Go Global !Go Global !Managerial Economics :Managerial Economics :Managers, Profits &MarketsByStephen OngStephen OngVisiti...
AgendaAgenda1.1. Managers & MarketsManagers & Markets2.2. The Firm & ProfitThe Firm & ProfitMaximisationMaximisation3.3. E...
Learning ObjectivesLearning ObjectivesTo understand the role ofTo understand the role ofmanagers in decision makingmanager...
11Managers & MarketsManagers & Markets
EconomicsEconomicsMicroeconomicsMicroeconomicsBranch of economics thatBranch of economics thatdeals with the behaviour ofd...
Why should managers studyWhy should managers studyeconomics?economics? To develop the economic insightTo develop the econ...
Microeconomic InfluencesMicroeconomic Influenceson Managerson Managers How consumer behaviour affects theirHow consumer b...
Market DemandMarket DemandDemandDemand is the number ofis the number ofunits of a good or service thatunits of a good or ...
Market SupplyMarket SupplyMarket supplyMarket supply is theis thenumber of units of a good ornumber of units of a good or...
Market EquilibriumMarket EquilibriumIn efficient markets with flexibleIn efficient markets with flexibleprices, the marke...
CONSUMERSCONSUMERSConsumers have limited incomes, which can beConsumers have limited incomes, which can be• spent on a wid...
Prices and MarketsPrices and Markets• Microeconomics describes howMicroeconomics describes how pricespricesare determined....
Theories and ModelsTheories and Models In economics, explanation andIn economics, explanation andprediction are based onp...
What Is a Market?What Is a Market?MARKET :MARKET : Collection of buyers andsellers that, through their actual or potentia...
Competitive versusCompetitive versusNoncompetitive MarketsNoncompetitive MarketsPerfectly Competitive marketPerfectly Comp...
Market PriceMarket PricePrice prevailing in a competitive marketPrice prevailing in a competitive marketIn markets that a...
The Extent of a MarketThe Extent of a Market Boundaries of a market, both geographicalBoundaries of a market, both geogra...
WHAT IS SWEETER?WHAT IS SWEETER?
THE MARKET FOR SWEETENERSTHE MARKET FOR SWEETENERS In 1990, the Archer-Daniels-In 1990, the Archer-Daniels-Midland Compan...
Diabetics, Sugar, HFCSDiabetics, Sugar, HFCS
Sweet CokeSweet Coke
Wholesale Sugar Market (1982-2010)Wholesale Sugar Market (1982-2010)
Corn & Ethanol Markets (1980– 2010)Corn & Ethanol Markets (1980– 2010)
The Price of SweetThe Price of Sweet
REALITY DOES SUCKREALITY DOES SUCK
TABLEMARKETS FOR BICYCLESMARKETS FOR BICYCLESTYPE OF BICYCLETYPE OF BICYCLE COMPANIES AND PRICESCOMPANIES AND PRICES(2011)...
Casestudy Presentation :Casestudy Presentation :The Global Pharmaceutical industryThe Global Pharmaceutical industry1.1. R...
Market StructureMarket StructureLarge Number of FirmsLarge Number of FirmsPerfectPerfectCompetitionCompetitionMonopolistic...
PerfectPerfectCompetitionCompetition Large number of firmsLarge number of firms Each firm produces anEach firm produces ...
Monopolistic CompetitionMonopolistic Competition Large number ofLarge number offirmsfirms Each firm produces aEach firm ...
OligopolyOligopoly Few large,Few large,mutuallymutuallyinterdependent,interdependent,firmsfirms Firms may produceFirms m...
MonopolyMonopolyOne firmOne firmproducing aproducing agood or servicegood or servicewith no goodwith no goodsubstitutessu...
Real versus Nominal PricesReal versus Nominal Prices Nominal priceNominal price Absolute price of a good, unadjusted for...
Egg Farmer or College Teacher?Egg Farmer or College Teacher?
THE REAL PRICETHE REAL PRICE OF EGGS vs EDUCATIONOF EGGS vs EDUCATIONTABLE 2 THE REAL PRICES OF EGGS AND OF A COLLEGE EDUC...
TheThe realreal prices of eggs inprices of eggs in 1970 dollars1970 dollars is calculated as follows:is calculated as foll...
TABLE 2TABLE 2 THE REAL PRICES OF EGGS AND OF A COLLEGE EDUCATIONTHE REAL PRICES OF EGGS AND OF A COLLEGE EDUCATION1970197...
TABLE 2TABLE 2 THE REAL PRICES OF EGGS AND OF A COLLEGE EDUCATIONTHE REAL PRICES OF EGGS AND OF A COLLEGE EDUCATION1970 19...
In nominal terms, the minimum wage hasIn nominal terms, the minimum wage hasincreased steadily over the past 70 years.incr...
I’m lovin’ it
Meanwhile, Oil PricesMeanwhile, Oil Prices ……
Race to the Bottom:Race to the Bottom:KaroshiKaroshi
Corporate Decision Making: The Toyota PriusCorporate Decision Making: The Toyota Prius Hybrid cars are more energy effici...
FuelFuelEfficiencyEfficiencyRaceRace
Public Policy Design:Public Policy Design: FuelFuelEfficiency Standards for the 21Efficiency Standards for the 21ststCentu...
22The FirmThe Firm&&Profit MaximisationProfit Maximisation
The FirmThe FirmA firm is a collection of resourcesA firm is a collection of resourcesthat is transformed into productsth...
The FirmThe FirmTransaction costsTransaction costs areareincurred when entering into aincurred when entering into acontra...
The FirmThe FirmTransaction costsTransaction costs areareincurred when entering into aincurred when entering into acontra...
The FirmThe Firm“Any customercan have a carpainted anycolour that hewants so long asit is black.”Henry Ford
The FirmThe FirmLimits to firm sizeLimits to firm sizetradeofftradeoff betweenbetweenexternal transactionsexternal trans...
Toyota Car Factories WorldwideToyota Car Factories Worldwide
Economic goal of the firmEconomic goal of the firmProfit maximizationProfit maximization hypothesis:hypothesis:the primar...
Economic goal of the firmEconomic goal of the firmShort-runShort-run versusversus Long-runLong-runnothing to do directly...
Goals other than profitGoals other than profitEconomic goalsEconomic goalsmarket share, growth ratemarket share, growth ...
““Quality is our lifeline.”Quality is our lifeline.”Akio Toyoda
Goals other than profitGoals other than profitNon-economic objectivesgood work environmentquality products andservices...
Do companies maximize profit?Do companies maximize profit?Criticism: companies do not maximizeCriticism: companies do not...
Position and power ofPosition and power ofmanagementmanagementhigh-level managers may ownhigh-level managers may ownvery...
Do companies maximize profit?Do companies maximize profit?Position and power of managementPosition and power of managemen...
Do companies maximize profit?Do companies maximize profit? Counter-arguments which support theCounter-arguments which sup...
Maximizing the wealthMaximizing the wealthof stockholdersof stockholders Views the firm from the perspective of aViews th...
Managerial Decision MakingManagerial Decision MakingQuestion : Finding the Best HotelQuestion : Finding the Best Hotel As...
Managerial Decision MakingManagerial Decision MakingStrategy SolutionStrategy SolutionStrategy:Strategy:Size up the 1stSi...
33Economic ProfitEconomic Profit
Economic profitsEconomic profitsEconomic profits and accountingprofits are typically different accountants measureaccoun...
Economic profitsEconomic profitsEconomists are concerned withEconomists are concerned withimplicit costs, called opportun...
ProfitProfit• Accounting profitAccounting profit• Total revenue less explicitTotal revenue less explicitcostcost• Normal p...
Profits ComparedProfits ComparedEconomicEconomicProfitProfitAccountingAccountingCosts (ExplicitCosts (ExplicitCosts Only)C...
ConclusionConclusion“Death from too much work is soDeath from too much work is socommonplace incommonplace in JapanJapan t...
Casestudy : TESCOCasestudy : TESCO1.1. Read and prepare theRead and prepare theCasestudy on TESCOCasestudy on TESCO(Johnso...
Core ReadingCore Reading• Keat, Paul G. and Young, Philip KY (2009)Managerial Economics, 6thedition, Pearson• Samuelson, W...
Questions?Questions?
Mba1014 managers, profits, markets 270413
Mba1014 managers, profits, markets 270413
Mba1014 managers, profits, markets 270413
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Mba1014 managers, profits, markets 270413

  1. 1. Go Global !Go Global !Managerial Economics :Managerial Economics :Managers, Profits &MarketsByStephen OngStephen OngVisiting Fellow, Birmingham City UniversityVisiting Fellow, Birmingham City UniversityVisiting Professor, College of Management,Visiting Professor, College of Management,Shenzhen UniversityShenzhen UniversityApril 2013April 2013
  2. 2. AgendaAgenda1.1. Managers & MarketsManagers & Markets2.2. The Firm & ProfitThe Firm & ProfitMaximisationMaximisation3.3. Economic ProfitEconomic Profit
  3. 3. Learning ObjectivesLearning ObjectivesTo understand the role ofTo understand the role ofmanagers in decision makingmanagers in decision makingTo understand basic concepts ofTo understand basic concepts ofthe market and its structurethe market and its structureTo understand the rationale ofTo understand the rationale offirms and the firm’s economicfirms and the firm’s economicgoalsgoalsTo distinguish betweenTo distinguish betweeneconomic profit and accountingeconomic profit and accountingprofitprofit
  4. 4. 11Managers & MarketsManagers & Markets
  5. 5. EconomicsEconomicsMicroeconomicsMicroeconomicsBranch of economics thatBranch of economics thatdeals with the behaviour ofdeals with the behaviour ofindividual economic units—individual economic units—consumers,consumers,firms,firms,workers, andworkers, and investors—investors—as well as the marketsas well as the marketsthat these units comprise.that these units comprise.MacroeconomicsMacroeconomicsBranch of economics thatBranch of economics thatdeals with aggregatedeals with aggregateeconomic variables, sucheconomic variables, suchasasthe level and growth ratethe level and growth rateof national output,of national output,interest rates,interest rates,unemployment, andunemployment, and inflation.inflation.
  6. 6. Why should managers studyWhy should managers studyeconomics?economics? To develop the economic insightTo develop the economic insightnecessary to identify your business’necessary to identify your business’competitive advantage.competitive advantage. To identify how the ups and downs inTo identify how the ups and downs ineconomy-wide economic activity willeconomy-wide economic activity willimpact your business.impact your business. To improve your business’To improve your business’profitability.profitability.
  7. 7. Microeconomic InfluencesMicroeconomic Influenceson Managerson Managers How consumer behaviour affects theirHow consumer behaviour affects theirrevenue.revenue. How production technology and inputHow production technology and inputprices affect their costs.prices affect their costs. How the market and regulatoryHow the market and regulatoryenvironment in which managersenvironment in which managersoperate influences their ability to setoperate influences their ability to setprices and to respond to theprices and to respond to thestrategies of their competitors.strategies of their competitors.
  8. 8. Market DemandMarket DemandDemandDemand is the number ofis the number ofunits of a good or service thatunits of a good or service thatbuyers are willing and able tobuyers are willing and able tobuy at various pricesbuy at various prices,,when other factors, like,when other factors, like,buyers incomes, tastes andbuyers incomes, tastes andpreferencespreferences and the prices ofand the prices ofgoods related in consumptiongoods related in consumptionare held constant.are held constant.
  9. 9. Market SupplyMarket SupplyMarket supplyMarket supply is theis thenumber of units of a good ornumber of units of a good orservice that businesses areservice that businesses arewilling and able towilling and able to produceproduceat various pricesat various prices, when, whenother factors, like,other factors, like, resourceresourceprices, productionprices, productiontechnologytechnology and prices ofand prices ofgoods related in productiongoods related in productionare held constant.are held constant.
  10. 10. Market EquilibriumMarket EquilibriumIn efficient markets with flexibleIn efficient markets with flexibleprices, the market priceprices, the market pricefluctuates to eliminatefluctuates to eliminateshortages (an excess of quantityshortages (an excess of quantitydemanded over quantitydemanded over quantitysupplied) and surpluses (ansupplied) and surpluses (anexcess of quantity supplied overexcess of quantity supplied overquantity demanded).quantity demanded).
  11. 11. CONSUMERSCONSUMERSConsumers have limited incomes, which can beConsumers have limited incomes, which can be• spent on a wide variety of goods and services, orspent on a wide variety of goods and services, or• saved for the future.saved for the future.WORKERSWORKERSWorkers also face constraints and make trade-offs.Workers also face constraints and make trade-offs.1.1. must decide whether and when to enter the workforce.must decide whether and when to enter the workforce.2.2. face trade-offs in their choice of employment.face trade-offs in their choice of employment.3.3. decide how many hours per week they wish to work,decide how many hours per week they wish to work,thereby trading off labour for leisure.thereby trading off labour for leisure.FIRMSFIRMSFirms also face limits in terms ofFirms also face limits in terms of• the kinds of products that they can produce, andthe kinds of products that they can produce, and• the resources available to produce them.the resources available to produce them.The Themes of MicroeconomicsThe Themes of MicroeconomicsTrade-Offs
  12. 12. Prices and MarketsPrices and Markets• Microeconomics describes howMicroeconomics describes how pricespricesare determined.are determined.• In a centrally planned economy, pricesIn a centrally planned economy, pricesare set by theare set by the government.government.• In a market economy, prices areIn a market economy, prices aredetermined by the interactions ofdetermined by the interactions ofconsumers, workers, and firms. Theseconsumers, workers, and firms. Theseinteractions occur ininteractions occur in marketsmarkets——collections of buyers and sellers thatcollections of buyers and sellers thattogether determine the price of a goodtogether determine the price of a good.
  13. 13. Theories and ModelsTheories and Models In economics, explanation andIn economics, explanation andprediction are based onprediction are based ontheoriestheories. Theories are developed. Theories are developedto explain observed phenomenato explain observed phenomenain terms of a set of basic rulesin terms of a set of basic rulesand assumptions.and assumptions.AA modelmodel is a mathematicalis a mathematicalrepresentation, based onrepresentation, based oneconomic theory, of a firm, aeconomic theory, of a firm, amarket, or some other entity.market, or some other entity.
  14. 14. What Is a Market?What Is a Market?MARKET :MARKET : Collection of buyers andsellers that, through their actual or potentialinteractions, determine the price of a product orset of products. Market definition : Determination ofthe buyers, sellers, and range of products thatshould be included in a particular market. Arbitrage :Arbitrage : Practice of buying at a lowlowprice at one location and selling at a higherhigherprice in another.
  15. 15. Competitive versusCompetitive versusNoncompetitive MarketsNoncompetitive MarketsPerfectly Competitive marketPerfectly Competitive marketMarket with many buyers and sellers, so that noMarket with many buyers and sellers, so that nosingle buyer or seller has a significant impact onsingle buyer or seller has a significant impact onpriceprice..Many other markets are competitive enough to beMany other markets are competitive enough to betreated as if they were perfectly competitive.treated as if they were perfectly competitive.Other markets containing a small number ofOther markets containing a small number ofproducers may still be treated as competitive forproducers may still be treated as competitive forpurposes of analysis.purposes of analysis.Finally, some markets contain many producers butFinally, some markets contain many producers butareare noncompetitivenoncompetitive; that is, individual firms; that is, individual firmscan jointlycan jointly affect the priceaffect the price..
  16. 16. Market PriceMarket PricePrice prevailing in a competitive marketPrice prevailing in a competitive marketIn markets that are not perfectly competitive,In markets that are not perfectly competitive,different firms might charge different prices for thedifferent firms might charge different prices for thesame product. This might happen because one firmsame product. This might happen because one firmis trying to win customers from its competitors, oris trying to win customers from its competitors, orbecause customers have brand loyalties that allowbecause customers have brand loyalties that allowsome firms to chargesome firms to charge higher priceshigher prices thanthanothers.others.The market prices of most goods will fluctuateThe market prices of most goods will fluctuateover time, and for many goods theover time, and for many goods thefluctuationsfluctuations can be rapid. This iscan be rapid. This isparticularly true for goods sold in competitiveparticularly true for goods sold in competitivemarkets.markets.
  17. 17. The Extent of a MarketThe Extent of a Market Boundaries of a market, both geographicalBoundaries of a market, both geographicaland in terms of range of products producedand in terms of range of products producedand sold within it.and sold within it. For some goods, it makes sense to talkFor some goods, it makes sense to talkabout a market only in terms of veryabout a market only in terms of veryrestrictive geographic boundaries.restrictive geographic boundaries. We must also think carefully about theWe must also think carefully about therange of products to include in a market.range of products to include in a market. Market definition is important for twoMarket definition is important for tworeasons:reasons: AA companycompany must understand who its actual andmust understand who its actual andpotential competitors are for the various products that itpotential competitors are for the various products that itsells or might sell in the future.sells or might sell in the future. Market definition can be important for public policyMarket definition can be important for public policydecisions.decisions.
  18. 18. WHAT IS SWEETER?WHAT IS SWEETER?
  19. 19. THE MARKET FOR SWEETENERSTHE MARKET FOR SWEETENERS In 1990, the Archer-Daniels-In 1990, the Archer-Daniels-Midland Company (ADM)Midland Company (ADM)acquired the Clinton Cornacquired the Clinton CornProcessing Company (CCP).Processing Company (CCP). The U.S. Department ofThe U.S. Department ofJustice (DOJ) challenged theJustice (DOJ) challenged theacquisition on the groundsacquisition on the groundsthat it would lead to athat it would lead to adominant producer of corndominant producer of cornsyrup with the power to pushsyrup with the power to pushprices above competitiveprices above competitivelevels.levels. ADM fought the DOJADM fought the DOJdecision, and the case went todecision, and the case went tocourt. The basic issue wascourt. The basic issue waswhether corn syrupwhether corn syruprepresented a distinctrepresented a distinctmarket.market. ADM argued that sugar andADM argued that sugar andcorn syrup should becorn syrup should beconsidered part of the sameconsidered part of the samemarket because they are usedmarket because they are usedinterchangeably to sweeten ainterchangeably to sweeten avast array of food products.vast array of food products.
  20. 20. Diabetics, Sugar, HFCSDiabetics, Sugar, HFCS
  21. 21. Sweet CokeSweet Coke
  22. 22. Wholesale Sugar Market (1982-2010)Wholesale Sugar Market (1982-2010)
  23. 23. Corn & Ethanol Markets (1980– 2010)Corn & Ethanol Markets (1980– 2010)
  24. 24. The Price of SweetThe Price of Sweet
  25. 25. REALITY DOES SUCKREALITY DOES SUCK
  26. 26. TABLEMARKETS FOR BICYCLESMARKETS FOR BICYCLESTYPE OF BICYCLETYPE OF BICYCLE COMPANIES AND PRICESCOMPANIES AND PRICES(2011)(2011)Mass Market Bicycles:Mass Market Bicycles:Sold by mass merchandiserssuch as Target, Wal-Mart,Kmart, and Sears.Huffy: $90—$140Huffy: $90—$140Schwinn: $140—$240Schwinn: $140—$240Mantis: $129—$140Mantis: $129—$140Mongoose: $120—$280Mongoose: $120—$280Dealer Bicycles:Dealer Bicycles:Sold by bicycle dealers –stores that sell only(or mostly)bicycles and bicycleequipment.Trek: $400—$2500Trek: $400—$2500Cannondale: $500—$2000Cannondale: $500—$2000Giant: $500—$2500Giant: $500—$2500Gary Fisher: $600—$2000Gary Fisher: $600—$2000Mongoose: $700—$2000Mongoose: $700—$2000Ridley: $1300—$2500Ridley: $1300—$2500Scott: $1000—$3000Scott: $1000—$3000Ibis: $2000 and upIbis: $2000 and upThere are actually two different markets forThere are actually two different markets forbicycles, markets that can be identified by thebicycles, markets that can be identified by thetype of store in which the bicycle is sold.type of store in which the bicycle is sold.A BICYCLE IS A BICYCLE. OR IS IT?A BICYCLE IS A BICYCLE. OR IS IT?
  27. 27. Casestudy Presentation :Casestudy Presentation :The Global Pharmaceutical industryThe Global Pharmaceutical industry1.1. Read and prepare theRead and prepare theCasestudy on The GlobalCasestudy on The GlobalPharmaceutical IndustryPharmaceutical Industry(Johnson, Whittington &(Johnson, Whittington &Scholes (2011)) forScholes (2011)) fordiscussion anddiscussion andpresentation next week.presentation next week.2.2. Identify and evaluate theIdentify and evaluate thechallenges facing globalchallenges facing globalpharmaceutical firms thepharmaceutical firms theExternal Environment andExternal Environment andIndustry analysis –Industry analysis –PESTEL and Five Forces.PESTEL and Five Forces.
  28. 28. Market StructureMarket StructureLarge Number of FirmsLarge Number of FirmsPerfectPerfectCompetitionCompetitionMonopolisticMonopolisticCompetitionCompetition OligopolyOligopoly MonopolyMonopolySingle FirmSingle Firm
  29. 29. PerfectPerfectCompetitionCompetition Large number of firmsLarge number of firms Each firm produces anEach firm produces anidentical good oridentical good orserviceservice Easy for new firms toEasy for new firms toenter the marketenter the market Complete information toComplete information toall buyers and sellers inall buyers and sellers inthe marketthe market
  30. 30. Monopolistic CompetitionMonopolistic Competition Large number ofLarge number offirmsfirms Each firm produces aEach firm produces agood or service that,good or service that,in some significantin some significantway, is differentway, is different Relatively easy forRelatively easy fornew firms to enternew firms to enterthe marketthe market ImperfectImperfectinformationinformation
  31. 31. OligopolyOligopoly Few large,Few large,mutuallymutuallyinterdependent,interdependent,firmsfirms Firms may produceFirms may producesimilar or highlysimilar or highlydifferentiateddifferentiatedproductsproducts Significant barriersSignificant barriersto new entryto new entry ImperfectImperfectinformationinformation
  32. 32. MonopolyMonopolyOne firmOne firmproducing aproducing agood or servicegood or servicewith no goodwith no goodsubstitutessubstitutesNew entry isNew entry isblockadedblockadedImperfectImperfectinformationinformation
  33. 33. Real versus Nominal PricesReal versus Nominal Prices Nominal priceNominal price Absolute price of a good, unadjusted for inflation.Absolute price of a good, unadjusted for inflation. Real priceReal price Price of a good relative to an aggregate measurePrice of a good relative to an aggregate measureof prices; price adjusted for inflation.of prices; price adjusted for inflation.Consumer Price IndexConsumer Price Index Measure of the aggregate price level.Measure of the aggregate price level.Producer Price IndexProducer Price Index Measure of the aggregate price level forMeasure of the aggregate price level forintermediate products and wholesale goods.intermediate products and wholesale goods.
  34. 34. Egg Farmer or College Teacher?Egg Farmer or College Teacher?
  35. 35. THE REAL PRICETHE REAL PRICE OF EGGS vs EDUCATIONOF EGGS vs EDUCATIONTABLE 2 THE REAL PRICES OF EGGS AND OF A COLLEGE EDUCATION1970 1980 1990 2000 2010Consumer PriceConsumer PriceIndexIndex38.838.8 82.482.4 130.7130.7 172.2172.2 218.1218.1NoNominaminal Pricesl PricesGrade A LargeGrade A LargeEggsEggs$0.61$0.61 $0.84$0.84 $1.01$1.01 $0.91$0.91 $1.54$1.54College EducationCollege Education $2,112$2,112 $3,502$3,502 $7,619$7,619 $12,976$12,976 $21,550$21,550Real Prices ($1970)Real Prices ($1970)Grade A LargeGrade A LargeEggsEggs$0.61$0.61 $0.40$0.40 $0.30$0.30 $0.21$0.21 $0.27$0.27College EducationCollege Education $2,112$2,112 $1,649$1,649 $2,262$2,262 $2,924$2,924 $3,835$3,835
  36. 36. TheThe realreal prices of eggs inprices of eggs in 1970 dollars1970 dollars is calculated as follows:is calculated as follows:While theWhile the nominalnominal price ofprice ofeggs roseeggs rose during these years, theduring these years, therealreal price of eggs actuallyprice of eggs actuallyfell.fell.THE REAL PRICE OF EGGSTHE REAL PRICE OF EGGS
  37. 37. TABLE 2TABLE 2 THE REAL PRICES OF EGGS AND OF A COLLEGE EDUCATIONTHE REAL PRICES OF EGGS AND OF A COLLEGE EDUCATION19701970 1980 19901990 2000 20102010Consumer Price Index 38.838.8 82.4 130.7130.7 172.2 218.1218.1Nominal PricesGrade A Large Eggs $0.61$0.61 $0.84 $1.01$1.01 $0.91 $1.54$1.54College Education $2,112$2,112 $3,502 $7,619$7,619 $12,976 $21,550$21,550Real Prices ($1970)Grade A Large Eggs $0.61$0.61 $0.40 $0.30$0.30 $0.21 $0.27$0.27College Education $2,112$2,112 $1,649 $2,262$2,262 $2,924 $3,835$3,835The real prices of eggs inThe real prices of eggs in 1990 dollars1990 dollars is calculated as follows:is calculated as follows:
  38. 38. TABLE 2TABLE 2 THE REAL PRICES OF EGGS AND OF A COLLEGE EDUCATIONTHE REAL PRICES OF EGGS AND OF A COLLEGE EDUCATION1970 1980 1990 2000 2010Consumer Price Index 38.8 82.4 130.7 172.2 218.1Nominal PricesGrade A Large Eggs $0.61 $0.84 $1.01 $0.91 $1.54College Education $2,112 $3,502 $7,619 $12,976 $21,550Real Prices ($1970)Grade A Large Eggs $0.61 $0.40 $0.30 $0.21 $0.27College Education $2,112 $1,649 $2,262 $2,924 $3,835The percentage change in real price is calculated as follows (inThe percentage change in real price is calculated as follows (in1990 dollars):1990 dollars):
  39. 39. In nominal terms, the minimum wage hasIn nominal terms, the minimum wage hasincreased steadily over the past 70 years.increased steadily over the past 70 years.However, in real terms its expected 2010However, in real terms its expected 2010level islevel is below that of the 1970s.below that of the 1970s.THE MINIMUMTHE MINIMUMWAGEWAGE
  40. 40. I’m lovin’ it
  41. 41. Meanwhile, Oil PricesMeanwhile, Oil Prices ……
  42. 42. Race to the Bottom:Race to the Bottom:KaroshiKaroshi
  43. 43. Corporate Decision Making: The Toyota PriusCorporate Decision Making: The Toyota Prius Hybrid cars are more energy efficient than cars with just aHybrid cars are more energy efficient than cars with just agasoline engine; the Prius, for example, can get 45 to 55gasoline engine; the Prius, for example, can get 45 to 55miles per gallon. The Prius was a big success, and within amiles per gallon. The Prius was a big success, and within afew years other manufacturers began introducing hybridfew years other manufacturers began introducing hybridversions of some of their cars.versions of some of their cars. The design and efficient production of the Prius involvedThe design and efficient production of the Prius involvednot only some impressive engineering, but a lot ofnot only some impressive engineering, but a lot ofeconomics as well.economics as well.1.1. Toyota had to think carefully about how theToyota had to think carefully about how the publicpublic wouldwouldreact to the design and performance of this new product.react to the design and performance of this new product.2.2. Toyota had to be concerned withToyota had to be concerned with the cost ofthe cost ofmanufacturingmanufacturing these cars.these cars.3.3. Toyota had to think about its relationship to the governmentToyota had to think about its relationship to the governmentand the effects of regulatory policies.and the effects of regulatory policies.
  44. 44. FuelFuelEfficiencyEfficiencyRaceRace
  45. 45. Public Policy Design:Public Policy Design: FuelFuelEfficiency Standards for the 21Efficiency Standards for the 21ststCenturyCenturyIn 1975, the U.S. government imposed regulations designedIn 1975, the U.S. government imposed regulations designedto improve the average fuel economy of domestically-soldto improve the average fuel economy of domestically-soldcars and light trucks. Thecars and light trucks. The CAFE (Corporate Average FuelCAFE (Corporate Average FuelEconomy)Economy) standards have become increasingly stringentstandards have become increasingly stringentover the years. Designing a fuel efficiency program involvesover the years. Designing a fuel efficiency program involveseconomics :economics :1.1. Government must evaluate the monetary impact of theGovernment must evaluate the monetary impact of theprogramme onprogramme on consumersconsumers..2.2. To estimate the likely impact of CAFE standards on theTo estimate the likely impact of CAFE standards on thecost of producingcost of producing cars and light trucks.cars and light trucks.3.3. To ask why problems related to oil consumption are notTo ask why problems related to oil consumption are notsolved by oursolved by our market-orientedmarket-oriented economy.economy.
  46. 46. 22The FirmThe Firm&&Profit MaximisationProfit Maximisation
  47. 47. The FirmThe FirmA firm is a collection of resourcesA firm is a collection of resourcesthat is transformed into productsthat is transformed into productsdemanded by consumersdemanded by consumersProfitProfit is the difference betweenis the difference betweenrevenue received and costsrevenue received and costsincurredincurred
  48. 48. The FirmThe FirmTransaction costsTransaction costs areareincurred when entering into aincurred when entering into acontractcontracttypes of transaction coststypes of transaction costsinvestigationinvestigationnegotiationnegotiationenforcing contractsenforcing contracts
  49. 49. The FirmThe FirmTransaction costsTransaction costs areareincurred when entering into aincurred when entering into acontractcontractinfluencesinfluencesuncertaintyuncertaintyfrequency of recurrencefrequency of recurrenceasset specificityasset specificity
  50. 50. The FirmThe Firm“Any customercan have a carpainted anycolour that hewants so long asit is black.”Henry Ford
  51. 51. The FirmThe FirmLimits to firm sizeLimits to firm sizetradeofftradeoff betweenbetweenexternal transactionsexternal transactionsand the cost ofand the cost ofinternal operationsinternal operationscompany chooses tocompany chooses toallocate resources soallocate resources sototal cost is minimumtotal cost is minimumoutsourcingoutsourcing ofofperipheral, non-coreperipheral, non-coreactivitiesactivities
  52. 52. Toyota Car Factories WorldwideToyota Car Factories Worldwide
  53. 53. Economic goal of the firmEconomic goal of the firmProfit maximizationProfit maximization hypothesis:hypothesis:the primary objective of the firm (tothe primary objective of the firm (toeconomists) is to maximize profitseconomists) is to maximize profitsOther goals include market share,Other goals include market share,revenue growth, and shareholderrevenue growth, and shareholdervaluevalueOptimal decision is the one thatOptimal decision is the one thatbrings the firm closest to its goalbrings the firm closest to its goal
  54. 54. Economic goal of the firmEconomic goal of the firmShort-runShort-run versusversus Long-runLong-runnothing to do directly with calendarnothing to do directly with calendartimetimeshort-run: firm canshort-run: firm can vary amount ofvary amount ofsome resourcessome resources but not othersbut not otherslong-run: firm can vary amount oflong-run: firm can vary amount of allallresourcesresourcesat times short-run profitability willat times short-run profitability willbe sacrificed for long-run purposesbe sacrificed for long-run purposes
  55. 55. Goals other than profitGoals other than profitEconomic goalsEconomic goalsmarket share, growth ratemarket share, growth rateprofit marginprofit marginreturn on investment, Return onreturn on investment, Return onassetsassetstechnological advancementtechnological advancementcustomer satisfactioncustomer satisfactionshareholder valueshareholder value
  56. 56. ““Quality is our lifeline.”Quality is our lifeline.”Akio Toyoda
  57. 57. Goals other than profitGoals other than profitNon-economic objectivesgood work environmentquality products andservicescorporate citizenship,social responsibilityEnvironment,Sustainability &Governance
  58. 58. Do companies maximize profit?Do companies maximize profit?Criticism: companies do not maximizeCriticism: companies do not maximizeprofits but instead merely aim toprofits but instead merely aim tosatisfice, which means to achieve asatisfice, which means to achieve asatisfactory goal, one that may notsatisfactory goal, one that may notrequire the firm to ‘do its best’require the firm to ‘do its best’two forces affect satisficing:two forces affect satisficing:position and power ofposition and power ofstockholdersstockholdersposition and power ofposition and power ofmanagementmanagement
  59. 59. Position and power ofPosition and power ofmanagementmanagementhigh-level managers may ownhigh-level managers may ownvery little of the firm’s stockvery little of the firm’s stockmanagers tend to be moremanagers tend to be moreconservative because jobs willconservative because jobs willlikely be safe if performance islikely be safe if performance issteady, not spectacularsteady, not spectacularDo companies maximize profit?Do companies maximize profit?
  60. 60. Do companies maximize profit?Do companies maximize profit?Position and power of managementPosition and power of managementmanagers may be more interested inmanagers may be more interested inmaximizing own income andmaximizing own income andperksperksmanagement incentives may bemanagement incentives may bemisaligned (eg. revenue not profits)misaligned (eg. revenue not profits) divergence of objectives is known asdivergence of objectives is known as‘principal-agent’‘principal-agent’ problemproblem
  61. 61. Do companies maximize profit?Do companies maximize profit? Counter-arguments which support theCounter-arguments which support theprofit maximization hypothesisprofit maximization hypothesislarge stockholdings held by institutionslarge stockholdings held by institutions(mutual funds, banks, etc.)(mutual funds, banks, etc.) scrutiny by professionalscrutiny by professional analystsanalystsstockmarket disciplinestockmarket discipline if managers do not seek to maximizeif managers do not seek to maximizeprofits, firms faceprofits, firms face threat ofthreat oftakeovertakeoverincentive effectincentive effect the compensation of many executivesthe compensation of many executivesis tied tois tied to stock pricestock price
  62. 62. Maximizing the wealthMaximizing the wealthof stockholdersof stockholders Views the firm from the perspective of aViews the firm from the perspective of astream of profitsstream of profits (cash flows) over(cash flows) overtimetime the value of the stream depends on whenthe value of the stream depends on whencash flows occurcash flows occur Requires the concept of theRequires the concept of the time valuetime valueof money: says a dollar earned in the futureof money: says a dollar earned in the futureis worth less than a dollar earned todayis worth less than a dollar earned today
  63. 63. Managerial Decision MakingManagerial Decision MakingQuestion : Finding the Best HotelQuestion : Finding the Best Hotel Assume there are only Three Hotels. (Assume there are only Three Hotels. (BestBest,,Medium, Worst)Medium, Worst) Traveller can visit and compare but cannotTraveller can visit and compare but cannotgo back.go back. What is your strategy to maximise yourWhat is your strategy to maximise yourchances of achieving your goal (chances of achieving your goal (BestBest Hotel)?Hotel)?BB BB M M W WM M W WM WM W BB WW BB MMW M WW M W BB MM BB
  64. 64. Managerial Decision MakingManagerial Decision MakingStrategy SolutionStrategy SolutionStrategy:Strategy:Size up the 1stSize up the 1stHotel butHotel butbypass it.bypass it.Stop at theStop at the2nd Hotel only2nd Hotel onlyif its better thanif its better thanthe 1st.the 1st.Simulation:Simulation:Travellerfinds BESTHotel 50% ofthe time!B B M M W WB B M M W WM W B W B MM W B W B MW M W B M BW M W B M B
  65. 65. 33Economic ProfitEconomic Profit
  66. 66. Economic profitsEconomic profitsEconomic profits and accountingprofits are typically different accountants measureaccountants measure explicitexplicitincurred costsincurred costs, as allowed by, as allowed byGAAPGAAP accountants useaccountants use historical costhistorical costof machinesof machines
  67. 67. Economic profitsEconomic profitsEconomists are concerned withEconomists are concerned withimplicit costs, called opportunityimplicit costs, called opportunitycostscostsAccordingly, economists useAccordingly, economists usereplacement cost of machinesreplacement cost of machines economic costs includeeconomic costs includehistorical and explicithistorical and explicit(accounting) costs(accounting) costs as well asas well asreplacement and implicitreplacement and implicit(economic) costs(economic) costs economic profit is totaleconomic profit is totalrevenue minus allrevenue minus alleconomic costseconomic costs
  68. 68. ProfitProfit• Accounting profitAccounting profit• Total revenue less explicitTotal revenue less explicitcostcost• Normal profitNormal profit• Equal to implicit costEqual to implicit cost• Economic or pure profitEconomic or pure profit• Total revenue less economicTotal revenue less economiccostcost
  69. 69. Profits ComparedProfits ComparedEconomicEconomicProfitProfitAccountingAccountingCosts (ExplicitCosts (ExplicitCosts Only)Costs Only)AccountingAccountingProfitProfitExplicitExplicitCostsCostsImplicit CostsImplicit Costs(Including a(Including aNormal Profit)Normal Profit)EconomicEconomic(Opportunity)(Opportunity)CostsCostsTotalRevenueTotalRevenueEconomicEconomic AccountingAccounting
  70. 70. ConclusionConclusion“Death from too much work is soDeath from too much work is socommonplace incommonplace in JapanJapan that therethat thereis a word for it --is a word for it -- karoshikaroshi..”..”The Washington Post, 13 July 2008The Washington Post, 13 July 2008
  71. 71. Casestudy : TESCOCasestudy : TESCO1.1. Read and prepare theRead and prepare theCasestudy on TESCOCasestudy on TESCO(Johnson, Whittington &(Johnson, Whittington &Scholes (2011)) forScholes (2011)) fordiscussion and presentationdiscussion and presentationnext week.next week.2.2. Identify and evaluate theIdentify and evaluate thechallenges facing TESCO’schallenges facing TESCO’sglobal expansion byglobal expansion byconducting Externalconducting ExternalEnvironment analysisEnvironment analysis(PESTEL);and Industry(PESTEL);and Industry(5+1 Forces) analysis.(5+1 Forces) analysis.
  72. 72. Core ReadingCore Reading• Keat, Paul G. and Young, Philip KY (2009)Managerial Economics, 6thedition, Pearson• Samuelson, William F. and Marks, Stephen G.(2010) Managerial Economics, 6thedition, JohnWiley• Pindyck, Robert S. and Rubinfeld, Daniel L.(2013)Microeconomics, 8thedition, Pearson• Samuelson, P.A. and Nordhaus, W. D.Samuelson, P.A. and Nordhaus, W. D.(2010)(2010)“Economics”“Economics” Irwin/McGraw-Hill, 19Irwin/McGraw-Hill, 19ththEditionEdition• Porter, Michael E. (2004)Porter, Michael E. (2004)“Competitive Strategy –“Competitive Strategy –Techniques for Analyzing Industries and Competitors”Techniques for Analyzing Industries and Competitors”Free PressFree Press
  73. 73. Questions?Questions?

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