Introduction to

Business Economics
Reading
•Required: Jones, T. T. (2004). Business economics and
managerial decision making. John Wiley & Sons (Chap 1)
•Recommended: Griffiths, A., & Wall, S. (2005). Economics for
business and management. Pearson Education. (Chap 4)
•Further reading:
1. Spieler, A. C., & Murray, A. S. (2008). Management Controlled
Firms v. Owner Controlled Firms: A Historical Perspective of
Ownership Concentration in the US, East Asia and the EU. J. Int'l
Bus. & L., 7, 49.
 What is economics?
•The dismal science
 What is economics?
•The dismal science
•not a prophecy
•a social science
•scarcity
•choice
•the market
•the rational consumer
What is Microeconomics?
•Small economic units (consumers, savers, firms,
individual industries, markets, workers, etc.)
•as important or more important than
macroeconomics (need to understand the
behavior of small units to understand the
aggregate)
What is Managerial Economics?
•A subset of microeconomics that emphasizes
the application of microeconomic theory and
methodology to the decision-making process
that analysts, managers, directors, and
supervisors are involved with
•Focus on government and nonprofit sectors
Importance of Theory
•Simplify and abstract from reality
•Assumptions underlying a theory do not have to
precisely describe reality
•Example: difference between a satellite photo and a
road map
• Photo shows all of the details on a route while road map
abstracts from reality, leaving out non-essential
information. Latter gives a clearer idea of how to get
from point A to point B
Three Basic Questions Fundamental to
Economics Decisions

•What goods should be produced?

•How should they be produced?
•For whom should they be produced?
Marginal Analysis “the key to the kingdom of microeconomics”
•Focus on changes rather than totals or
aggregates?
•Incremental change
•What happens at the margin
•Marginal cost, marginal revenue, marginal
benefit, etc.
Market Analysis
•Buyers and Sellers
•Production, sale, or purchase of commodity or
service
•Central role of prices
•Prices as signals
The Role of Profits
•Economic Cost (or opportunity cost) is the
highest valued benefit that must be sacrificed as
a result of choosing an alternative.
•Economic profit is the difference between
revenues and total economic cost (including the
economic or opportunity cost of owner supplied
resources such as time and capital.
The Role of Profits
The Role of Profits
•Economic Profit
= Total revenue – Total economic cost
= Total revenue – Explicit costs – Implicit costs
Role of Government in the
Economy
Major Functions of Government
1. Allocation
2. Distribution
3. Stabilization
Some Things to Consider
1. Allocation of resources between government
and the private sector

ØThe Production Possibility Curve

Government
Goods and Production Possibility
Services Curve

B
GB

GA A

PB PA Private Goods and Services

Some Things to Consider continued

2. Government expenditures and revenues can be

either exhaustive or transfers
ØUse of productive resources
ØRedistribution of existing resources
 How Microeconomics, specifically
Managerial Economics, can improve
business decision-making skills: the
case of M.D.s

Source: Thomas and Maurice, Managerial

Economics, ninth edition
Price Discrimination
•Doctor specializing in vasectomies wanted to
use price discrimination to increase revenue
•Placed ads in local newspapers’ TV Guide with a
$40 off coupon. Why?
•Believes only lower income patients will clip the
coupon and pay the lower price
Strategic Entry Deterrence
•Doctor in New Orleans wanted to open new
clinics in Baton Rouge and Morgan City, where
no clinics like his were operating.
•Chose to price services just slightly above his
average total cost, but significantly below the
monopoly price he could command. Why?
Cost minimizing input combination
•Doctor who owned a chain of walk-in clinics chose to reduce the
number of MDs employed and replace them with RNs. Why?
•For many of the procedures performed, RNs could perform them just
as well as long as they are supervised by MDs
• Even though MDs have higher marginal products, the marginal products per
dollar spent on RNs is greater than that for MDs
Overview of a Company
Types of business organization
Types of business organization
Common characteristics

•Owners
•Managers
•Objectives
•Resources
•Organizational structures
•Performance assessment
Owner- or Managerial
Controlled?
Owner- or Managerial controlled?

•Control?
The power to select or change management
•Control is a function of the following factors:
• The size of the largest holding
• The size and distribution of the remaining shares
• The willingness of other shareholders to form a voting block
• The willingness of other shareholders to be active and to vote
against the controlling group
Owner- or Managerial controlled?

Is the firm management controlled or owner

controlled?
Owner- or Managerial controlled?

Owner control occurs where the equity holders

of a firm maintain sufficient control over the
board of directors to have a measurable
influence on policy either by direct control of
votes on the board of directors, or indirectly
through a sufficiently large share of the voting
stock.
Owner- or Managerial controlled?

Managerial control exists in a firm where the

shareholders fail to achieve sufficient board
representation or voting stock control allowing
managers to exercise more judgment than would
be possible under owner control regime.
Owner- or Managerial controlled?

Compare between owner- and managerial

control?
Owner- or Managerial controlled?

•Owner Control:
• More productive and thus more accountable to
the owner’s wishes
• Can align the interests of the owner and the
manager by default
• Helps retain the ability of the owner to control the
future direction of the company
• Avoid the problem of agency
Owner- or Managerial controlled?

•Managerial Control:
• Suitable for the complexity, scale, and scope of
a company’s operation expansion
• Protect minority shareholders
• Possess specific knowledge that effective
management
 Systems of
Corporate Control
Corporate Governance

Corporate governance concerns all the steps

taken by the owners of a company to ensure that
it produces for them the best possible benefit.
Corporate Governance
•Corporate Governance:
• Specifies the distribution of rights and responsibilities
• Provides the structure through which the company
objectives are set, and means of attaining those
objectives and monitoring performance
• Affected by the type of ownership structure and
owners it has
ØHelps maximize efficiency
Corporate Governance
Corporate Governance
•Insider systems:
• Concentrated ownership, dominated by corporate and/
or institutional shareholders
• Shares: trading often involve large blocks
• Close and stable relationship between management and
shareholders
• Shareholders often hold positions on the board of
directors or other senior managerial positions
• Priority to stakeholders
ØMore active owner participation
Corporate Governance
•Outsider systems:
• Dispersed share ownership, dominated by nonbank financial
institutions, private individuals
• Boards of companies: Owners and stakeholders
• Shares: easily traded, held for investment purposes
• No close relationship between shareholders and management
• Active market for corporate control
• Shareholder rights are focused
• Priority to market regulation
 Constraints on
Managerial Discretion
Managerial Constraints
The degree of discretion that senior executive
managers have in setting objectives is limited by
both external and internal constraints
•External constraints: Arises from the active
market in company shares
•Internal constraints: Arises from the role of non-
executive board members and stakeholders
Managerial Constraints
Managerial Constraints
Stakeholders of an Organization
 The Economics of
Effective Management
Managerial Constraints
•Basic principles of an effective manager:
• Identify goals and constraints
• Recognize the role of profits and incentives
• Understand the markets
• Recognize the time value of money
• Use marginal analysis