Managerial Economics Essay Example for Free

Managerial political economy EssayChapter 1 Introduction to Managerial Economics4. Describe the importance of the other things have-to doe with assumption in managerial economic analysis.5. Describe what constitutes a trade, distinguish competitive from non-competitive markets, and discuss imperfect markets.6. accent the globalization of markets.NOTES1. Definition. Managerial economics is the science of directing scarce resources to manage embody effectively.2. Application. Managerial economics applies to(a) Businesses (such as decisions in relation to clients including pricing and publicize suppliers competitors or the internal workings of the organization), nonprofit organizations, and households. (b) The old economy and new economy in essentially the identical way except for two characteristic aspects of the new economy the importance of network make and scale and scope economies.i. network effects in shoot the benefit provided by a dish depends on the total number of other users, e.g., when only matchless person had email, she had no one to communicate with, but with 100 mm users on line, the solicit for Internet services mushroomed.ii. scale and scope economies scaleability is the degree to which scale and scope of a business can be ontogenesisd without a corresponding development in costs, e.g., the information in Yahoo is eminently scaleable (the same information can serve 100 as well as 100 mm users) and to serve a larger number of users, Yahoo needs only increase the capacity of its computers and links.iii. Note the term open technology (of the Internet) refers to the relatively let off admission of developers of content and applications. (c) twain global and local markets.3. Scope.(a) Microeconomics the study of individual economic behavior where resources are costly, e.g., how consumers respond to changes in prices and income, how businesses decide on habit and sales, voters behavior and setting of tax policy.(b) Managerial ec onomies the application of microeconomics to managerial issues (a scope more limited than microeconomics).(c) Macroeconomics the study of aggregate economic varyings directly (as opposed to the assemblage 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 behavior is opinionated and therefore canbe studied. Systematic economic behavior manner individuals share common motivations and behave systematically in making economic choices, i.e, a person who faces the same choices at two different times will behave in the same way some(prenominal) times.(b) Economic mould a concise description of behavior and outcomes i. focuses on particular issues and key variables (e.g., price, salary), omits considerable information, hence unrealistic at timesii. constructed by inductive reasoningiii. to b e tested with empirical data and revised as appropriate. 5. Basic concepts.(a) Margin vis a vis average variables in managerial economics analyses. i. marginal value of a variable the change in the variable associated with a unit increase in a driver, e.g., amount earned by working one more hourii. average value of a variable the total value of the variable divided by the total quantity of a driver, e.g., total make up divided by total no. of hours workediii. driver the independent variable, e.g., no. of hours worked iv. the marginal value of a variable whitethorn be less 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 f scummys.i. post the quantity at a specific point in time, measured in units of the item, e.g., items on a balance sheet ( assets and liabilities), the worlds oil reserves in the beginning of a yearii. Flow the change in stock over some period of time, measured in units per time period e.g., items on an income statement (receipts and expenses), the worlds current production of oil per day.(c) prop other things equal the assumption that all other relevantfactors do not change, and is made so that changes due to the factor being studied whitethorn be examined independently of those other factors. Having analysed the effects of each factor, they can be put together for the complete picture. 6. Organizational boundaries.(a) Organizations include businesses, non-profits and households. (b) Vertical boundaries delineate activities adjacent to or further from the end user. (c) Horizontal boundaries relate to economies of scale (rate of production or delivery of a good or service) and scope (range of different items produced or delivered).3Chapter 1 Introduction to Managerial Economics(d) Organizations wh ich are members of the same industry may pack different vertical and horizontal boundaries.7. Competitive markets.(a) Markets.i. a market consists of buyers and sellers that communicate with one another for voluntary 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 describes the systematic effect of changes in prices and othereconomic variables on buyers and sellers, and the inte raction of these choices.(c) Non-competitive markets a market in which market fountain exists. 8. Market indicant.(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 understand 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 break away information than others. (b) The challenge is to resolve the imperfection 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 blend 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 do more markets to be more integrated across geographical border enabling the opportunity to sell in new markets as well as global sourcing. Foreign sources may provide cheaper skilled labor, specialized resources, or superior quality, resulting in lower production costs and/or improved quality.ANSWERS TO reach CHECKS1A. The managerial economics of the new eco nomy is much 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 follow 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 willing 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 completely realistic to be useful. 5. (a) Average price per minute = (210 + 120 x 4)/5 = 138 yen per minute. (b) Price of marginal minute = 120 yen.6. (a) Flow (b) S tock (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 numbers 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 information than another. WORKED ANSWER TO DISCUSSION QUESTIONJupiter Car Rental offers two schemes for rental of a compact car. It claps $60 per day for an unlimited mileage plan, 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 guest 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 affect the average and marginal costs for a customer who drives 50 miles?6Chapter 1 Introduction to Managerial EconomicsAnswer(a) It is helpful to sketch the total rental cost as a function of the mileage (see figure below). The breakeven 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$400100200measure (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, while marginal cost = 20 cents per mile. The increase in the basic charge doesnt affect the marginal cost.7