Chapter 1: Managers and Economics

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1 Economics for Managers by Paul Farnham Chapter 1: Managers and Economics 1.1

2 The best time for a managerial angle on life 1.2

3 What happened on the global markets in the last year? Governments designing rescue plans'' for their economies; and then, designing exit strategies.'' Major economies going g into recessions simultaneously; and also coming out recently. Central banks desperately throw liquidity on the markets; but until when? Stock market indices falling sharply around the world, and then going back up since March. Consumer confidence and demand going down since 2008, and back up since Spring 09 Consumers and firms were credit-constrained but find it increasingly easy to borrow now 1.3

4 Important issues in managerial economics Why are these things happening? And what can managers do about them? What is their impact on incomes, investment, savings of the local economy, and on sales of businesses? What can the central banks and the governments do in situations like this? What are firms doing in recessions? How are economies working? (And why are they failing?) What are the functions of money? And how can we make more of them? Is the crisis over? 1.4

5 Two Perspectives of Economics Microeconomics Analyzes the decisions that individual consumers, firms, and industries make as they operate in a market economy Macroeconomics Focuses on the overall level of economic activity, changes in price level, and amount of unemployment 1.5

6 Important Definitions Managerial economics When microeconomics is applied to business decision making Price Amount of money charged for different goods and services in a market economy 1.6

7 Important Definitions Output Products sold by a firm Input Resources such as land, labor, capital, raw materials, and entrepreneurship 1.7

8 Microeconomic Influences on Managers Relative prices The price of one good in relation to the price of another similar good Markets The institutions and mechanisms used for the buying and selling of goods and services 1.8

9 Major Types of Markets Many firms Perfect competition Monopolistic competition One firm Oligopoly Monopoly 1.9

10 Characteristics of Markets 1. Number of firms competing with one another 2. Whether products sold are differentiated or undifferentiated 3. Whether entry into the market is easy or difficult 4. Amount of information available to market participants i t 1.10

11 Perfect Competition Characteristics A large number of firms in the market Undifferentiated product Ease of entry into the market Complete information available to all market participants 1.11

12 Perfect Competition: Assumption 1 Behavior of an individual firm is distinguished from the outcomes for the entire market or industry Price-taker A firm cannot influence the price of its product and therefore can sell any amount of output at that price 1.12

13 Perfect Competition: Assumption 2 No product differentiation Consumers do not care about the identity of a specific supplier Purchase is based largely l on price of the product 1.13

14 Perfect Competition: Assumption 3 Entry into the market is costless If a perfectly competitive firm is making a profit, other firms will enter the industry to attempt to earn profits also 1.14

15 Perfect Competition: Assumption 4 Complete information is available to all market participants p Perfectly competitive firms have no market power to influence the prices of its products and develop competitive strategies 1.15

16 Monopoly Single firm produces a product for which there are no close substitutes Barriers to entry exist to keep competitors from entering the market 1.16

17 Monopolistic Competition Firms produce differentiated products Several firms are in an industry Each firm has only limited it ability to earn above-average profits 1.17

18 Oligopoly Competition among a small number of large firms that have market power but must consider competitors actions Mutual interdependence is a key characteristic Oligopoly firms have market power but may be limited in how they use that t power 1.18

19 Goal of Profit Maximization i Firms develop strategies to earn highest profit possible Profit acts as a signal in a market economy Increased competition leads to lower prices and revenues, eliminating excess profits 1.19

20 Managerial Rule of Thumb: Microeconomic Influences on Managers How consumer behavior affects revenues How production technology and input prices affect costs How the market environment influences their ability to set prices and respond to competitors 1.20

21 Macroeconomic Influences on Managers The circular flow model shows the level of economic activity in a country as a flow of expenditure from households to businesses The flow then returns to consumers in the form of factors of production 1.21

22 How Economists Use the Circular Flow Model Personal consumption expenditures (C) Gross private domestic investment spending (I) Government consumption expenditures and gross investment (G) Net export spending (F) or total export spending (X) minus total import spending (M) 1.22

23 The Circular Flow: firms and households Income ($ ) Lb Labor Households Firms Goods (bread ) Expenditure ($ ) 1.23

24 The Circular Flow in the economy 1.24

25 Gross Domestic Product (GDP) Measure of overall economic activity used to judge how an economy is performing Measures the market value of currently produced final goods and services within a given time 1.25

26 Factors Affecting Macro Spending Behavior Changes in consumption and investment behavior of private individuals New directions of a country s monetary or fiscal policies Developments occurring internationally that affect domestic economy 1.26

27 Policies Monetary policies Policies adopted by a country s central bank that influence interest rates and the amount of funds available for loans Fiscal policies Changes in taxes and spending by national governments that can stimulate or restrain the economy 1.27

28 Managerial Rule of Thumb: Macroeconomic Influences on Managers Changes in the macro environment affect individual firms and industries through the microeconomic factors of demand, production, cost, and profitability 1.28

29 Summary of Key Terms Microeconomics Macroeconomics Perfect competition Monopolistic competition Oligopoly Monopoly Circular flow model 1.29

30 Summary of Key Terms Consumption Investment Government spending Spending on exports and imports Monetary policy Fiscal policy 1.30

31 Do you have any questions? 1.31

32 Administration of the course Grade distribution: 1. Midterm: 25 points 2. Final: 25 points 3. Attendance and participation: i 10 points 4. Assignment 1 + Assignment 2: 40 points Hints: 1. Attend the lectures and exercises 2. Problems?: petar.stankov@cerge-ei.cz 3. Course web-site:

GACE Economics Assessment Test at a Glance

GACE Economics Assessment Test at a Glance Updated June 2017 See the GACE Economics Assessment Study Companion for practice questions and preparation resources. Assessment Name Economics Grade Level 6