Lecture 1a Introduction

ECW2731 Managerial
Economics
Lecture 1-1: Introduction
ECF2931 Managerial Economics
Contact details
1
2
Lecturer: Dr. Audrey Siah

Office: 6-5-22
Email: audrey.siah@monash.edu

Office hours:
Tuesday 10-1 pm, 2-4 pm
Assessment
To pass the unit you must: complete
all the required work,
obtain an overall grade of at least 50%
of the total marks, AND
obtain at least a 40% grade of the final
exam.
Task Due Date Value
Mid-term Test During Lecture in week 4 (60
min.)
30%
Tutorial Participation Weekly tutorial participation 10%
Final Exam Official Examination Period - TBA 60%
Assessment - Mid-term Test
Date: Week 4 (In class, during the lecture)
Value: 30%
Details:
Duration: 60 min.
The exam format will be short answers questions.
Material that has been covered in the chapters 1, 2, 3, 4, 7, 8 and 10.
The test will be closed book.
CALCULATORS WILL BE PERMITTED.
Assessment - Tutorial Participation
Value: 10%
Details:
First tutorials commence in week 2, Monday (16
th
Dec 2013).

Your attendance and compl eti on of the questi on gi ven will be
expected and evaluated in each tutorial.
Assessment - Final Examination
Date: Official Examination Period-TBA
Value: 60%
Details:
Duration: 2 hours
The final exam will cover ALL materials covered during the semester
(lectures and tutorials).
The final exam will be closed book.
To pass the subject you MUST obtain at least a 40% grade of the
final exam.
CALCULATORS WILL BE PERMITTED.
ECF2931 Managrial Economics
Reading

Mark Hirschey (2009), Managerial Economics, 12th edition
Any other text in Managerial Economics
Media (Australian Financial Review, The Age, The Australian, and
etc.)

Outline Lecture 1 - Part 1
Lecture objectives:
Introduction to Managerial Economics
How Is Managerial Economics Useful?
Theory of the Firm
Profit Measurement
Why Do Profits Vary among Firms?
Role of Business in Society
Unit objectives:
Recognize and evaluate the various theories of the organisation
How Is Managerial Economics Useful?
Evaluating Choice Alternatives
Identify ways to efficiently achieve goals.
Specify pricing and production strategies.
Spell out production and marketing rules to maximize profits.

Making the Best Decision
Managerial economics helps meet management objectives efficiently.
Managerial economics shows the logic of consumer, and government
decisions.
Managerial Economics
Managerial economics applies (micro-)economic principles to key
management decisions but also considering the macroeconomic context.
Microeconomics provides a set of tools to understand and analyze human
behaviour.
Managerial economics incorporates these tools into the managerial
decision making process.
Managerial Economics and Economic Concepts and
Methods
1. The rational actor paradigm - The behavioral concept
People are broadly self-interested and make rational decisions in
order to maximize their material welfare.

"It is not from the benevolence of the butcher, the brewer, or the baker
that we expect our dinner, but from their regard to their own interest."

"An Inquiry into the Nature and Causes of the Wealth of Nations", Adam
Smith (1776)
1. The rational actor paradigm - The behavioral concept
People make rational decisions (most of the time).
People think in alternatives compare expected costs and
expected benefits
People choose that alternative when benefits exceed costs
More general: People act consciously and do their best in
predicting the costs and benefits.
2. Incentives matter!
Rational people make decisions by comparing costs and benefits.
Incentives influence costs and benefits of choice alternatives.
People respond to incentives
Examples - Public Policy:
The effect of the Australian "baby bonus" on baby births.
The effect of bonus system for managers on corporate performance.
Applying economic principles
Example:
Levitt, S. and Syverson, C. (2008)
Homeowners hire real-estate agents to sell their house. Real
estate agents tend to be better informed about the value of
the house state of the local housing market

Real estate agents tend to sell houses too cheap and too quickly. Why?
Real estate agents compare costs and benefits of property
transactions:
Costs:
Showing the house to prospective buyers
Advertising and marketing
Hosting an auction
Benefits:
A (small) fraction of the purchase price of the home
Real estate agent has incentive to sell the house quickly and
encourage client to accept suboptimal low offers.
The rational homeowner takes this into account.
However, the agent has an informational advantage and will
always try to portray an offer as extremely high.
Testable prediction:
For two identical houses, one owned by a real estate agent and
the other owned by clients.
The real estate agents house will stay longer on the market
and sell for a higher price
Levitt, S. and Syverson, C. (2008) collected data from nearly
100,000 home sales in Cook County, IL.
Control for a wide range of house and neighborhood characteristics.
Results:
Agent-owned houses sell for about 3.7% more (U$ 7,600 at the
median sales price)
Agent-owned houses stay on t he market an extra 9.5 days.
A theory indicating how a firm behaves and what its goals are.

Expected Value Maximization
Owner-managers maximize short-run profits.
Primary goal is long-term expected value maximization.

Constraints and the Theory of the Firm
Resource constraints.
Social constraints.

Limitations of the Theory of the Firm
Alternative theory adds perspective
For example, theories that
incorporate managers self interest.
Theory of the firm
The firm as a series of contractual relations
Business Versus Economic Profit
Business (accounting) profit reflects explicit costs and revenues.

Economic profit.
- Business profit minus the implicit costs of equity and other
owner-provided inputs used by the firm.
- Profit at risk-adjusted normal rate of return on
capital.
- Considers cash and noncash items.

Variability of Business Profits
Business profits vary widely.
Profit measurement
Disequilibrium Profit Theories
Frictional Profit Theory
- Abnormal profits observed following unanticipated changes
in product demand or cost conditions.

Monopoly Profit Theory
- The above-normal profits are sometimes caused by barriers to
entry that limit competition.

Compensatory Profit Theories
- Above-normal rates of return can sometimes be seen as a reward
to firms that are extraordinarily successful in meeting customer
needs, maintaining efficient operations, and so forth.
- Profits accrue to firms that are better, faster, or cheaper than the
competition.
Why do profits vary among firms?
Why Firms Exist?
Businesses help satisfy consumer wants.
Businesses contributes to social welfare.

Social Responsibility of Business
Serve customers.
Provide employment opportunities.
Obey laws and regulations.
Role of business in society
Value maximization

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