Managers and Economics

Chapter 1

Why should managers study economics?

To develop the economic insight necessary to identify your business competitive advantage. To identify how the ups and downs in economy-wide economic activity will impact your business. To improve your business profitability.

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Microeconomics and Macroeconomics

Microeconomics is the branch of economics that analyzes the decisions that individual consumers, firms and industries make as they produce, buy and sell goods and services.

Macroeconomics is the branch of economics that focuses on the overall level of economic activity, changes in the price level, and the amount of unemployment by analyzing group or aggregate behavior in different sectors of the economy.

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Microeconomics

Corporate News: Gasoline Sales Show Life; Valero Is Among Refiners Gaining From Falling Energy Prices
Ana Campoy. Wall Street Journal. (Eastern edition). New York, N.Y.: Oct 29, 2008. pg.

B.3

World News: EU Hits Cartel Operator With $1.12 Billion Fine

2008. pg. A.6

John W. Miller. Wall Street Journal. (Eastern edition). New York, N.Y.: Nov 13,

Small Firms Shiver as Health Premiums Rise

Vanessa Fuhrmans. Wall Street Journal. (Eastern edition). New York, N.Y.: Nov 17, 2008. pg. B.1

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Macroeconomics

World News: Japan Enters Recession; Demand Falls

A.9 Kris Maher, Ilan Brat. Wall Street Journal. (Eastern edition). New York, N.Y.: Nov 8, 2008. pg. A.1

Hiroko Tabuchi. Wall Street Journal. (Eastern edition). New York, N.Y.: Nov 17, 2008. pg.

Labor Data Show Pain Across Economy

Stable Money Is the Key to Recovery
Journal. (Eastern edition). New York, N.Y.: Nov 14, 2008. pg. A.17

Sudeep Reddy,

Judy Shelton. Wall Street

Stimulate Car Buyers, Not Car Makers Robert Hahn, Peter

Passell. Wall Street Journal. (Eastern edition). New York, N.Y.: Nov 15, 2008. pg. A.11

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Microeconomic Influences on Managers

How consumer behavior affects their revenue. How production technology and input prices affect their costs. How the market and regulatory environment in which managers operate influences their ability to set prices and to respond to the strategies of their competitors.

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Market Demand

Demand is the number of units of a good or service that buyers are willing and able to buy at various prices, when other factors, like, buyers incomes, tastes and preferences and the prices of goods related in consumption are held constant.

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

Market Supply

Market supply is the number of units of a good or service that businesses are willing and able to produce at various prices, when other factors, like, resource prices, production technology and prices of goods related in production are held constant.

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Market Equilibrium

In efficient markets with flexible prices, the market price fluctuates to eliminate shortages (an excess of quantity demanded over quantity supplied) and surpluses (an excess of quantity supplied over quantity demanded).

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Market Structure

Large Number of Firms Perfect Competition Monopolistic Competition Oligopoly

Single Firm Monopoly

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Perfect Competition

Large number of firms Each firm produces an identical good or service Easy for new firms to enter the market Complete information to all buyers and sellers in the market

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Monopolistic Competition

Many number of firms Each firm produces a good or service that, in some significant way, is different Relatively easy for new firms to enter the market Imperfect information

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Oligopoly

Few large, mutually interdependent, firms Firms may produce similar or highly differentiated products Significant barriers to new entry Imperfect information

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Monopoly

One firm producing a good or service with no good substitutes New entry is blockaded Imperfect information

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Understanding Microeconomics

Helps managers develop competitive advantage and increase profitability by:

Understanding how consumer behavior affects their revenues. Understanding how production technologies and input prices affect their costs. Understanding how the market and regulatory environment influences their ability to set prices and implement competitive strategies.
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Macroeconomic Influences on Managers

Domestic business cycle fluctuations Global economic conditions Inflation Interest rate fluctuations Technological change

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Circular Flow of Economic Activity

Personal consumption expenditures (C) Gross private domestic investment spending (I) Government consumption expenditures and gross investment (G) Net export spending (X-M)

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The Circular Flow of Economic Activity

Foreign Sector M C X

Domestic Market for currently Produced goods and services

Revenue
I TP Firm Sector

G Household Sector TB Government Sector

S
Income, Wages, Rent, Interest, Profit
Borrowing

Borrowing
Borrowing

Financial Markets Expenses Resource Markets

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Personal Consumption Expenditures

Real Personal Consumption Expenditures
% change from preceeding period 5
4 3 2 1 0

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20 0 I2 4 0 III 05 20 05 I2 0 III 06 20 0 I2 6 0 III 07 20 0 I2 7 0 III 08 20 08

-1 -2 -3 -4

Spending by households on durable goods, nondurable goods, and services [C]. Largely determined by consumer income but also influenced by such factors as consumer wealth and confidence.

III

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Gross Private Domestic Investment

Real Gross Private Domestic Investment
% change from preceeding period 15
10 5 0

20

20

III

-10 -15 -20

I2

-5

Spending by households and firms on nonresidential structures, equipment, software, residential structures and inventories (I). Largely determined by market interest rates but also influenced by business confidence.

04

00 III 5 20 05 I2 00 III 6 20 06 I2 00 7 III 20 07 I2 00 III 8 20 08

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Government Spending and Gross Investment

Real Government Spending and Gross Investment % change from preceeding period 7 6 5 4 3 2 1 0 -1

20

20

20

20

-3

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-2

Federal, state and local government consumption spending and gross investment (G). Largely determined within the political process but may be used to try to manage macroeconomic activity.

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Net Export Spending

Real Net Export Spending
% change from preceeding period
10 5 0

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Net exports are the difference between the value of US exports and US imports (X-M). Net exports are primarily determined by currency exchange rates, relative prosperity and relative interest rates.

Real Gross Domestic Product

Real Gross Domestic Product
% change from preceeding period 6
5 4 3 2 1 0

Real gross domestic product is the market value of all final goods and services produced in the economy. GDP = C+I+G+(X-M)

-II I -II I -II I 05 06 07 08 -II I 08 -I -I -I -I 20

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Understanding Macroeconomics

Macroeconomic factors like, inflation, exchange rates, interest rates, and economic growth rates around the world are largely beyond a managers control. Knowledge of these factors and how they affect your business is a key factor in the development of a businesses competitive strategies.
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