ECNE610 - MANAGERIAL ECONOMICS

Lecture 1. Introduction and Overview of

Managerial Economics

Week1 Dr. Mazharul Islam 1

 LESSON PLAN
• Introduction (Me and You)-15 minutes (5.30pm-5.45pm)
• Overview of the Course – 20 minutes (5.45pm-6.05pm)
– Objectives
– Learning methods
– Assessment
– Course materials
– Recommendations
• Break (Salatul Magrib & Refreshment) - 20 minutes
• Attendance re-checking - 5 minutes
• Basic Terms and Concepts of Economics– 105 Minutes
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 INTRODUCTION
• Me:
– Personal
– Education
– Professional

• Now you:
– Background (personal , professional)
– Career goals
– What do you want from this course?

Dr. Mazharul Islam 3

 My Background- Education
 Graduate certificate in Learning and Teaching
(Higher Education)
 Swinburne University of Technology, Melbourne,
Australia
 Ph.D in Economics- 2003
National University of Malaysia
 Master in Economics- 1999 (by research)
National University of Malaysia
 M. S.S in Economics- 1996
Chittagong University, Bangladesh
 B.S.S in Economics (Hons.)
Chittagong University, Bangladesh.
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 My Background- Work
 Lecturer, Faculty of Business and Enterprise,
Swinburne University of Technology, Australia (June
2010 to January 2014).

 Research Officer, College of Business, RMIT

University, Melbourne, Australia (January 2008 to
June 2010).

 Lecturer, Faculty of Business Administration,

Universiti Tun Abdul Razak, Kuala Lumpur, Malaysia
(January 2004 to December 2007).

 Research Assistant, National University of Malaysia

and International Islamic University of Malaysia.
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 Course Overview-Objectives
 Learn about economic principles and theories, and how
these principles and theories are applied in managing
organizational resources.
 Understand the changing economic environment in the
new and global economy.
 Comprehend the changing role of government in
managing economic growth and stability in the new and
global economy.
 Appreciate the structure of markets corresponding to
the emerging role of information and knowledge in the
new economy.
 How to apply managerial economics in action.
 Develop analytical and problem solving skills.
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 Course Overview-
Learning Methods
• Lectures (interactive)
– Group work
– Group discussion Case(s)
– Relevant video(s)
• Text Book
– Paul G. Keat and Philip K.Y.Young, Managerial
Economics- Economic tools for today decision
makers, 6th edition, available at Book Store

•Other References
http://www.kau.edu.sa/DRS-0061123.aspx
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 Course Overview-Assessment
Individual and Group assessments
Class participation, Individual 25% Ongoing
group discussion,
and presentation.
Mid-term exam Individual 20% 3rd April
2014
Final exam Individual 40% 15th May
2014
Project paper Group 15% 20th May
2014
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 Lesson Objectives
 To learn about
 The key tools and terms of economics that is
essential to know to understand economics clearly.
 Explain the two big questions of economics.
 Explain the key ideas that define the economic way
of thinking.
 Economics and managerial decision making.
 Economics of a business.
 Explain how economists go about their work as
social scientists and policy advisers.
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 Key Tools & Terms of Economics

ECONOMICS
 It is the social science concern. It is a study of
how people use their scarce resources to
satisfy their unlimited wants.
OR
 The study of the behavior of human beings in
producing, distributing and consuming
material goods and services in a world of
scarce resources.

 It is categorized mainly into two parts such as

Macroeconomics and Microeconomics
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 Key Tools & Terms of Economics
MICROECONOMICS
• Microeconomics is the study that deals
with an individual industry, firm or
household. For example, talk about the
price of Al Baik. It means it talk about
individual decision maker in specific
markets, especially:
osupply and demand
opricing of output
oproduction process
ocost structure
odistribution of income.
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 Key Tools & Terms of Economics
MACROECONOMICS:
It is a study that examine the economy as a whole. It
means that it is concerned with the overall
performance of the economy. Such as it does not
discuss about the price of Al Baik but about the
average price of all goods and services produced in
the economy. Especially talk about:
onational output (GDP)
ounemployment
oinflation
ofiscal and monetary policies
otrade and finance among nations
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 Key Tools & Terms of
Economics
MANAGERIAL ECONOMICS
The use of economic analysis to make business
decisions involving the best use (allocation) of an
organization’s scarce resources.
ECONOMIC PROBLEM
 Basic economic problem is wants are virtually
unlimited while the resources available to satisfy
these wants are scarce.
SCARCITY
 Lack of enough resources to satisfy all the needs and
wants of a specified group of people. Since resources
are scarce, it follows that the goods and services we
produce must also be limited.
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 Key Tools & Terms of
Economics
CHOICE
 Due to scarcity, we can’t have all that
we want. We must decide what we will
have, and what we must forgo. That is
why we make choices.
 Opportunity cost is the amount (or
subjective value) that must be
sacrificed in choosing one activity
over the next best alternative.
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 Key Tools & Terms of
Economics
TWO BIG ECONOMIC QUESTIONS
Q1. How do choices end up determining
allocation decisions in scarcity? i.e how
to make three choices below?:
What should be produced?
How should it be produced?
For whom should be produced?

Q2. When do choices made in the pursuit

of self-interest ?
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 Key Tools & Terms of
Economics
What?
The things that satisfy human wants that
means Goods and services needs to
produce.
– In 2011, Agriculture accounts for 2% of
total Saudi Arabian production,
Industry goods for 69.1%, and
Services for 28.9% (Source: Central
Intelligence Agency (CIA) World
Factbook 2012).

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 Key Tools & Terms of
Economics
How?
Goods and services are produced by using
productive resources that economists call
factors of production.
Factors of production are grouped into four
categories:
 Land
 Labor
 Capital
 Entrepreneurial Ability

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 Key Tools & Terms of
Economics
LAND
It does not refer only a plots of ground but also
includes all other natural resources such as crude oil,
water, air, and minerals etc.
LABOR
It is not simply the number of human bodies but it
refers to the work time and work effort that people
devote to producing goods and services. It
categorized into two parts– physical and mental (9.56
millions out of 26.53 millions in 2010 where about
80% of the labor force is non-national - Source: CIA
World Factbook 2012).
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 Key Tools & Terms of
Economics
CAPITAL
In economics the term capital refers to final
goods produced for use in further
production. It also categorized into two
parts. These are:
– Physical capital: factories, machines, tools,
buildings, airports, highways and other
manufactured items employed to produce
goods and services.
– Human capital: consists of the knowledge
and skill people acquire to enhance their
labor productivity.

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 Key Tools & Terms of
Economics
ENTREPRENEURIAL ABILITY
– Special kind of human skill
– Talent required to dream up a new
product or find a better way to produce
an existing one.

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 Key Tools & Terms of
Economics
PAYMENTS FOR RESOURCES
Wages  payment for use of labor

Interest  payment for the use of capital

Rent  payment for use of land

Profit  reward for entrepreneur’s effort

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 Key Tools & Terms of
Economics
FOR WHOM?
Who gets the goods and services depends
on the incomes that people earn i.e. the
customers most likely to purchase.

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 Key Tools & Terms of
Economics
When is the Pursuit of Self-Interest?
Economics assumes that human behavior
reflects “rational self-interest”. It means that
people always try to make the best choices
they can, given the available information.
Moreover, Individuals try to maximize the
expected benefit achieved with a given cost
or minimize the expected cost of achieving
a given benefit. Peoples allocate their time,
energy, and money to maximize it.
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 Key Tools & Terms of
Economics
GOODS AND SERVICES
Goods
- Tangible items
- Require scarce resources
- Satisfy human wants
Services
- Intangible items
- Require scarce resources
- Satisfy human wants

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 Economics and Managerial
Decision Making
Questions that managers must answer:
What are the economic conditions in a particular
market in which we are or could be competing?
o market structure?
o supply and demand?
o technology?
o government regulations?
o international dimensions?
o future conditions?
o macroeconomic factors?
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 Economics and Managerial
Decision Making
Questions that managers must
answer:
Should our firm be in this business?
• if so, what price and output
levels should we set in order to
maximize our economic profit or
minimize our losses in the short
run?
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 Economics and Managerial
Decision Making
Questions that managers must
answer:
How can we maintain a competitive
advantage over other firms?
• cost-leader?
• product differentiation?
• market niche?
• outsourcing, alliances, mergers?
• international perspective?
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 Economics and Managerial
Decision Making
Questions that managers must answer:
What are the risks involved?
o Change in demand/supply conditions.
o Technological changes and the effect of
competition.
o Change in interest rates and inflation rates.
o Exchange rates changes for companies in
international trade.
o Political risk for firms with foreign operations.
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 Economics of a Business
The economics of a business refers to the key
factors that affect the firm’s ability to earn an
acceptable rate of return on its owners’
investment.
The most important of these factors are
–competition
–technology
–customers
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 Economics of a Business
• The four-stage model
–Stage I (the ‘good old days’)
• market dominance
• high profit margin
• cost plus pricing

… changes in technology, competition,

and customers force firm into Stage II ..
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 Economics of a Business
• The four-stage model
–Stage II (crisis)
• cost management
• downsizing
• restructuring
• Reengineering

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 Economics of a Business
• The four-stage model
–Stage III (reform)
• revenue management
• cost cutting has limited benefit

… focus on ‘top-line’ growth ..

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 Economics of a Business
• The four-stage model
–Stage IV (recovery)
• revenue plus

… revenue grows profitably

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 Ten Principles of Economics.

• PRINCIPLE #1 : People Face Trade Offs

• PRINCIPLE #2: The Cost of Something Is What You Give Up to Get It
• PRINCIPLE #3: Rational People Think at the Margin
• PRINCIPLE #4: People Respond to Incentives
• PRINCIPLE #5: Trade Can Make Everyone Better Off
• PRINCIPLE #6: Markets Are Usually a Good Way to Organize Economic Activity
• PRINCIPLE #7: Government Can Sometimes Improve Market Outcomes
• PRINCIPLE #8: A Country's Standard of Living Depends on its Ability to Produce Goods and
Services
• PRINCIPLE #9: Prices Rise When the Government Prints Too Much Money
• PRINCIPLE #10 and Ending: Society Face a Short-Run Tradeoff Between Inflation and

Unemployment .

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Now it’s over for
today. Do you have
any question?

2w/9/2013 Dr. Mazharul Islam 35