Economics is the social science that examines how individuals, institutions, and society make optimal choices. In this module we establish the groundwork for the rest of the course. Specifically, we study the basics of organizational architecture, economic theory as a managerial simplification tool, the effects of microeconomics and industrial organization, as well as methods for measuring and maximizing economic profit. The module takes a close look at how these elements affect managerial decisions, business practices, and strategies. In this module the concepts of economic behavior and market structure are discussed.
The discussion provides an understanding of the concepts of economic choice, and illustrates the fundamentals of supply and demand, and their effects on market equilibrium. The effects of shifts and the movements of supply and demand are discussed, and the numerous variables that affect market equilibrium are listed. Quantitative and qualitative analyses are given (with real life examples) and methods for predicting market exchange are discussed as well. In this module, we also discuss the issues when managers are not owners of a firm, and they have objectives different from those of owners. Several corporate control mechanisms are discussed and addressed in this module. The four market structures are briefly discussed in this module.
Managerial Economics: Foundations of Business Analysis and Strategy: Chapters 1 and 2
1. When Burton Cummings graduated with honors from Canadian Trucking Academy his father gave him a $350,000 tractor-trailer rig. Recently, Burton was boasting to some fellow truckers that his revenues were typically $25,000 per month, while his operating costs (fuel, maintenance, and depreciation) amounted to only $18,000 per month. Tractor-trailer rigs identical to Burton’s rig rent for $15,000 per month. If Burton were driving trucks for one of the competing trucking firms, he would earn $5,000 per month.
a. How much are Burton’s explicit costs per month? How much are his implicit costs per month?
b. What is the dollar amount of opportunity cost of resources used by Burton Cummings each month?
c. Burton is proud of the fact that he is generating a net cash flow of $7000 ($25,000 – $18,000) per month since he would be earning only $5,000 per month, if he were working for a trucking firm. What advice would you give Burton Cummings?
2. Business Week recently declared, “We have entered the Age of the Internet” and observed that when markets for goods or services gain access to Internet, more consumers and more businesses participate in the market. Use supply and demand analysis to predict the effect of e-commerce on equilibrium output and equilibrium price of products gaining a presence on the Internet.
3. Determine the effect upon equilibrium price and quantity sold if the following changes occur in a particular market:
a. Consumers’ income increases and the good is normal.
b. The price of a substitute good (in consumption) increases.
c. The price of a substitute good (in production) increases
d. The price of a complement good (in consumption) increases
e. The price of inputs used to produce the good increases.
f. Consumers expect that the price of the good will increase in the near future.
g. It is widely publicized that consumption of the good is hazardous to health.
h. Cost reducing technological change takes place in the industry.
For each of the pair of events indicated below, perform qualitative analysis to predict the direction of change in either the equilibrium price or equilibrium quantity. Explain why the change is indeterminate.
a. Both a and h conditions occur simultaneously.
b. Both d and e conditions occur simultaneously.
c. Both d and h conditions occur simultaneously.
d. Both f and c conditions occur simultaneously.
4. This module discusses ways in which the interests of the owners of a firm and the managers who are not owners may differ. What are some of the common differences in such interests? What are the implications of these potentially differing interests on the overall competitive performance of the firm?
5. Construct a graph showing equilibrium in the market for movie tickets. Label both axes and denote the initial equilibrium price and quantity as P0 and Q0. For each of the following events, draw an appropriate new supply or demand curve for movies, and predict the impact of the event on the market price of a movie ticket and the number of tickets sold in the new equilibrium situation:
a. Movie theatres double the price of soft drinks and popcorn.
b. A national video rental chain cuts its rental rate by 25%.
c. Cable television begins offering pay-per-view movies.
d. The Screen Writers’ Guild ends a 10-month strike.
e. Kodak reduces the price it charges Hollywood producers for motion picture films.