This document provides an overview of managerial economics. It explains that managers should study economics to develop competitive advantages, understand how economic conditions impact their business, and improve profitability. It then defines microeconomics as the study of individual consumer and firm decisions, and macroeconomics as the study of overall economic activity and changes. The document proceeds to discuss key microeconomic concepts such as market structures, demand, supply, and equilibrium. It also covers macroeconomic influences on businesses and concepts like the circular flow of economic activity and GDP. The overall message is that understanding economics helps managers make better strategic decisions.

1. MANAGERIAL ECONOMICS
Lecture 1: Managers and
Economics
by
Angeline Chivapathy

2. 2
Why should managers study
economics?
o To develop the economic insight necessary to
identify your business’ competitive advantage.
o To identify how the ups and downs in
economy-wide economic activity will impact
your business.
o To improve your business’ profitability.

3. Microeconomics and
Macroeconomics
 Microeconomics is the
branch of economics
that analyzes the
decisions that individual
consumers, firms and
industries make as they
produce, buy and sell
goods and services.
 Macroeconomics is the
branch of economics that
focuses on the overall level
of economic activity,
changes in the price level,
and the amount of
unemployment by
analyzing group or
aggregate behavior in
different sectors of the
economy.
3

4. 4
Microeconomics
 Corporate News: Gasoline Sales Show Life;
Valero Is Among Refiners Gaining From Falling
Energy Prices
 World News: EU Hits Cartel Operator With
$1.12 Billion Fine
 Small Firms Shiver as Health Premiums Rise

5. 5
Macroeconomics
 World News: Japan Enters Recession; Demand
Falls
 Labor Data Show Pain Across Economy
 Stable Money Is the Key to Recovery
 Stimulate Car Buyers, Not Car Makers

6. 6
Microeconomic Influences on
Managers
 How consumer behavior affects their revenue.
 How production technology and input prices
affect their costs.
 How the market and regulatory environment in
which managers operate influences their ability
to set prices and to respond to the strategies of
their competitors.

7. 7
Market Demand
 Demand is the number of units of a good or
service that buyers are willing and able to buy
at various prices, when other factors, like,
buyers incomes, tastes and preferences and
the prices of goods related in consumption are
held constant.

8. 8
Market Supply
 Market supply is the number of units of a good
or service that businesses are willing and able
to produce at various prices, when other
factors, like, resource prices, production
technology and prices of goods related in
production are held constant.

9. 9
Market Equilibrium
 In efficient markets with flexible prices, the
market price fluctuates to eliminate shortages
(an excess of quantity demanded over quantity
supplied) and surpluses (an excess of quantity
supplied over quantity demanded).

10. Market Structure
10
Large Number of Firms
Perfect
Competition
Monopolistic
Competition Oligopoly Monopoly
Single Firm

11. 11
Perfect Competition
 Large number of firms
 Each firm produces an
identical good or service
 Easy for new firms to
enter the market
 Complete information to
all buyers and sellers in
the market

12. 12
Monopolistic Competition
 Large number of firms
 Each firm produces a
good or service that, in
some significant way, is
different
 Relatively easy for new
firms to enter the market
 Imperfect information

13. 13
Oligopoly
 Few large, mutually
interdependent, firms
 Firms may produce
similar or highly
differentiated products
 Significant barriers to
new entry
 Imperfect information

14. 14
Monopoly
 One firm producing a
good or service with no
good substitutes
 New entry is blockaded
 Imperfect information

15. 15
Understanding Microeconomics
 Helps managers develop competitive
advantage and increase profitability by:
– Understanding how consumer behavior affects their
revenues.
– Understanding how production technologies and
input prices affect their costs.
– Understanding how the market and regulatory
environment influences their ability to set prices and
implement competitive strategies.

16. 16
Macroeconomic Influences on
Managers
 Domestic business cycle fluctuations
 Global economic conditions
 Inflation
 Interest rate fluctuations
 Technological change

17. Circular Flow of Economic Activity
 Personal consumption expenditures (C)
 Gross private domestic investment spending (I)
 Government consumption expenditures and gross
investment (G)
 Net export spending (X-M)
17

18. The Circular Flow of Economic
Activity
18
Foreign Sector
Domestic Market for currently
Produced goods and services
Government
Sector
Financial Markets
Resource Markets
Firm SectorHousehold Sector
XM
Borrowing
G
Revenue
Expenses
Income, Wages,
Rent, Interest,
Profit
C
I
TB
TP
Borrowing
Borrowing
S

19. 19
Personal Consumption
Expenditures
 Spending by households
on durable goods,
nondurable goods, and
services [C].
 Largely determined by
consumer income but
also influenced by such
factors as consumer
wealth and confidence.
Real Personal Consumption
Expenditures
-4
-3
-2
-1
0
1
2
3
4
5
III2004I2005III2005I2006III2006I2007III2007I2008III2008
% change from preceeding period

20. 20
Gross Private Domestic Investment
Real Gross Private Domestic
Investment
-20
-15
-10
-5
0
5
10
15
III2004
I2005III2005
I2006III2006
I2007
III2007
I2008III2008
 Spending by households
and firms on
nonresidential structures,
equipment, software,
residential structures and
inventories (I).
 Largely determined by
market interest rates but
also influenced by
business confidence.
% change from preceeding period

21. Government Spending and Gross
Investment
Real Government Spending and Gross
Investment
-3
-2
-1
0
1
2
3
4
5
6
7
2004-III
2005-I2005-III
2006-I2006-III
2007-I2007-III2008-I2008-III
 Federal, state and local
government
consumption spending
and gross investment
(G).
 Largely determined
within the political
process but may be
used to try to manage
macroeconomic
activity.
21
% change from preceeding period

22. Net Export Spending
Real Net Export Spending
-20
-15
-10
-5
0
5
10
2004-III
2005-I2005-III
2006-I2006-III
2007-I2007-III
2008-I2008-III
 Net exports are the
difference between the
value of US exports and
US imports (X-M).
 Net exports are primarily
determined by currency
exchange rates, relative
prosperity and relative
interest rates.
% change from preceeding period
22

23. Real Gross Domestic Product
Real Gross Domestic Product
-1
0
1
2
3
4
5
6
2004-III
2005-I2005-III
2006-I2006-III
2007-I2007-III
2008-I2008-III
 Real gross domestic
product is the market
value of all final goods
and services produced in
the economy.
 GDP = C+I+G+(X-M)
% change from preceeding period
23

24. Understanding Macroeconomics
 Macroeconomic factors like, inflation,
exchange rates, interest rates, and economic
growth rates around the world are largely
beyond a managers control.
 Knowledge of these factors and how they affect
your business is a key factor in the
development of a businesses competitive
strategies.
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