2. 1 Welcome to EC 209: Managerial Economics- Group A By: Dr. Jacqueline Khorassani Class 1: Week One

3. 2 Monday, September 3 11:00-11:50 Fottrell (AM) Study the Course Contract available on line at www.marietta.edu/~khorassj Study the Course Contract available on line at www.marietta.edu/~khorassjwww.marietta.edu/~khorassj –Click on Fall 2007 Courses –Click on EC 209 : Managerial Economics Click on Course Contract Click on Course Contract –It is in Microsoft Word format Make sure you understand the contract Make sure you understand the contract Ask me questions via an email to khorassj@marietta.edu or jacqueline.khorassani@nuigalway.ie. Ask me questions via an email to khorassj@marietta.edu or jacqueline.khorassani@nuigalway.ie. khorassj@marietta.edu jacqueline.khorassani@nuigalway.ie khorassj@marietta.edu jacqueline.khorassani@nuigalway.ie

4. 3 Highlights of the Contract Why Managerial Economics? Why Managerial Economics? Suppose you are the manager of a ice-cream shop Suppose you are the manager of a ice-cream shop Lists some of the decisions you have to make Lists some of the decisions you have to make –Price of ice-cream –Quantity of ice-cream –Inputs (how to minimize cost subject to the constraint of quality of inputs) –Productivity/ efficiency Where have you leaned about these stuff? Where have you leaned about these stuff? –MICROECOMICS

5. 4 Why Managerial Economics? Do managers have full information? Do managers have full information? –No Where have you learned about decision making under uncertainty? Where have you learned about decision making under uncertainty? –STATISTICS Managerial Economics is about microeconomics, statistics, and more Managerial Economics is about microeconomics, statistics, and more

6. 5 Textbook Managerial Economics and Business Strategy, fifth edition, by Michael R. Baye. Managerial Economics and Business Strategy, fifth edition, by Michael R. Baye. Purchase this book from the college bookshop because a chapter from another economics textbook is included with the version of the book available in the college bookshop. We will be using this chapter during the course. Purchase this book from the college bookshop because a chapter from another economics textbook is included with the version of the book available in the college bookshop. We will be using this chapter during the course.

7. 6 Means of Communication 1. Class Mondays: 11:00-11:50, Fottrell (AM) Tuesdays: 15:00-15:50, Cairnes Theatre Thursdays: 15:00-15:50, Tyndall Theatre Mondays: 11:00-11:50, Fottrell (AM) Tuesdays: 15:00-15:50, Cairnes Theatre Thursdays: 15:00-15:50, Tyndall Theatre 2. My website www.marietta.edu/~khorassj www.marietta.edu/~khorassj www.marietta.edu/~khorassj 3. Email 1.khorassj@marietta.edu khorassj@marietta.edu 2.Jacqueline.khorassani@nuigalway.ie Jacqueline.khorassani@nuigalway.ie

8. 7 Means of Communication 4. Office 310 St. Anthony’s 310 St. Anthony’s Phone: 091- 493105 (office Phone: 091- 493105 (office Hours Hours Mondays: 14:00-15:00 Tu & Th: 12:00-13:00 Wednesdays: 13:00-14:00 & by appointment. Mondays: 14:00-15:00 Tu & Th: 12:00-13:00 Wednesdays: 13:00-14:00 & by appointment. 5. Blackboard (Later) –http://balckboard.nuigalway.ie http://balckboard.nuigalway.ie

9. 8 My Teaching Philosophy I am not a lecturer I am not a lecturer –In other words, I am not going to be a transmitter of knowledge. I am a designer I am a designer You are not knowledge sponges You are not knowledge sponges You are knowledge constructors You are knowledge constructors

10. 9 My tasks 1.Design a map that will lead you toward the construction of your knowledge. – Study guides will be posted on my website in the beginning of each week. 2.Help you figure out how to ask the right questions when you feel lost. 3.Ask you questions in an attempt to find out if you are on the right track. 4.Give clear and meaningful answers to your questions. – PowerPoint slides of the classroom activities will be posted on my website at the end of each week.

11. 10 Your tasks 1. Study and follow the map 2. Ask questions when you feel lost –A dumb question is better than no question 3. Respond to my questions –Be prepared to be wrong sometimes

12. 11 Our joint task is to build a learning environment in which we feel free and comfortable to express our thoughts; to respectfully disagree with each other at times; and to learn from each other. is to build a learning environment in which we feel free and comfortable to express our thoughts; to respectfully disagree with each other at times; and to learn from each other.

13. 12 Assignments Carry 100 points (25% of the course grade). Carry 100 points (25% of the course grade). Will be completed on line on Aplia Will be completed on line on Aplia You will need to register on line. You will need to register on line. The details are outlined in the course contract. The details are outlined in the course contract.

14. 13 Examination There is only one exam at the end of the term. There is only one exam at the end of the term. Carries 300 points or 75% of the course grade. Carries 300 points or 75% of the course grade.

15. 14 Study the textbook’s Preface Believe me it is not a waste of time to read the Preface of a book Believe me it is not a waste of time to read the Preface of a book Ask me questions via an email. Ask me questions via an email.

16. 15 Chapter 1 Who is a manager? Who is a manager? –A person who directs resources to achieve a stated goal. What is economics? What is economics? –The science of making decisions in the presence of scare resources. What is managerial economics? What is managerial economics? –The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal. What are some goals and constraints of managers? What are some goals and constraints of managers?

17. 16 Costs What is the accounting (explicit) cost of producing ice-cream What is the accounting (explicit) cost of producing ice-cream –The explicit costs of the resources needed to produce ice-cream. Milk, ice-cream machine, labor,…. Milk, ice-cream machine, labor,…. What is the opportunity cost of producing ice-cream? What is the opportunity cost of producing ice-cream? –The cost of the explicit and implicit resources that are foregone when a decision is made. What is an example of implicit cost? What is an example of implicit cost? –If you run your own ice-cream shop and do not directly (explicitly) pay salary to yourself.

18. 17 Ec 209: Managerial Economics-Group A Week One- Class 2 Week One- Class 2 –Tuesday, September 4 –Cairness Is anybody here for the first time? Is anybody here for the first time?

19. 18 I received a question This class does not have a regular tutorial This class does not have a regular tutorial There will be teaching assistant who will hold office hours and special tutorial sessions as needed There will be teaching assistant who will hold office hours and special tutorial sessions as needed

20. 19 Profits Accounting Profits Accounting Profits –Total revenue minus total explicit cost. Economic Profits Economic Profits –Total revenue minus total opportunity cost. Which one is higher? Which one is higher?

21. 20 What are accounting profits and Economic profit of the ice-cream shop? Revenue = €2000 Revenue = €2000 Cost of labor = €500 Cost of labor = €500 Cost of other inputs = €700 Cost of other inputs = €700 The owner is the manager but she does not pay herself salary The owner is the manager but she does not pay herself salary Accounting profit=? Accounting profit=? Economic profit=? Economic profit=?

22. 21 Why profits are important? The reason you are making profits is because people are willing and able to pay a high price (relative to your cost) for your ice-cream. The reason you are making profits is because people are willing and able to pay a high price (relative to your cost) for your ice-cream. Why do they pay a high price? Why do they pay a high price? –Because the value of ice-cream to them is high. (They really want it badly.)

23. 22 Sustainabl e Industry Profits 2. Power of Input Suppliers 3. Power of Buyers 1. Entry 4. Substitutes & Complements3. Industry Rivalry The Five Forces Framework and Profitability

24. 23 Understand Incentives Are important Are important –Examples

25. 24 Market Interactions Is there a rivalry between consumer & Producer Is there a rivalry between consumer & Producer –Consumers attempt to locate low prices, while producers attempt to charge high prices. Is there a rivalry between consumer & consumer? Is there a rivalry between consumer & consumer? –Scarcity of goods

26. 25 Market Interactions Is there a rivalry between Producer & Producer> Is there a rivalry between Producer & Producer> –Scarcity of consumers –Scarcity of resources What is the role of Government What is the role of Government –Disciplines the market process.

27. 26 Would you prefer to receive €100 today or €100 next year? €100 today or €100 next year? €100 today or €105 next year? €100 today or €105 next year? €100 today or €120 next year? €100 today or €120 next year? What affects your decision? What affects your decision? Bring calculators to this class please Bring calculators to this class please

28. 27 The Time Value of Money Present value (PV) of a lump-sum amount (FV) to be received at the end of “n” periods when the per-period interest rate is “i”:

29. 28 If interest rate is 10% Then the present value of € 110 to be received one year form now is Then the present value of € 110 to be received one year form now is PV = 110/(1+0.1) = 100 PV = 110/(1+0.1) = 100

30. 29 Examples 1. Lotto –winner choosing between a single lump-sum payout of $104 million or $198 million over 25 years. 2. Business You need to choose between a project with a expected profit of €200 next year and another one with the expected profit of €230 in 2 years. You need to choose between a project with a expected profit of €200 next year and another one with the expected profit of €230 in 2 years.

31. 30 Present Value of a Series Present value of a stream of future amounts (FV t ) received at the end of each period for “n” periods:

32. 31 Example You will be receiving 100 next year, 200 in 2 years and 50 in 3 years What is the present value of this income stream if the interest rate is 10%?

33. 32 EC 209: Managerial Economics Week One: Class 3 Week One: Class 3 –Thursday, September 6 –15:10- 16:00 Teaching Assistant Teaching Assistant –Darragh Flannery –d.flannery@nuigalway.ie.flannery@nuigalway.ie –Office: 234, St. Anthony's –Office Hours: Mondays

34. 33 Note: Aplia Enrollment Aplia Enrollment –Is Under Professor Brendan Kennley’s name

35. 34 Notes: At the end of each week, I post classroom slides on line. At the end of each week, I post classroom slides on line. In the beginning of a new week, I post a study guide on line. In the beginning of a new week, I post a study guide on line. Your job is to review the study guide and ask me questions. Your job is to review the study guide and ask me questions. If you don’t ask, I assume that you have no problem and I may not cover certain material. But you are responsible to know everything that is on the study guide. If you don’t ask, I assume that you have no problem and I may not cover certain material. But you are responsible to know everything that is on the study guide.

36. 35 I received a question on implicit/explicit cost Explicit cost is out of pocket cost Explicit cost is out of pocket cost –Pay €200 to attend this class Implicit cost is forgone benefit Implicit cost is forgone benefit –When attend class can’t go to movies Value of movies to you = €50 Value of movies to you = €50 Total opportunity cost of class = implicit cost + explicit cost = €250 Total opportunity cost of class = implicit cost + explicit cost = €250

37. 36 What is the net present value of a stream of future amounts? Suppose a manager can purchase a stream of future receipts (FV t ) by spending “C 0 ” dollars today. The NPV of such a decision is Decision Rule: If NPV < 0: Reject project NPV > 0: Accept project

38. 37 What is the present value of a perpetuity of identical cash flows? An asset that perpetually generates a stream of cash flows (CF) at the end of each period is called a perpetuity. The present value (PV) of a perpetuity of cash flows paying the same amount at the end of each period is

39. 38 What is the value of a firm? The value of a firm equals the present value of current and future profits. –PV =    t / (1 + i) t If profits grow at a constant rate (g < i) and current period profits are   : If the growth rate in profits < interest rate and both remain constant, maximizing the present value of all future profits is the same as maximizing current profits.

40. 39 Control Variables Control Variables –Quantity of Output –Price –Product Quality –Money spent on advertising –Money spent on R&D What are some variables that managers can control?

41. 40 Basic Managerial Question: How much of the control variable should be used to maximize net benefits? Where Where –Net benefits = total benefits – total costs

42. 41 Marginal analysis: Suppose the control variable under study is output, Q Marginal Benefit, MB –Is the benefit of the last unit of control variable output,Q. –Is equal to the change in total benefits divided by a change in the output Q: Graphically, the MB curve is the slope (derivative) of the total benefit curve.

43. 42 Marginal Cost (MC) Is the cost of the last unit of output, Q Is equal to the change in total costs divided by a change in the control variable, Q: Graphically, the MC curve is the slope (derivative) of the total cost curve

44. 43 Marginal Principle To maximize benefits, the managerial control variable (Q) should be increased up to the point where MB = MC. To maximize benefits, the managerial control variable (Q) should be increased up to the point where MB = MC. MB > MC means the last unit of the output increased benefits more than it increased costs  need to produce more output MB > MC means the last unit of the output increased benefits more than it increased costs  need to produce more output MB < MC means the last unit of the output increased costs more than it increased benefits  need to produce less output MB < MC means the last unit of the output increased costs more than it increased benefits  need to produce less output

45. 44 The Geometry of Optimization Q Total Benefits & Total Costs Benefits Costs Q* B C Slope = MC Slope =MB

46. 45 Conclusions Make sure you include all costs and benefits when making decisions (opportunity cost). Make sure you include all costs and benefits when making decisions (opportunity cost). When decisions span time, make sure you are comparing apples to apples (PV analysis). When decisions span time, make sure you are comparing apples to apples (PV analysis). Optimal economic decisions are made at the margin (marginal analysis). Optimal economic decisions are made at the margin (marginal analysis).