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

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

3. 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

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. Scope of Managerial Economics
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.

10. EXAMPLE: INCREASE IN OIL PRICE
Micro effect: vehicle users, electronic power generators
Macro effect: inflation, unemployment

11. Methodology
economic model – concise description of behavior and outcomes
marginal vis-à-vis average
stock vis-à-vis flow
other things equal

12. Methodology Timing static model – single point in time
dynamic model – focus on sequence of actions and payments

13. 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)

14. 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

15. 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

16. Market: continued
Competitive Markets
Market Power
Imperfect Markets

17. Competitive market Benchmark for managerial economics
Extremely competitive market
many buyers and many sellers
no room for managerial strategizing
Achieves economic efficiency

18. Competitive market
Model:
demand
supply
market equilibrium

19. 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

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