Introduction to
Managerial Economics
Plan for this week
Course introduction
 Course: scope, goals, and topics
 Preliminaries: background concepts

(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Who am I?
Name: Pascal Courty
 Nationality: French
 PhD in Economics from University of Chicago
 Research: pricing policies (industrial
organization), incentive compensation
(personnel economics)
 You want to learn more about me

 http://web.uvic.ca/~pcourty/
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Course description
This is a course in applied microeconomics
with a primary focus on the needs of
managers
 We study firms and markets, how they
operate and how the market mechanism
works
 The goal is to provide a range of economic
tools and concepts to analyze market
outcomes, and then help understand how to
apply them in practice

(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Course Content
1.
2.
3.
4.
5.
6.
8.
9.
10.
11.
Introduction
Demand
Elasticity
Supply
Competitive Mkts
Economic Efficiency
Monopoly
Pricing Policy
Strategic Thinking
Oligopoly
(c) 1999-2007, I.P.L. Png & D.E. Lehman
Microeconomics
Tool Kit
Strategy
Tool Kit
5
Course requirements
Problem sets (top 3 grades out of 5 problem
sets) based on a real world case study and
formal exercises (30%)
 Midterm exam on November 9th (40%)
 Industry project (30%)

(c) 1999-2007, I.P.L. Png & D.E. Lehman
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What does microeconomics brings
to management education?

Formal models (= Stylised descriptions)
Role of assumptions is to abstract from irrelevant
details
 Models provide an explicit analysis using a
transparent and logical method


Useful frameworks to discuss management
problems
Language to discuss business situations
 One of the intellectual foundation for management
education

(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Source: Airbus
Reproduced with permission
Airbus vs Boeing
Airbus: Until 2001, established under French
law as a “Groupe d’Intérêt Economique”
 Boeing: Listed company

April
2004
Boeing
launches
787
Dec.
2004
Dec.
2005
Airbus
launches
A350
2005 sales
Airbus: 1111
Boeing: 1029
(c) 1999-2007, I.P.L. Png & D.E. Lehman
June
2006
Airbus delays
A380; shares
fall 26%
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Airbus vs Boeing
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
Boeing’s Christmas stocking”?
 How should Boeing respond?

(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Managerial economics

Science of directing scarce resources
 resources
– financial, human, physical
 management of customers, suppliers,
competitors, internal organization
 setting – business, nonprofit, household
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Old/new economy
Network effects – benefit/cost depends on
total number of other users
 Scaleability – economies of scale and scope

(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Preliminaries
Scope and methodology
 Timing
 Organization
 Market
 Globalization

(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Preliminaries: Scope
 Managerial
economics based on
microeconomics



micro – individual economic behavior
macro – aggregate economic behavior
Example: increase in oil price
≫ micro
effects – vehicle users, electric power
generators
≫ macro effects – inflation, unemployment
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Preliminaries: Methodology
Economic model – concise abstraction of
behavior and outcomes
 Marginal vis-à-vis average
 Stock vis-à-vis flow
 Other things equal

(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Preliminaries: Methodology

Timing
 static
model – single point in time
 dynamic model – focus on sequence of actions
and payments
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Preliminaries
Scope and methodology
 Timing
 Organization
 Market
 Globalization

(c) 1999-2007, I.P.L. Png & D.E. Lehman
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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
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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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:
$2
$2
$3 

 $0.94 million
2
[1.01] [1.01]
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Preliminaries
Scope and methodology
 Timing
 Organization
 Market
 Globalization

(c) 1999-2007, I.P.L. Png & D.E. Lehman
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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)
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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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
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Individual behavior

Bounded rationality: individuals have limited cognitive
abilities and cannot fully exercise self-control

Separate accounting for different categories of benefits
and costs

Lack self-control: addictive behavior and difficulty
postponing immediate gratification for longer-term
benefits

More sensitive to losses than to gains

Decisions may depend on how choices are “framed”
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Preliminaries
Scope and methodology
 Timing
 Organization
 Market
 Globalization

(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Market
Definition: 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

(c) 1999-2007, I.P.L. Png & D.E. Lehman
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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
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Competitive market

Model:
 demand
 supply
 market
equilibrium
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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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
 R&D expenditure
 strategy toward competitors
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Market power:
Prozac

August 2001: US Court of Appeals limited
Prozac patent
 Lilly
market value dropped $36 billion
 Barr market value rose $1.1 billion

Huge discrepancy in impact – why?
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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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
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Imperfect market:
Disneyland Hong Kong
Disney insisted on rights to adjoining property
before commencing new investment.
 Why?

(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Preliminaries
Scope and methodology
 Timing
 Organization
 Market
 Globalization

(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Globalization: Why?

Growth of cross-border
trade and investment
 falling
trade barriers
 falling financial barriers
 falling communications
costs
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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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
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Globalization: Communications

Transport



air transport liberalization
containerization of surface transport
Telecommunications


de-regulation
scale economies in bandwidth
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Globalization:
Outsourcing
tele-radiology
transcription
record-keeping
outgoing call center,
eg, telemarketing
incoming call center,
eg, customer service
Globalization: e-commerce
Extends geographical reach –Google, eBay,
Yahoo, Amazon
 Limitations

 payments
system
 trade barriers
 shipment costs
(c) 1999-2007, I.P.L. Png & D.E. Lehman
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Summary
Scope and methodology
 Timing
 Organization
 Market
 Globalization

(c) 1999-2007, I.P.L. Png & D.E. Lehman
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