Economics for Managers
by Paul Farnham
Chapter 1:
Managers and Economics
U Thein Naing
Associate Professor(Retired)
Yangon University of Economics
1.1
What is Economics?
Economics
Human being Resources
Wants (or) Desires
- Unlimited -Limited
Problems of Choice
What to How to For Whom to
Produce Produce Produce
Economics is the study of how society
manages its scarce resources.
-Economic System:( 1)Centrally Planned Economy
(Command Economy),
(2) Market Economy(Capitalist Economy)(Laissez faire),
(3)Mixed Economy
-Economic Sector
The best time for a managerial angle
on life…
1.3
What happened on the global markets in
the last year?
• Governments designing “rescue plans'' for their
economies; and then, designing “exit strategies.''
• Major economies going into recessions
simultaneously; and also coming out recently.
• Central banks desperately throw liquidity on
the markets; but until when?
• Stock market indices falling sharply around the
world, and then going back up since March.
• Consumer confidence and demand going down
since 2008, and back up since Spring’09
• Consumers and firms were credit-constrained but
find it increasingly easy to borrow now
1.4
Important issues in managerial
economics
• Why are these things happening? And what can managers
do about them?
• What is their impact on incomes, investment, savings of
the local economy, and on sales of businesses?
• What can the central banks and the governments do in
situations like this?
• What are firms doing in recessions?
• How are economies working? (And why are they failing?)
• What are the functions of money? And how can we make
more of them?
• Is the crisis over?
1.5
Why should managers study
economics?
• To develop the economic insight
necessary to identify your business’
competitive advantage.
• To identify how the ups and downs in
economy-wide economic activity will
impact your business.
• To improve your business’ profitability.
Two Perspectives
of Economics
Microeconomics
• Analyzes the decisions that individual
consumers, firms, and industries make as
they operate in a market economy
Macroeconomics
• Focuses on the overall level of
economic activity, changes in price
level, and amount of unemployment
1.7
Important Definitions
Managerial economics
• When microeconomics is applied to
business decision making
Price
• Amount of money charged for different
goods and services in a market
economy
• Output prices influence the revenue a
firm while input prices influence a
firm’s costs of production 1.8
Important Definitions
Output
• Products sold by a firm
Input
• Resources such as land, labor, capital, raw
materials, and entrepreneurship
Managerial decisions are influenced by events
that occur in the larger economic environment-
(Changes in the overall level of economic
activity, interest rates, unemployment rates,
and exchange rates- Macroeconomics)
1.9
Microeconomic Influences
on Managers
Relative prices
• The price of one good in relation to the
price of another similar good
Markets
• The institutions and mechanisms used
for the buying and selling of goods and
services
1.10
Major Types of Markets
Many firms One firm
Perfect
competition
Monopolistic
competition
Oligopoly
Monopoly
1.11
Characteristics
of Markets
1. Number of firms competing with
one another
2. Whether products sold are
undifferentiated( Homogeneous)
3. Whether entry into the market is
easy or difficult
4. Amount of information available
to market participants
1.12
(1)Perfect Competition
Characteristics
• A large number of firms in the market
( eg. Agricultural Market/ Industry)
• Undifferentiated product( Homogeneous)
• Ease of entry into the market
• Complete information available to all
market participants
1.13
Perfect Competition:
Assumption 1
Behavior of an individual firm is
distinguished from the outcomes for
the entire market or industry
There are so many firms in a perfectly
competitive industry( market)
• Price-taker
• A firm cannot influence the price of its
product and therefore can sell any
amount of output at that price 1.14
Perfect Competition:
Assumption 2
• No product
differentiation(Homogeneous)
• Consumers do not care about the
identity of a specific supplier
• Purchase is based largely on price
of the product
1.15
Perfect Competition:
Assumption 3
• Entry into the market is costless(free
entry)
• If a perfectly competitive firm is
making a profit, other firms will enter
the industry to attempt to earn profits
also (Ԓ = TR - TC)
1.16
Perfect Competition:
Assumption 4
• Complete information is available to
all market participants
• Perfectly competitive firms have no
market power to influence the prices
of its products and develop
competitive strategies
1.17
(2) Monopoly
• Single firm produces a product for
which there are no close substitutes
• Barriers to entry exist to keep
competitors from entering the market
1.18
(3) Monopolistic Competition
• Firms produce differentiated products
•Several firms are in an industry
•(eg. Drugstores, Bookstores)
• Each firm has only limited ability to earn
above-average profits
1.19
(4)Oligopoly
• Competition among a small number of
large firms that have market power but
must consider competitors’ actions
(Airline Industry, Beer Industry,
Cigarettes Industry)
• Mutual interdependence is a key
characteristic
• Oligopoly firms have market power but
may be limited in how they use that
power 1.20
Goal of Profit
Maximization
• Firms develop strategies to earn
highest profit possible
• Profit acts as a signal in a market
economy
• Increased competition leads to
lower prices and revenues,
eliminating excess profits
1.22
Managerial Rule of Thumb:
Microeconomic Influences on
Managers
• How consumer behavior affects
revenues
• How production technology and input
prices affect costs
• How the market environment
influences their ability to set prices
and respond to competitors
1.23
Macroeconomic
Influences on Managers
• The circular flow model shows the
level of economic activity in a country
as a flow of expenditure from
households to businesses
• The flow then returns to consumers
as income received from the
production process ( in the form of
factors of production) 1.24
How Economists Use the
Circular Flow Model
Economists use the circular flow model in
Figure to define and analyze the spending
behavior of different sectors of the economy
• Personal consumption expenditures (C)
• Gross private domestic investment
spending (I)
• Government consumption expenditures and
gross investment (G)
• Net export spending (F) or total export
spending (X) minus total import spending (M)
1.25
The Circular Flow: firms and
households
Income ($ )
Labor
Households Firms
Goods (bread )
Expenditure ($ )
1.26
The
Circular
Flow in
the
economy
© 2005 Prentice Hall, Inc.
1.27
Gross Domestic
Product (GDP)
• Measure of overall economic
activity used to judge how an
economy is performing
• Measures the market value of
currently produced final goods and
services within a given time
1.29
Factors Affecting Macro
Spending Behavior
• (1)Changes in consumption and investment
behavior of private individuals
• (2)New directions of a country’s monetary
or fiscal policies( central bank and
government)
• (3)Developments occurring
internationally that affect domestic
economy 1.30
Policies
• Monetary policies: Policies adopted by a
country’s central bank that influence the money
supply, interest rates and the amount of funds
available for loans
• Fiscal policies: Changes in taxes( T) and
spending by national governments(G) that can
stimulate or restrain the economy
• Exchange Rate Policies: need to be coordinated
with monetary and fiscal policies to maintain the
proper rate of economic growth
1.31
Managerial Rule of Thumb:
Macroeconomic Influences
on Managers
Changes in the macro
environment affect individual
firms and industries through the
microeconomic factors of
demand, production, cost, and
profitability
1.32
Summary of Key Terms
• Microeconomics
• Macroeconomics
• Perfect competition
• Monopolistic competition
• Oligopoly
• Monopoly
• Circular flow model
1.33
Summary of Key Terms
• Consumption
• Investment
• Government spending
• Spending on exports and imports
• Monetary policy
• Fiscal policy
1.34
Do you have any
Do you have any
questions?
1.35
