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

I NTRODUCTION TO M ANAGERIAL E CONOMICS

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

Q UESTIONS OF M ANAGERIAL E CONOMICS R ELATED TO THE C ASE 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?

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

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.

O LD /N EW E CONOMY 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

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

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

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

T IMING Discount future values to be comparable with present values If discount rate = 10%, $1 next year worth 1/1.10 = 91 cents now $1 two years worth about 83 cents now

T IMING Net present value: sum of discounted values of inflows and outflows over time Example: Month 1: gain of $3 million Months 2 and 3: loss of $2 million Net present value:

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

A NOTHER E XAMPLE 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

A NOTHER E XAMPLE OF H ORIZONTAL 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

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, or one party has better information than others

G LOBALIZATION : W HY ? Growth of cross-border trade and investment falling trade barriers falling financial barriers falling communications costs

G LOBALIZATION : T RADE SYSTEM World Trade Organization Regional free trade areas European Union North American Free Trade Agreement ASEAN ASEAN-China, ASEAN-India

GLOBALIZATION: OUTSOURCING Outsourcing: the purchase of services or suppliers from external sources. U.S. financial services business outsource customer service to contractors in the Philippines and India

G LOBALIZATION : E - COMMERCE Extends geographical reach –Google, eBay, Yahoo, Amazon Limitations payments system trade barriers shipment costs