1. Economic Analysis for Managers (ECO 501) Fall Semester, 2012
Khurrum S. Mughal

2. Course Material Required Texts & Readings:
Managerial Economics, by H. Craig Petersen & W. Cris Lewis
Recommended Readings: Articles from
Managerial Economics in a Global Economy, 5th Edition, by Dominick Salvatore
Economist Weekly, Business Section.

4. Economics

5. Economics Definition:
How societies use scarce resources to produce valuable goods and services and distribute them among different individuals.
(Economics, 19th Edition by Paul A. Samuelson & William D. Nordhaus)

6. Economics Scarcity Efficiency
Production is never high enough to meet everyone’s demand
Wants are unlimited
Efficiency
An economy is producing efficiently unless no individual’s economic welfare can be improved unless someone else is made worse off

8. Basics of Economics Microeconomics Study of economics at smaller scale
Adam Smith: Markets, Firms, & Households
Wealth of Nations (1776): Determination of prices of land, labour, & capital; and strength and weaknesses of market mechanism
Macroeconomics
Study of overall performance of the economy
General Theory of Employment, Interest & Money, John M Keynes (1936)
What causes business cycles, with alternating spells of high unemployment and high inflation
Fallacies Encountered in Economic Reasoning:
The post hoc fallacy - causality
Failure to hold other things constant
The fallacy of composition

9. Basics of Economics Positive Economics Normative Economics
Based on facts of an economy
Normative Economics
Involves ethical precepts and norms of fairness

10. Basics of Economics Types of Economies
Market Economies: Individual and private firms make the major decisions regarding production and consumption (laissez-faire economy)
Command Economies: Government makes all important decisions about production and distribution
Mixed Economies

11. Basics of Economics Limited Resources:
Land
Labour
Energy
Factories and tools
Technical knowledge etc.
Allocation among innumerable possibilities
Choice of input and output allocation
Factors of Production: land, labour and capital

12. Basics of Economics

13. Basics of Economics
Opportunity Cost: The cost of giving up any activity when one makes a choice to choose the best possible alternative
Example: Choosing between production of computers and printers by a firm on PPF

14. Basics of Economics
Marginal Analysis: How much you get from using one more unit
Marginal Utility
Marginal Product
Marginal Revenue
Marginal Cost

15. Basics of Economics Time Dimension: Short Run Long Run
Operating period in which at least one factor of production is in fixed supply
Long Run
Operating period in which all factors of production are in variable supply
Short Run Profits Vs Long Run Success of Business

16. Managerial Economics
Application of theory and tools of analysis of decision science to examine how an organization can achieve its aims and objectives most efficiently

17. Management Decision Problems
Managerial Economics
Management Decision Problems
Economic Theory:
Micro & Macroeconomics
Decision Science:
Mathematical Economics and Econometrics
Managerial Economics:
Application of economic theory and decision tools to solve managerial decision problems

18. Relationship to Economic Theory
Linked to individual firms investment decision, production and preferences of consumers.
Macroeconomic conditions in which a firm is functioning.
Economic theories aim to predict economic behaviour
Theory of the firm is of utmost importance for Managerial Economics

19. Relationship to Decision Sciences
Mathematical Economics is used to formalize the economic models of economic theory in the form of an equation
Econometric tools are used to statistically analysis the models using real world data
The tools are used for forecasting as well.
For Example: Demand of Education

20. Relationship with Business Administration
Integration of Economic Theory, Decision Science Tools, and Business Areas of Study
Managerial Decision Process:
Establishing the objective of the firm
Problems and Obstacles towards achieving the objective
Identifying the range of possible solutions
Selecting the optimal solution
Implementation of the solution

21. Relationship with Business Administration
Types of Business Decisions
Price and Output Decisions
Demand Estimation
Choice of technique of production
Advertising Decisions
Long-run Production Decisions
Investment Decisions

22. Theory of The Firms
Definition: A firm is an organization that combines and organizes resources for producing goods/services for sale
Without firms it would be very costly for entrepreneurs to organize production or service activities
Firms exist to save on transaction costs
The larger a firms grows…………diminishing returns to management
A firm pay household for their services and the income is used to buy commodities of the firm

23. Theory of The Firms
Objective of the Firm: Traditionally to maximize short term profits
The expenditure on R & D, New Capital Equipment and enhanced promotional campaigns are signals of long run profitability and growth.
Primary Objective: Maximize the wealth or value of the firm

24. Theory of The Firms
Value of the Firm: Discounted Stream of all the future profits of the firm
Time dimension allows for uncertainty in future

25. Theory of The Firms TR depends on sales and product price
TC depends on the resources and technology of production
Discount Rate (r) depends on the perceived risk of the firm and on the cost of borrowing of funds
To enhance the value of the firm:
Marketing Dept can organize off season sales
Production & HR Depts can enhance quality and introduce new products
Accounts Dept can provide the cost and sale info well in time

26. Principal-Agent Problem
Maximizing vs Satisficing
Principal Agent Problem/Agency Problem
Solutions

27. Profit Role of Profit Accounting Profit Economic Profit
Opportunity Cost
Economic Profit Vs Normal Profit
Role of Profit
Signal to Producers
Encouragement to entrepreneurs

28. Theories of Profit Risk Bearing Theories of Profit
Above normal profits like in oil and gas exploration sector
Frictional Theory of Profit
Profits arise from disturbances or friction in long-run equilibrium
Monopoly Theory of Profit
Firms with monopoly power can restrict output and charge higher prices than under perfect competition

29. Theories of Profit Innovation Theory of Profit
Profit is the reward of a successful innovation
Managerial Efficiency Theory of Profits
Firms with avg efficiency earns avg rate of return as compared to an efficient firm in terms of management of productive operation and successfully meeting consumer needs

30. Functional Relationships in Economics
y=f(x) or y=g(x,z) or y=h(x1, x2,…..xn)
Total, Average and Marginal Products
Example: Labor to be employed in Construction
Economic Models: Experiments similar to Natural science experiments by holding everything else constant

31. Economic Models Equilibrium Qd=Qs Example of Demand and Supply
Demand Function
Qd=a-bP where b<0
Supply Function
Qs=c+dP where d>0
Equilibrium
Qd=Qs