Lesson 7: Managerial Economics


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Watch this with a 10-15 minute audiotrack at http://vimeo.com/novusprogram/lesson7

This lesson gives students an overview of Managerial Economics and how it can be applied to a small business. It focused on examining two managerial economic principles: demand analysis and the production decision. It describes ways that a business can affect its demand curve and how competitive analysis can help a manager make one of the most important decisions: pricing of goods and services. It then moves to the production decision, focusing on the different types of expenses, total cost vs. average total cost vs. marginal cost, and how to find the break-even point for a good or service.

The Novus project is a combination of video tutorials designed to be used in conjunction with a free business simulation software program. The Novus Business and IT Program contains 36 business and IT training videos, covering basic finance, accounting, marketing, economics, business strategy, Word, Excel, and PowerPoint. Users will have an opportunity to apply the lessons in the Novus Business Simulator. Over six rounds, the user or teams will have to make decisions on capital purchases, financing, production, financing, and human resources for a microbrewery. This channel has arranged the 36 video lessons into the order in which they are meant to be used with the simulator. To watch this slideshow as a video, please go to our Vimeo page at: https://vimeo.com/novusprogram. To download our free business simulation software, please go to our SourceForge page at: http://sourceforge.net/projects/novus/.

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Lesson 7: Managerial Economics

  1. 1. Managerial Economics Lesson 7 To learn the basic concepts of managerial economics including analyzing demand, deciding how much to produce, pricing and cost.Novus Business and IT Training Program
  2. 2. Managerial Economics• Economic Theory for a Business• Focuses on Micro-economics – Individual Consumers – Individual Businesses – Individual IndustriesNovus Business and IT Training Program 1
  3. 3. Primary Focus of Managerial Economics• Demand Analysis – How Much do Customers Want?• Production Decision – What to Produce? – How to Produce? – How Much to Produce? – For Whom?Novus Business and IT Training Program 2
  4. 4. Demand Curve• Different for a business than for its market• Considerations – Price – Competitor Behavior – Time of Year – Business Hours – LocationNovus Business and IT Training Program 3
  5. 5. Price• Internal Factors – Things you can control• External Factors – Things you cannot controlNovus Business and IT Training Program 4
  6. 6. Price Elasticity• How a change in one variable affects others – If prices are lowered, will you sell more? – If prices are raised, can you still sell as much?Novus Business and IT Training Program 5
  7. 7. Competitor Pricing• Understanding your competitors’ prices is very important• Same item + your higher price = lower sales for you• Understand what customers thinkNovus Business and IT Training Program 6
  8. 8. Other Factors• Competitor Behavior – Customer service• Convenience• Promotion• Time of YearNovus Business and IT Training Program 7
  9. 9. Demand Analysis Summary• Thorough Market Review• Give Customers a Reason to Come to You• Consider SeasonalityNovus Business and IT Training Program 8
  10. 10. Production Decision• Can you buy or produce enough to meet demand?• “Production” includes – Goods and services – Made or bought for resaleNovus Business and IT Training Program 9
  11. 11. Price versus Cost• Pricing affect Production Decision• Cost categories: – Fixed – Variable – MixedNovus Business and IT Training Program 10
  12. 12. Total Cost• Fixed + Variable + Mixed = Total• Prices must be high enough to cover total cost Quantity 1 Fixed Costs $50 Variable Costs 2 Total Cost 52Novus Business and IT Training Program 11
  13. 13. Average Total Cost• Average Total Cost = Total Cost / Quantity Quantity 10 100 Fixed Costs $50 $50 Variable Costs 20 200 Total Cost 70 250 Average Total Cost $7 $2.50• Economies of ScaleNovus Business and IT Training Program 12
  14. 14. Marginal Cost• Cost to buy / produce / sell one more item• Usually amount of variable cost (including variable-mixed)• Sale price should be higher than marginal costNovus Business and IT Training Program 13
  15. 15. Break-Even• When total cost and sales are equal• Calculation of break-even Fixed Costs $50 Sales Price $3 Marginal Cost $2 Difference $1 Break even units 50 unitsNovus Business and IT Training Program 14
  16. 16. Summary Market Production Competitors Price DemandNovus Business and IT Training Program 15