01int_sg - Chapter Chapter 1: Introduction to Managerial...

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Chapter 1: Introduction to Managerial Economics © 2001 I.P.L. Png and C.W.J. Cheng 1 Chapter 1 Introduction to Managerial Economics CHAPTER SUMMARY Managerial economics is the science of directing scarce resources to manage cost effectively. It consists of three branches: competitive markets, market power, and imperfect markets. A market consists of buyers and sellers that communicate with each other for voluntary exchange. Whether a market is local or global, the same managerial economics apply. A seller with market power will have freedom to choose suppliers, set prices, and use advertising to influence demand. A market is imperfect when one party directly conveys a benefit or cost to others, or when one party has better information than others. An organization must decide its vertical and horizontal boundaries. For effective management, it is important to distinguish marginal from average values and stocks from flows. Managerial economics applies models that are necessarily less than completely realistic. Typically, a model focuses on one issue, holding other things equal. KEY CONCEPTS managerial economics average value horizontal boundaries microeconomics stock market m a c r o e c o n o m i c s
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Chapter 1: Introduction to Managerial Economics 2 4. Describe the importance of the "other things equal" assumption in managerial economic analysis. 5. Describe what constitutes a market, distinguish competitive from non-competitive markets, and discuss imperfect markets. 6. Emphasize the globalization of markets. NOTES 1. Definition . Managerial economics is the science of directing scarce resources to manage cost effectively. 2. Application . Managerial economics applies to: (a) Businesses (such as decisions in relation to customers including pricing and advertising; suppliers; competitors or the internal workings of the organization), nonprofit organizations, and households. (b) The “old economy” and “new economy” in essentially the same way except for two distinctive aspects of the “new economy”: the importance of network effects and scale and scope economies. i. network effects in demand – the benefit provided by a service depends on the total number of other users, e.g., when only one person had email, she had no one to communicate with, but with 100 mm users on line, the demand for Internet services mushroomed. ii. scale and scope economies – scaleability is the degree to which scale and scope of a business can be increased without a corresponding increase in costs, e.g., the information in Yahoo is eminently scaleable (the same information can serve 100 as well as 100 mm users) and to
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01int_sg - Chapter Chapter 1: Introduction to Managerial...

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