Fundamentals of Managerial Economics

Jul 19, 2024

Fundamentals of Managerial Economics

Learning Objectives

  • Understand the six principles for effective managerial decision-making.
  • Explore key elements such as goals, constraints, and incentives.
  • Differentiate between accounting and economic profits.
  • Discuss the role of profits in the market economy.
  • Review Porter’s Five Forces Framework from a managerial economics perspective.
  • Refresher on present value analysis and the time value of money.
  • Understand marginal analysis for finding optimal levels to achieve maximum profit.

What is Managerial Economics?

  • Study of directing scarce resources to efficiently achieve managerial goals, typically profit.
  • Involves setting goals and making choices to achieve them amidst constraints.

Applications of Managerial Economics

  • Decisions on outsourcing vs. in-house production.
  • Product range decisions (e.g., one model vs. various models).
  • Determining production quantities and pricing strategy.

Six Principles of Managerial Economics

  1. Identify Goals and Constraints
  2. Recognize the Nature and Importance of Profits
  3. Understand Incentives
  4. Understand the Markets
  5. Recognize Time Value of Money
  6. Use Marginal Analysis

Decisions and Constraints

  • Importance of well-defined goals (e.g., profit maximization).
  • Types of constraints: technological, input production (labor, assets).

Role of Profits

  • Signals resource allocation to where they are most valuable to society.
  • Accounting Profit: Revenues - Costs.
  • Economic Profit: Accounting profit minus opportunity costs.

Understanding Incentives

  • Individuals and groups often maximize economic self-interest.
  • Aligning incentives between individual and organizational goals to enhance productivity and profitability.

Market Definition

  • Comprised of buyers and sellers facilitating exchanges.
  • Influence of government regulations and market dynamics (e.g., Porter’s Five Forces).

Porter’s Five Forces with Managerial Economics Lens

  1. Entry Barriers: Cost of entry, economies of scale, switching costs.
  2. Power of Input Suppliers: Examined under monopolies and perfect competition.
  3. Power of Buyers: Price-value considerations and market clearing prices.
  4. Industry Rivalry: State of industry (monopolistic vs. pure competition).
  5. Substitutes and Complements: Consumer alternatives and factors enhancing product attractiveness.
  • Analysis goes deeper to produce more precise and meaningful insights.