1. Lecture One: Introduction to Managerial Economics
Lecturer: Jack Wu
NCCU

2. 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.

3. CASE: BOEING AND AIRBUS
Until 2001, Airbus was established under French law as a “Groupe d’Intérêt Economique” . However, Airbus corporatized in 2001.
Boeing: Listed company
April 2004: Boeing launches 787 Dreamliner with 50 orders from All Nippon Airways of Japan
December 2004: Airbus launches A350
Airbus Chief Commercial Officer John Leahy remarks that A350 would “put a hole in Boeing’s Christmas stocking”.

4. Questions of Managerial Economics Related to the Case
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?

5. 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?

6. 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.

7. 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.

8. 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

9. 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

10. 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

11. Another Example 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

12. Another Example of Horizontal 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

13. 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

14. Market: continued
Competitive Markets
Market Power
Imperfect Markets

15. 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

16. 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

17. 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

18. Imperfect market Definition: where
one party directly conveys a benefit or cost to others, or
one party has better information than others