now you: – Background (personal , professional) – Career goals – What do you want from this course? Dr. Mazharul Islam

My Background- Education ECON582 My Background- Education Graduate certificate in Learning and Teaching (Higher Education) Swinburne University of Technology, Melbourne, Australia Ph.D in Economics- 2003 National University of Malaysia Master in Economics- 1999 (by research) M. S.S in Economics- 1996 Chittagong University, Bangladesh B.S.S in Economics (Hons.) Chittagong University, Bangladesh. Dr. Mazharul Islam

ECON582 My Background- Work Lecturer, Faculty of Business and Enterprise, Swinburne University of Technology, Australia (June 2010 to January 2014). Research Officer, College of Business, RMIT University, Melbourne, Australia (January 2008 to June 2010). Lecturer, Faculty of Business Administration, Universiti Tun Abdul Razak, Kuala Lumpur, Malaysia (January 2004 to December 2007). Research Assistant, National University of Malaysia and International Islamic University of Malaysia. Dr. Mazharul Islam

Course Overview-Objectives ECON582 Course Overview-Objectives Learn about economic principles and theories, and how these principles and theories are applied in managing organizational resources. Understand the changing economic environment in the new and global economy. Comprehend the changing role of government in managing economic growth and stability in the new and global economy. Appreciate the structure of markets corresponding to the emerging role of information and knowledge in the new economy. How to apply managerial economics in action. Develop analytical and problem solving skills. Dr. Mazharul Islam

Course Overview- Learning Methods ECON582 Course Overview- Learning Methods • Lectures (interactive) – Group work – Group discussion Case(s) – Relevant video(s) Text Book – Paul G. Keat and Philip K.Y.Young, Managerial Economics- Economic tools for today decision makers, 6th edition, available at Book Store Other References http://www.kau.edu.sa/DRS-0061123.aspx Dr. Mazharul Islam

Course Overview-Assessment ECON582 Course Overview-Assessment Individual and Group assessments Class participation, group discussion, and presentation. Individual 25% Ongoing Mid-term exam 20% 3rd April 2014 Final exam 40% 15th May 2014 Project paper Group 15% 20th May 2014 Dr. Mazharul Islam

Lesson Objectives To learn about ECON582 Lesson Objectives To learn about The key tools and terms of economics that is essential to know to understand economics clearly. Explain the two big questions of economics. Explain the key ideas that define the economic way of thinking. Economics and managerial decision making. Economics of a business. Explain how economists go about their work as social scientists and policy advisers. Dr. Mazharul Islam

Key Tools & Terms of Economics It is the social science concern. It is a study of how people use their scarce resources to satisfy their unlimited wants. OR The study of the behavior of human beings in producing, distributing and consuming material goods and services in a world of scarce resources. It is categorized mainly into two parts such as Macroeconomics and Microeconomics Dr. Mazharul Islam

Key Tools & Terms of Economics MICROECONOMICS Microeconomics is the study that deals with an individual industry, firm or household. For example, talk about the price of Al Baik. It means it talk about individual decision maker in specific markets, especially: supply and demand pricing of output production process cost structure distribution of income. Dr. Mazharul Islam

Key Tools & Terms of Economics MACROECONOMICS: It is a study that examine the economy as a whole. It means that it is concerned with the overall performance of the economy. Such as it does not discuss about the price of Al Baik but about the average price of all goods and services produced in the economy. Especially talk about: national output (GDP) unemployment inflation fiscal and monetary policies trade and finance among nations Dr. Mazharul Islam

Key Tools & Terms of Economics MANAGERIAL ECONOMICS The use of economic analysis to make business decisions involving the best use (allocation) of an organization’s scarce resources. ECONOMIC PROBLEM Basic economic problem is wants are virtually unlimited while the resources available to satisfy these wants are scarce. SCARCITY Lack of enough resources to satisfy all the needs and wants of a specified group of people. Since resources are scarce, it follows that the goods and services we produce must also be limited. Dr. Mazharul Islam

Key Tools & Terms of Economics CHOICE Due to scarcity, we can’t have all that we want. We must decide what we will have, and what we must forgo. That is why we make choices. Opportunity cost is the amount (or subjective value) that must be sacrificed in choosing one activity over the next best alternative. Dr. Mazharul Islam

Key Tools & Terms of Economics TWO BIG ECONOMIC QUESTIONS Q1. How do choices end up determining allocation decisions in scarcity? i.e how to make three choices below?: What should be produced? How should it be produced? For whom should be produced? Q2. When do choices made in the pursuit of self-interest ? Dr. Mazharul Islam

Key Tools & Terms of Economics What? The things that satisfy human wants that means Goods and services needs to produce. In 2011, Agriculture accounts for 2% of total Saudi Arabian production, Industry goods for 69.1%, and Services for 28.9% (Source:  Central Intelligence Agency (CIA) World Factbook 2012). Deciding what goods and services to produce and in what quantities (e.g., guns versus butter, capital goods versus consumer goods, etc.). Whatever is profitable will be produced. Dr. Mazharul Islam

Key Tools & Terms of Economics How? Goods and services are produced by using productive resources that economists call factors of production. Factors of production are grouped into four categories: Land Labor Capital Entrepreneurial Ability Decide how best to allocate resources (e.g., capital intensive versus labor intensive, domestic production versus foreign production etc.). Resources should be allocated and combined in the least costly way. Dr. Mazharul Islam

Key Tools & Terms of Economics LAND It does not refer only a plots of ground but also includes all other natural resources such as crude oil, water, air, and minerals etc. LABOR It is not simply the number of human bodies but it refers to the work time and work effort that people devote to producing goods and services. It categorized into two parts– physical and mental (9.56 millions out of 26.53 millions in 2010 where about 80% of the labor force is non-national - Source: CIA World Factbook 2012). Dr. Mazharul Islam

Key Tools & Terms of Economics CAPITAL In economics the term capital refers to final goods produced for use in further production. It also categorized into two parts. These are: Physical capital: factories, machines, tools, buildings, airports, highways and other manufactured items employed to produce goods and services. Human capital: consists of the knowledge and skill people acquire to enhance their labor productivity. Dr. Mazharul Islam

Key Tools & Terms of Economics ENTREPRENEURIAL ABILITY Special kind of human skill Talent required to dream up a new product or find a better way to produce an existing one. Dr. Mazharul Islam

Key Tools & Terms of Economics PAYMENTS FOR RESOURCES Wages  payment for use of labor Interest  payment for the use of capital Rent  payment for use of land Profit  reward for entrepreneur’s effort Dr. Mazharul Islam

Key Tools & Terms of Economics FOR WHOM? Who gets the goods and services depends on the incomes that people earn i.e. the customers most likely to purchase. whoever is willing and able to pay for them. Off course the ability to pay depends on the country’s distribution of income and wealth. Dr. Mazharul Islam

Key Tools & Terms of Economics When is the Pursuit of Self-Interest? Economics assumes that human behavior reflects “rational self-interest”. It means that people always try to make the best choices they can, given the available information. Moreover, Individuals try to maximize the expected benefit achieved with a given cost or minimize the expected cost of achieving a given benefit. Peoples allocate their time, energy, and money to maximize it. Dr. Mazharul Islam

Key Tools & Terms of Economics GOODS AND SERVICES Goods - Tangible items - Require scarce resources - Satisfy human wants Services - Intangible items Dr. Mazharul Islam

Economics and Managerial Decision Making Questions that managers must answer: What are the economic conditions in a particular market in which we are or could be competing? market structure? supply and demand? technology? government regulations? international dimensions? future conditions? macroeconomic factors? Dr. Mazharul Islam

Economics and Managerial Decision Making Questions that managers must answer: Should our firm be in this business? if so, what price and output levels should we set in order to maximize our economic profit or minimize our losses in the short run? Dr. Mazharul Islam

Economics and Managerial Decision Making Questions that managers must answer: How can we maintain a competitive advantage over other firms? cost-leader? product differentiation? market niche? outsourcing, alliances, mergers? international perspective? How can we organize and invest in our resources in such a way that we can maintain a competitive advantage. Dr. Mazharul Islam

Economics and Managerial Decision Making Questions that managers must answer: What are the risks involved? Change in demand/supply conditions. Technological changes and the effect of competition. Change in interest rates and inflation rates. Exchange rates changes for companies in international trade. Political risk for firms with foreign operations. Uncertainty incorporates in our daily lives specially when we are considering what may happen in the future. Risk or uncertainty always present in the operations of a business. So we can say that risk is the possibility that the outcomes of a certain action will turn out to be worse than expected. Typical types of risk that businesses face would be Dr. Mazharul Islam

Economics of a Business The economics of a business refers to the key factors that affect the firm’s ability to earn an acceptable rate of return on its owners’ investment. The most important of these factors are competition technology customers Dr. Mazharul Islam

Economics of a Business The four-stage model Stage I (the ‘good old days’) market dominance high profit margin cost plus pricing … changes in technology, competition, and customers force firm into Stage II .. The impact of changing economics on well established companies can be easily understood by four stage mode of change framework. IBM, Kodak etc. made high profit margin due to their market dominance by simply making up their costs. Changes in technology, competition, and customers put pressure on their profit margins as well as market share and force them into stage II. Dr. Mazharul Islam

Economics of a Business The four-stage model Stage II (crisis) cost management downsizing restructuring Reengineering In stage II, they required protection through cost cutting, downsizing, restructuring, and reengineering. In USA, this stage started in 1980s and continued on to the early 1990s Dr. Mazharul Islam

Economics of a Business The four-stage model Stage III (reform) revenue management cost cutting has limited benefit … focus on ‘top-line’ growth .. When they realized that the continual focus on cost had its limits insofar as its ability to increase profit, in mid-1990s they required to enter stage III. After all companies can save so much money only by reducing its work-force or by becoming more efficient. Therefore they enter in stage IV Dr. Mazharul Islam

Economics of a Business The four-stage model Stage IV (recovery) revenue plus … revenue grows profitably Therefore they enter in stage IV where they focus on top-line growth. Dr. Mazharul Islam

Ten Principles of Economics. PRINCIPLE #1 : People Face Trade Offs PRINCIPLE #2: The Cost of Something Is What You Give Up to Get It PRINCIPLE #3: Rational People Think at the Margin PRINCIPLE #4: People Respond to Incentives PRINCIPLE #5: Trade Can Make Everyone Better Off PRINCIPLE #6: Markets Are Usually a Good Way to Organize Economic Activity PRINCIPLE #7: Government Can Sometimes Improve Market Outcomes PRINCIPLE #8: A Country's Standard of Living Depends on its Ability to Produce Goods and Services PRINCIPLE #9: Prices Rise When the Government Prints Too Much Money PRINCIPLE #10 and Ending: Society Face a Short-Run Tradeoff Between Inflation and Unemployment . Dr. Mazharul Islam

Now it’s over for today. Do you have any question? HBC608HBC608 ECON582 HBC608 Now it’s over for today. Do you have any question? 2w/9/2013 Dr. Mazharul Islam Finance NotesFinance notes Finance notes 35