I NTRODUCTI ON TO BUSI NESS

ADMI NI STRATI ON: ECONOMI CS

(MANAGERI AL ECONOMI CS, Part I )
Lecturer: Ekaterina Vladimirovna Sokolova
(Public Administration Department)

E-mail: sokolova@som.pu.ru


Course Structure
(Economics or Managerial Economics, Part I )
Topic 1. Basics of economic analysis

Topic 2. Demand and supply
Topic 2.1. I ndividual consumer demand
Topic 2.2. Market demand and supply

Topic 3. Production analysis and cost analysis
Topic 3.1. Production policy
Topic 3.2. Theory of cost

Topic 4. Market structure analysis
Topic 4.1. Perfect competition and monopoly
Topic 4.2. Monopolistic competition and oligopoly
Grading Policy
MIB (Economics)
70% - mid-term (or final) exam
30% - individual in-class assignments

MITIM (Managerial Economics) 2 grades
1
st
:
70% - mid-term (final for MIB) exam
30% - individual in-class assignments
2
nd
:
70% - final exam (Winter session, Managerial Economics,
Part II)
30% - individual in-class assignments (Managerial
Economics, Part II)
Final grade = 1
st
*1/3 + 2
nd
* 2/3
Economics (Managerial Economics, Part I ),
Final Evaluation (Mid-term or final exam)
35 points

for written mid-term exam (for MITIM
students)
or
final exam (for MIB students)
Economics (Managerial Economics, Part I ),
Current Evaluation

15 points for 3 in-class assignments (5
points each)
after the end of the corresponding group of topics

each assignment includes 5 multiple choice questions
The student can receive 5 points for each group of
topics and these points will be considered in final mark

respectively the individual assignment can give 15
points
Economics (Managerial Economics, Part I ),
I ndividual I n-class Assignments
Three individual assignments (after the end of the
corresponding group of topics)

Each assignment includes 3 tasks

The student can receive 3 points for each group of
topics and these points will be considered in final mark

Respectively the individual assignments give 12
points for final mark
I n-class Group Work
In-class group work will take place at seminars

Discussion of cases and answering given
questions

Doesnt give any points for final mark
Literature
Microeconomics: Optimization, Experiments,
and Behaviour. Burkett, John
P. 2006. Oxford Univ. Press., Source:
http://site.ebrary.com/

Microeconomics Demystified. Depken,
Craig. 2005. The McGraw-Hill Companies.,
Source: http://site.ebrary.com/

Baye M. Managerial Economics and Business
Strategy [Text] / M. Baye. McGraw-Hill,
2006. 620 p.

Topic 1.
Basics of economic analysis
Economics the science of making
decisions in the presence of scarce
resources
Managerial Economics vs. Microeconomics:
Common and Different
Microeconomics Managerial Economics
How should the prices
be set?
In which way
were the prices
set?
Computer Manufacturer (e.g.: IBM)
Similar concepts
Opportunity Cost
Def #1: the cost of the explicit and implicit resources
that are forgone when a decision is made

Def #2: the value of the other products that the
resources used in its production could have produced
instead

The opportunity cost of using a resource includes
both the explicit (or accounting) cost of the resource
and the implicit cost of giving up the next-best
alternative use of the resource
Economic vs. Accounting Profits
Def : Accounting profit the total amount of money
taken in from sales (total revenue, or prices times
quantity sold) minus the money cost of producing
goods or services

Def : Economic profit the difference between total
revenue (TR) and total opportunity cost (TC)
Reasons for the Existence of Profit

Innovation

Risk

Monopoly power
The Five Forces Framework and
I ndustry Profitability
Entry

Power of input suppliers

Industry (market) rivalry

Substitutes and complements.

Power of buyers
I ncentives
Def: Incentives affect how resources are
used and how hard employees work

E.g.: A manager should be doing a good job
mistake
But!: the effect of a per hour salary for workers to
increase output
Markets
Consumer-producer rivalry

Consumer-consumer rivalry

Producer-producer rivalry

Government and the market
Managerial I nterests and Sales
Maximization
Separation of ownership from control in large
corporations

Sales represent a measure of managements
success, especially since many observers focus
attention on a firms share of the market as an
indicator of its performance

Economic Optimization Process
Economic Optimization Process
Choices involve benefits and costs

Optimal decision choice alternative that produces a
result most consistent with managerial objectives

Profit Maximization

Maximizing profit means maximizing the value of the
firm, which is the present value of current and future
profits

The Role of Constraints
Value of firm
Input, legal, and
other constraints
Limited by

n
t
t
t t
i
TC TR
1
1
equals
The value of i
depends on:
Values of TR
t

depend on:
Values of TC
t

depend on:
1. Riskiness of firm
2. Conditions in
capital market
1. Demand and forecasting
2. Pricing
3. New product developing
1. Production techniques
2. Cost functions
3. Process development
Expressing Economic Relations
spreadsheet table of electronically stored data
graph visual representation of data
equation analytical expression of functional
relationship

dependent variable Y variable determined by X
values
independent variable X variable determined
separately from the Y variable
Total, Average, and Marginal Relations
(1)
Marginal change in the dependent variable caused
by a 1-unit change in an independent variable

Marginal revenue

Marginal cost

Marginal profit
Total, Average, and Marginal Relations
(2)
Units of output,
Q
Total profits, Marginal profits,

Average
profits,
0 0 0 -
1 19 19 19
2 52 33 26
3 93 41 31
4 136 43 34
5 175 39 35
6 210 35 35
7 217 7 31
8 208 -9 26

Graphing Total, Marginal, and Average

Relations
Marginal profit is the slope of the total profit curve

Total profit is maximized when the marginal profit
equals zero

Average profit rises (falls) when marginal profit is
greater (less) than average profit
Marginal Analysis in Decision Making
Finding maximums or minimums

Distinguishing maximums from minimums

Maximizing the difference between two functions
Multivariate Optimization
The marginal effect of each independent variable on
the dependent variable
holding constant the effect of all other independent variables

Partial derivatives
The unchanged variables are treated as constants in the
differentiation process
I ncremental Concept in Economic
Analysis
Marginal relations measure only the effect associated
with unitary changes in variables

The incremental concept is often used as the
practical equivalent of marginal analysis

Def: Incremental change is the total change resulting
from a decision
E.g.: Incremental profit is the profit gain or loss associated
with a given decision