University of Santo Tomas Economics and Managerial Decision Making The Economics of a Business Review of Economic Terms and Concepts Economics is the study of the behavior of human beings in producing, distributing and consuming material goods and services in a world of scarce resources. (McConnell, 1993) Management is the discipline of organizing and allocating a firms scarce resources to achieve its desired objectives. Managerial Economics is the use of economic analysis to make business decisions involving the best use (allocation) of an organizations scarce resources. Questions that managers must answer: What are the economic conditions in a particular market? Market structure Supply and demand conditions Technology Government regulations International dimensions Future dimensions Macroeconomic factors
Questions that managers must answer: Should the firm be in business? If so, what price and output levels achieve our goals? Questions that managers must answer: How can we maintain a competitive advantage over our competitors? Cost-leader Product differentiation Focus on market niche Outsourcing, alliances, mergers and acquisitions International dimension (regional or country focus or expansion) Questions that managers must answer: What are the risks involved? Risk is the chance or possibility that actual future outcomes will differ from those expected today (unfavorable results) Types of risks: Changes in the supply and demand conditions; Technological changes and the effect of competition; Changes in the interest rate and the inflation rate; Exchange rate changes for firms involved in international trade; Political risks for companies with foreign operations The economics of a business refers to the key factors that affect the ability of a firm to earn an acceptable rate of return on its owners investment; The most important of these factors are: Competition Technology Customers
There are four stage model of change: Stage 1 Good old days High profit margins Cost plus Stage 2 Cost management Cost-cutting, downsizing and restructuring, and reengineering Stage 3 Limits to growth in profits Top line growth or revenue growth Revenue management Stage 4 Revenue plus Microeconomics is the study of individual consumers and producers in specific markets. Supply and demand Pricing of outputs and inputs (also called the factors of production or resources) production processes Cost structure Distribution of income and output
Macroeconomics is the study of the aggregate economy. National income analysis Unemployment Inflation Fiscal policy Monetary policy Trade and investments
Scarcity is the condition in which resources are not available to satisfy all the needs and wants of a specified group of people. Opportunity cost is the amount or subjective value that must be sacrificed in choosing one activity over the next- best alternative.
Because of scarcity, an allocation decision must be made. The allocation decision of a society is comprised of three separate choices: What and how many goods and services should be produced? How should these goods and services be produced? (land, labor, capital and entrepreneurial efforts) For whom should these goods and services be produced? For the firm, these allocation choices can be restated as follows: What: the product decision How : The hiring, staffing, procurement, and capital budgeting decisions. For whom : The market segmentation decision. Entrepreneurship is the willingness to take certain risks in the pursuit of goals. Management is the ability to organize and administer various tasks in pursuit of certain objectives. Business Ethics Unethical conduct is inconsistent with the goal of value maximization and contrary to the enlightened self interest of management and its employees. To become successful in business, a set of ethical rules should be adopted:
To become successful in business, a set of ethical rules should be adopted: Above all else, keep your word. Say what you mean and mean what you say; Do the right thing. A handshake with an honorable person is worth more than a ton of legal documents from a corrupt individual;
To become successful in business, a set of ethical rules should be adopted: Accept responsibility for your mistakes, and fix them. Be quick to share credit for success; Leave something on the table. Profit with your customer and not off your customer. Stick by your principles. Principles are not for sale at any price.