LECTURE ONE IMBA NCCU Managerial Economics Lecturer: Jack Wu

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Lecture One

• IMBA NCCU
• Managerial Economics
• Lecturer Jack Wu

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Introduction to Managerial Economics
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CASE BOEING AND AIRBUS

• Airbus Until 2001, established under French law
  as a Groupe dIntérêt Economique
• Boeing Listed company
• April 2004 Boeing launches 787
• December 2004 Airbus launches A350

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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
  Boeings Christmas stocking?
• How should Boeing respond?

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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 Boeings
  Dreamliner?

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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

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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 RD strategies, design their
  organizations, and so on.
• The same is true of Airbus.

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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.

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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

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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.

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EXAMPLE INCREASE IN OIL PRICE

• Micro effect vehicle users, electronic power
  generators
• Macro effect inflation, unemployment

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Methodology

• economic model concise description of behavior
  and outcomes
• marginal vis-à-vis average
• stock vis-à-vis flow
• other things equal

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Methodology

• Timing
• static model single point in time
• dynamic model focus on sequence of actions and
  payments

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Timing

• Discount future values to be comparable with
  present values
• If discount rate 10,
• 1 next year worth 1/1.10 91 cents now
• 1 two years worth about 83 cents now

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Timing

• Net present value sum of discounted values of
  inflows and outflows over time
• Example
• Month 1 gain of 3 million
• Months 2 and 3 loss of 2 million
• Net present value

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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)

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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

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Another Example of vertical boundaries internet

• vertical chain provision of content, internet
  access, telephone or cable service
• Case America Online merged with Time Warner gt
  become a provider of entire vertical chain
• Case Google provides internet content, but
  neither telephone or cable service

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Another Example of Horizontal boundaries sale of
personal computer

• Scale the rate of production
• Scope the range of different items produced
• In terms of scale HP and Lenovo have wider
  horizontal boundaries than small businesses
  producing generic machines.
• In terms of scope HP has wider horizontal
  boundaries than Lenovo

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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

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Market continued

• Competitive Markets
• Market Power
• Imperfect Markets

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Competitive market

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

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Competitive market

• Model
• demand
• supply
• market equilibrium

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Market power

• Definition ability of a buyer or seller to
  influence market conditions
• Seller with market power must manage
• costs
• pricing
• advertising expenditure
• RD expenditure
• strategy toward competitors

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Imperfect market

• Definition where
• one party directly conveys a benefit or cost to
  others, or
• one party has better information than others

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Globalization Why?

• Growth of cross-border trade and investment
• falling trade barriers
• falling financial barriers
• falling communications costs

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Globalization Trade system

• World Trade Organization
• Regional free trade areas
• European Union
• North American Free Trade Agreement
• ASEAN
• ASEAN-China, ASEAN-India

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GLOBALIZATION OUTSOURCING

• Outsourcing the purchase of services or
  suppliers from external sources.
• U.S. financial services business outsource
  customer service to contractors in the
  Philippines and India

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Globalization e-commerce

• Extends geographical reach Google, eBay, Yahoo,
  Amazon
• Limitations
• payments system
• trade barriers
• shipment costs