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 ra3onal 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
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
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.
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
 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
Owner- or Managerial
Controlled?
Owner- or Managerial controlled?

•Control?
The power to select or change management
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
ØHelps maximize efficiency