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These Definitions Cover a Number of Different Approaches 1. Analysis based on the theory of the firm 2. Analysis based upon management sciences 3. Analysis based upon industrial economics
Related to, but not the same as management science and industrial economics.
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Definitions & assumptions Theoretical analysis If predictions not supported by data, model is amended or discarded If predictions borne out by data, the model is valid, for the moment
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Predictions
Managerial Economics
Economics in general takes a positive and predictive approach not prescriptive or normative
trying to explain what is not what should be the main objective is to understand how a market economy works
Not very concerned about the descriptive realism of assumptions: I assume X does not mean I believe X to be true Some real tension if the models are used for prescription
assume perfect knowledge: OK for model-building cannot say to a manager: behave AS IF you had perfect knowledge
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Economic Analysis
Comparative Statics
begin with an initial equilibrium position - the starting point change something identify the new equilibrium, e.g:in neo-classical model of the firm
When demand increases? When costs rise? When a fixed cost increases?
This is the main purpose of the model -what it was designed to do it will cost me $30 per unit to supply something which will give me $20 per unit in revenue- should I do it? I must pay $20 billion to set up in my industry. Should I charge higher prices to get that money back?
Normative prescriptions
Positive and Normative are linked by if? IF the aim of the firm is to maximise profit what will it do/what should it do?
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What is the purpose of economic analysis? Why do we want to apply economic analysis to business problems?
For the academic economist: to understand, to make predictions about firms behavior The positive approach to theory: What is? For the businessperson: to assist decision-making, to provide decision-rules which can be applied The normative approach to theory: What should be? These purposes are different, they can lead to misunderstanding, and economists are not always honest about the limitations of their approach for practical purposes.
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If the aim is to produce decision-rules which can be applied by practising managers, unrealistic assumptions will produce decision-rules which are not operational
for instance, set output and price by MC=MR
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How Can Managerial Economics Assist Decision-Making? 1. Adopt a general perspective, not a sample of one 2. Simple models provide stepping stone to more complexity and realism 3. Thinking logically has value itself and can expose sloppy thinking
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The basis for some of the more rigourous analysis of issues in Marketing and Strategic Management.
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Questions Asked in Industrial Organization: Why are some markets monopoly-like while others are competitive? How can industry performance and structure be measured or analyzed? How does the performance of individual firms affect the structure and performance of the industry in which they operate? If industry performance seems deficient but remediable, which government policies are likely to help more than they cost?
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Basic Conditions
Structure
Government Policy
Conduct
Performance
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