Chapter 1 - Managers and Economics

Managers and EconomicsChapter 1

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

*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.



Microeconomics and MacroeconomicsMicroeconomics 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.*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


*MicroeconomicsCorporate 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.3World News: EU Hits Cartel Operator With $1.12 Billion Fine John W. Miller. Wall Street Journal. (Eastern edition). New York, N.Y.: Nov 13, 2008. pg. A.6Small Firms Shiver as Health Premiums Rise Vanessa Fuhrmans. Wall Street Journal. (Eastern edition). New York, N.Y.: Nov 17, 2008. pg. B.1



*MacroeconomicsWorld News: Japan Enters Recession; Demand Falls Hiroko Tabuchi. Wall Street Journal. (Eastern edition). New York, N.Y.: Nov 17, 2008. pg. A.9Labor Data Show Pain Across Economy Sudeep Reddy, Kris Maher, Ilan Brat. Wall Street Journal. (Eastern edition). New York, N.Y.: Nov 8, 2008. pg. A.1Stable Money Is the Key to Recovery Judy Shelton. Wall Street Journal. (Eastern edition). New York, N.Y.: Nov 14, 2008. pg. A.17Stimulate Car Buyers, Not Car Makers Robert Hahn, Peter Passell. Wall Street Journal. (Eastern edition). New York, N.Y.: Nov 15, 2008. pg. A.11Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


*Microeconomic Influences on ManagersHow 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. Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


*Market DemandDemand 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 SupplyMarket 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.Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


*Market EquilibriumIn 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).Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


*Perfect CompetitionLarge number of firmsEach firm produces an identical good or serviceEasy for new firms to enter the marketComplete information to all buyers and sellers in the marketCopyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


*Monopolistic CompetitionLarge number of firmsEach firm produces a good or service that, in some significant way, is differentRelatively easy for new firms to enter the marketImperfect informationCopyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


*OligopolyFew large, mutually interdependent, firmsFirms may produce similar or highly differentiated productsSignificant barriers to new entryImperfect informationCopyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


*Understanding MicroeconomicsHelps 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.Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


*Macroeconomic Influences on ManagersDomestic business cycle fluctuationsGlobal economic conditionsInflationInterest rate fluctuationsTechnological changeCopyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


Circular Flow of Economic ActivityPersonal consumption expenditures (C)Gross private domestic investment spending (I)Government consumption expenditures and gross investment (G)Net export spending (X-M)*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


*Personal Consumption ExpendituresSpending 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.% change from preceeding periodCopyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


*Gross Private Domestic InvestmentSpending 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.% change from preceeding periodCopyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


Government Spending and Gross InvestmentFederal, 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.*% change from preceeding periodCopyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


Net Export SpendingNet 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.% change from preceeding period*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


Real Gross Domestic ProductReal gross domestic product is the market value of all final goods and services produced in the economy.

GDP = C+I+G+(X-M)% change from preceeding period*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


Understanding MacroeconomicsMacroeconomic 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.*Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


Chapter 1 - Managers and Economics

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