Managerial Economics Essay

Chapter 1 Introduction to wishrial Eco no.ics4. Describe the importance of the early(a) things check assumption in managerial scotch analysis.5. Describe what constitutes a grocery store, distinguish competitive from non-competitive markets, and discuss imperfect markets.6. Emphasize the world-wideization of markets.NOTES1. Definition. managerial economics is the science of directing scarce resources to manage apostrophize aftermathively.2. Application. managerial economics applies to(a) Businesses (such as decisions in relation to guests including pricing and advertising suppliers competitors or the internal workings of the ecesis), nonprofit organizations, and households.(b) The old prudence and new economy in essentially the same way except for two distinctive aspects of the new economy the importance of networkeffects and scale and kitchen range economies.i. network effects in demand the benefit provided by a ser infirmity depends on the total number of other users, e.g., when only wholeness person had email, she had no iodine to communicate with, but with 100 mm users on line, the demand for network portions mushroomed.ii. scale and background signal economies scale dexterity is the percentage point to which scale and scope of a business can be increase without a corresponding increase in equal, e.g., the information in rube is eminently scaleable (the same information can serve 100 as headspring as 100 mm users) and to serve a bigger number of users, Yahoo needs only increase the capacity of its com moveers and links.iii. pure tone the term open technology (of the Internet) refers to the comparatively free admission of developers of mental object and applications. (c) Both worldwide and local markets.3. Scope.(a) Microeconomics the study of individual economic bearing where resources argon costly, e.g., how consumers respond to flip-flops in prices and income, how businesses decide on employment and sales, voters manner and setting of tax policy.(b) Managerial economies the application of microeconomics to managerial resigns (a scope to a greater extent limited than microeconomics).(c) Macroeconomics the study of aggregate economic variables directly (as opposed to the collection of individual consumers and businesses), e.g., issues relating to interest and exchange rates, inflation, unemployment, import and export policies.2Chapter 1 Introduction to Managerial Economics4. Methodology.(a) Fundamental premise economic look is systematic and therefore canbe studied. Systematic economic doings means individuals sh be common motivations and behave systematically in devising economic choices, i.e, a person who faces the same choices at two opposite propagation will behave in the same way or so(prenominal) times.(b) Economic stupefy a concise description of behavior and outcomes i. focuses on particular issues and key variables (e.g., price, salary), omits considerable information, hence unre alistic at timesii. constructed by inductive reasoningiii. to be tested with empirical information and revised as appropriate. 5. Basic concepts.(a) Margin vis a vis average variables in managerial economics analyses. i. marginal apprize of a variable the change in the variable associated with a unit increase in a driver, e.g., amount earned by working one to a greater extent moii. average shelter of a variable the total value of the variable divided by the total quantity of a driver, e.g., total redeem divided by total no. of hours workediii. driver the strong-minded variable, e.g., no. of hours worked iv. the marginal value of a variable may be little that, equal to, or greater than the average value, depending on whether the marginal value is decreasing, constant or increasing with respect to the driver v. if the marginal value of a variable is greater than its average value, the average value increases, and vice versa.(b) Stocks and flows.i. stock the quantity at a sp ecific point in time, measured in units of the item, e.g., items on a balance sheet (assets and liabilities), the publics oil reserves in the beginning of a classii. fuse the change in stock over some effect of time, measured in units per time period e.g., items on an income statement (receipts and expenses), the institutions current action of oil per sidereal day.(c) Holding other things equal the assumption that all other relevantfactors do not change, and is make so that changes due to the factor being studied may be examined independently of those other factors. Having analysed the effects of each factor, they can be put unneurotic for the complete picture. 6. Organizational boundaries.(a) Organizations include businesses, non-profits and households. (b) Vertical boundaries delineate activities closer to or further from the end user. (c) horizontal boundaries relate to economies of scale (rate of cropion or delivery of a good or usefulness) and scope (range of di ametric items produced or delivered).3Chapter 1 Introduction to Managerial Economics(d) Organizations which are members of the same industry may drive different vertical and crosswise boundaries.7. hawkish markets.(a) Markets.i. a market consists of vendees and sellers that communicate with one another for unpaid worker exchange. It is not limited by physical structure. ii. in markets for consumer products, the buyers are households and sellers are businesses.iii. in markets for industrial products, both buyers and sellers are businesses.iv. in markets for human resources, buyers are businesses and sellers are households.v. Note an industry is made up of businesses engaged in the production or delivery of the same or similar items.(b) Competitive markets.i. markets with many buyers and many sellers, where buyers provide the demand and sellers provide the supply, e.g., the silver market. ii. the demand-supply model basic starting point of managerial economics, the model describe s the systematic effect of changes in prices and othereconomic variables on buyers and sellers, and the interaction of these choices.(c) Non-competitive markets a market in which market power exists. 8. Market power.(a) Market power the ability of a buyer or seller to influence market conditions. A seller with market power will have the freedom to choose suppliers, set prices and influence demand.(b) Businesses with market power, whether buyers or sellers, still need to run across and manage their costs.(c) In addition to managing costs, sellers with market power need to manage their demand through price, advertising, and policy toward competitors. 9. Imperfect Market.(a) Imperfect market where one party directly conveys a benefit or cost to others, or where one party has better information than others. (b) The challenge is to resolve the blur and be cost-effective. (c) Imperfections can also arise within an organization, and hence, another issue in managerial economics is how to structure incentives and organizations. 10. Local vis a vis global markets.(a) Local markets owing to relatively high costs of communication and trade, some markets are local, e.g., housing, groceries. The price in one local market is independent of prices in other local markets.4Chapter 1 Introduction to Managerial Economics(b) Global markets owing to relatively low costs of communication and trade, some markets are global, e.g., mining, shipping, financial services. The price of an item with a global market in one place will move together with the pries elsewhere.(c) Whether a market is local or global, the same managerial economic principles apply.(d) Note Falling costs of communication and trade are causation more markets to be more integrated across geographical entrap enabling the opportunity to sell in new markets as well as global sourcing. Foreign sources may provide cheaper skilled labor, specialise resources, or superior quality, resulting in lower production co sts and/or improved quality. makeS TO PROGRESS CHECKS1A. The managerial economics of the new economy is a lot the same as that of the old economy with two aspects being more important network effects in demand and scale and scope economies.1B. Vertical boundaries delineate activities closer to or further from the end user. Horizontal boundaries define the scale and scope of operations. ANSWERS TO REVIEW QUESTIONS1. Marketing over the Internet is a scaleable activity. Delivery through UPS is somewhat scaleable UPS already incurs the fixed cost of an international collection and distribution network it may be free to give Amazon bulk discounts for larger volumes of business.2. Number of cars in service January 2002 + production + imports exports scrappage during 2002 = Number of cars in service January 2003. Number of cars in service is stock other variables are flows.3. omitted.4. No, models must be less than entirely realistic to be useful. 5. (a) Average price per minute = (2 10 + 120 x 4)/5 = 138 yen per minute. (b) Price of marginal minute = 120 yen.6. (a) Flow (b) Stock (c) Stock.5Chapter 1 Introduction to Managerial Economics7. (a) The electricity market includes buyers and sellers. (b) industry consists of sellers only.Theelectricity8. (a) False. (b) False.9. omitted.10. If there are scale economies, the organization could product at a lower cost on a larger scale, which means wider horizontal boundaries and vice versa. 11. Yes. Horizontal boundaries how many product categories should it sell? Vertical boundaries should it operate its own warehouses and delivery service? 12. Intel has relatively more market power.13. (b).14. Both (a) and (b).15. Competitive markets have large amount of buyers and sellers, none of which can influence market conditions. By contrast, a buyer or seller with market power can influence market conditions. A market is imperfect if one party directly conveys benefits or costs to others, or if one party has better informati on than another. WORKED ANSWER TO DISCUSSION QUESTIONJupiter Car Rental offers two schemes for rental of a compact car. It criminates $60 per day for an unlimited international graybackage visualise, and $40 per day for a time-and-mileage plan with 100 free miles plus 20 cents a mile for mileage in excess of the free allowance. a. For a customer who plans to drive 50 miles, which is the cheaper plan. What are the average and marginal costs per mile of rental? (The marginal cost is the cost of an additional mile of usage.)b. For a customer who plans to drive 150 miles, which is the cheaper plan. What are the average and marginal costs per mile of rental?c. If Jupiter raises the basic charge for the time-and-mileage plan to $44 per day, how would that shanghai the average and marginal costs for a customer who drives 50 miles?6Chapter 1 Introduction to Managerial EconomicsAnswer(a) It is helpful to view the total rental cost as a function of the mileage (see figure below). The br eakeven between the two plans is at 200 miles per day. For 50 miles, the time-and-mileage plan is cheaper. Average cost = $40/50 = 80 cents per mile. Marginal cost = 0.Total cost ($)time-and-mileage planunlimited mileage plan$60$400100200Quantity (miles per day)(b) For the 150 mile customer, the time-and-mileage plan is still cheaper. Average cost = $(40 + 0.2 x 50)/150 = 33 cents per mile marginal cost = 20 cents per mile.(c) After the increase in the basic charge, the average cost = $(44 + 0.2 x 50)/150 = 36 cents per mile, mend marginal cost = 20 cents per mile. The increase in the basic charge doesnt affect the marginal cost.7