slides_class1 - Managerial Economics Class 1 1 Managerial...

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Managerial Economics – Class 1 1. Managerial Economics 1. What is it? 2. Why study it? 3. Course Overview 2. Models and Economic Theory 3. The Classic Market Model in Economics 1. Demand 2. Supply 3. Equilibrium 4. Consumer and Producer Surplus 5. Why Markets? Adam Smith’s Invisible Hand
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What is Managerial Economics? Managerial Economics = “Economics useful for managers” Fine, but what is economics, then? Microeconomics: 1. Studies behavior of individuals and organizations in market and nonmarket settings ( institutions ) 2. Behavior is directed at some clear goal ( rationality ) 3. Conflicting objectives are brought into balance ( equilibrium) by market and nonmarket institutions 4. Descriptive ( positive ) and evaluative ( normative ) analysis 5. Recommends government/institutional actions ( policy prescription ) Micro vs. Macro – the distinction can be blurry. Roughly: Micro (this class): focus on single market, firms and consumers Macro: focus on aggregate behavior (GDP, inflation, interest rates)
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Course Overview Competitive Markets Supply & Demand Equilibrium Quantitative Demand Analysis Elasticity Learning from Data Market Structure Perf. Comp. Monopoly Oligopoly The Firm (Production &) Costs Pricing / Production Decisions Profit Maximization Game Theory Strategic Management Advanced Pricing Strategies Price Discrimination Economics of Information Informational Asymmetry
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Models and Economic Theory Modern economic theory relies heavily on mathematical models Economic models may be analyzed algebraically, graphically or both All economic models involve substantial abstractions from reality – even those by Nobel prize winners! The role of models in economic theory is similar to the role of maps in navigation. The most useful maps: Clearly indicate the location of critical buildings, streets, etc. Avoid including extraneous information that is likely to be distracting
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Classic Market Model Price supply demand Quantity Supply and demand in a competitive market: The Most Famous Picture in Economics
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Classic Market Model But, what is a “market”? In economics, a market is an institution in which goods or services may be (voluntarily) exchanged The term need not imply that buyers and sellers meet at a specific physical location Sometimes it is important to attach a geographical and/or temporal scope: Market for wool sweaters in July Market for wool sweaters in Argentina Market for wool sweaters in Argentina in July
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Classic Market Model It is helpful to talk about a specific example. For concreteness, let’s talk about the market for beer . For now, we want to focus on a “commodity” good. So, let’s avoid thinking in terms of branded products. The “good” that you should therefore picture is:
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Classic Market Model Here is the basic picture adapted to our beer market: $7 112 Price ($ per 6-pack) supply demand 1,000s 6-packs/month Market for Beer
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Demand Demand refers to the amount of a good or service that consumers wish to purchase in a market.
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