BUSINESS

ECONOMICS

Sisdjiatmo K. Widhaningrat

BLEMBA
June 2012.
 Introduction
Economics and Managerial Decision Making
The Economics of a Business
Economic Terms :
that are important for business people.
Business/Managerial Economics
Relationship to microeconomics
macroeconomics and related fields
Important types of decisions regarding
allocation of scarce resources
Examples of how changes affect companys
ability to earn an acceptable return 2
 Economics and Managerial
Decision Making

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)

3
 Economics and Managerial
Decision Making
Management is the discipline of organizing
and allocating a firms scarce resources to
achieve its desired goals and/or objectives.
Involves the ability to organize and administer
various tasks in pursuit of certain objectives.
Managerial Economics :
the use of economic analysis to make
business decisions involving the best use
of an organizations scare resources.
4
 Business and Profit
Business :
Organization that provides goods or
services to earn profit.
Profit :
Difference between a businesss revenues
and its expenses.

Capital :
Funds needed to create and operate a
business enterprise.
5
 Economics and Managerial
Decision Making

Business (Managerial) Economics :

The use of economic analysis

(micro and macroeconomics) to
make business decisions, involving
the best use (allocation) of an
organizations scarce resources.
6
 Managerial (Business) Economics
and Other Business Diciplines
Marketing : Demand, Price Elasticity.
Finance : Capital budgeting, Break-even analysis,
Opportunity cost, Economic value added.
Managerial Accounting : Relevant cost, BEP,
Incremental cost analysis, Opportunity cost.
Management Science : Linear programming,
Regression analysis, Forecasting.
Strategy (Strategic Management) : Types of
competition, Structure-conduct-performance
analysis.
7
 Economics of a Business
The key factors that affect the ability of a
firm to earn an acceptable rate of return
on its owner investment (Keat & Young, Ch. 1
and 2).
Keat & Young, Ch. 2 (6th Edition, 2009) :
Do Companies maximize profits ?
Maximizing the Wealth of the Stockholders
Business Risk
Financial Risk
Wealth Maximization
Market Value Added and Economic VA. 8
Evolution of U.S. Business

Production Marketing
Era Era

Laissez-Faire &
Entrepreneurship Global Era
Era

Industrial Information &

Revolution Internet Era
9
Economics & Managerial Decision Making
Relationship to other business disciplines :
Marketing: Demand, Price Elasticity
Finance: Capital Budgeting, Break-Even
Analysis, Opportunity Cost, Economic Value
Added
Management Science: Linear Programming,
Regression Analysis, Forecasting
Strategy: Types of Competition, Structure-
Conduct-Performance Analysis
Managerial Accounting: Relevant Cost, Break-
Even Analysis, Incremental Cost Analysis,
Opportunity Cost
10
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 Conditions?
Macroeconomic Factors?
Should our firm be in this business?
If so, what price and output levels
achieve our goals? 11
Questions that managers must answer
How can we maintain a competitive
advantage over our competitors?
Cost-leader?
Product Differentiation?
Market Niche?
Outsourcing, alliances, mergers,
acquisitions?
International Dimensions?

12
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.
Types of risk
Changes in demand and supply conditions
Technological changes and the effect of
competition
Changes in interest rates and inflation rates
Exchange rates for companies engaged in
international trade
Political risk for companies with foreign
operations 13
 Review
Organizations are open systems
Organizations affect and are affected
by the external environment
The external environment has two
components :
Macro-Environment
Competitive Environment

14
 The Macroenvironment

The most general elements in the

external environment that potentially
can influence strategic decisions
Top executives must consider external
factors before taking any action

15
 Components of the
Macroenvironment

Laws and Politics

Economy
Technology
Demographics
Social Values

16
 The Competitive Environment
A smaller environment
that includes the
specific organizations
with which the
organization interacts
Includes:
Rivalry among
current competitors
Threat of new
entrants
Threat of substitutes
Power of suppliers
Power of customers
17
 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
18
 The Economics of a Business

Four Stage Model of Change

Stage I
The good old days
Market Dominance
High Profit Margins
Cost Plus Pricing
Changes in Technology, Competition,
Customers forced into Stage II
19
 The Economics of a Business

Four Stage Model of Change

Stage II
Cost management
Cost Cutting
Downsizing
Restructuring
Reengineering to deal with changes

20
 The Economics of a Business

Four Stage Model of Change

Stage III
Revenue Management
Cost cutting has limited benefit
Focus on top-line growth

21
 The Economics of a Business

Four Stage Model of Change

Stage IV
Revenue Plus
Grow revenues profitably

22
 Review of Economic Terms

Microeconomics is the study of individual

consumers and producers in specific
markets.
Supply and demand
Pricing of output
Production processes
Cost structure
Distribution of income and output

23
 Review of Economic Terms

Macroeconomics is the study of the

aggregate economy.
National Income Analysis (GDP)
Unemployment
Inflation
Fiscal and Monetary policy
Trade and Financial relationships
among nations
24
 Review of Economic Terms

Scarcity is the condition in which

resources are not available to satisfy all
the needs and wants of a specified group
of people.

25
 Review of Economic Terms

Resources are factors of production or

inputs.
Examples:
Land
Labor
Capital
Entrepreneurship

26
 Review of Economic Terms

Opportunity cost is the amount or

subjective value that must be sacrificed in
choosing one activity over the next best
alternative.

27
 Review of Economic Terms
Because of scarcity, an allocation decision
must be made.
The allocation decision is comprised of three
separate choices:
What and how many goods and services
should be produced?
How should these goods and services be
produced?
For whom should these goods and
services be produced?
28
 Review of Economic Terms

Economic Decisions for the Firm

What: The product decision begin or
stop providing goods and/or services.
How: The hiring, staffing, procurement,
and capital budgeting decisions.
For whom: The market segmentation
decision targeting the customers most
likely to purchase.

29
 Review of Economic Terms

Three processes to answer what, how,

and for whom
Market Process: use of supply,
demand, and material incentives
Command Process: use of
government or central authority, usually
indirect
Traditional Process: use of customs
and traditions
30
 Review of Economic Terms

Entrepreneurship :
the willingness to take certain risks
in the pursuit of goals.

31
 Strategic consideration for a firm

Finance : Profit, Wealth of the

Shareholders.
Human Resources
External factors that can influence
performance of the firm :
Micro economics variables
Macro economics variables
Other non-economic variables.
32
 Micro economics variables

Consumers behavior
Producers behavior
Market :
Perfect competition
Monopoly
Oligopoly
Monopolistic competition
Factors Market :
Labor market : wages.
33
 Macro economic variables

Gross National Product or Gross Domestic

Product.
Inflation
Interest Rate
Exchange Rate
Tax

34
 Non-economic factors

Laws and Regulations

Security
Political stability
Culture (and Religion)

35