Managers

and
Economics
Francis A. La Torre
MBA - 103
Two Perspectives:

Microeconomics
and
Macroeconomics
 The branch of economics that analyzes the decisions that individual consumers,
Microecomics - firms, and industries make as they produce, buy, and sell goods and services.

Microeconomics applied to business decision making.

Managerial Economics-

Pricing- Key element in any Market system.

The amount of money that is charged for goods and
services in any market economy. Prices act as signals
Prices- that influence the behavior of both consumers and
producers of these goods and services

Managers must understand how prices are determined.

Output- The final goods and services produced and sold by

firms in a market economy.

The factors of production, such as land, labor, capital,

Input- raw materials, and entrepreneurship, that are used to
produce the outputs or the final goods and services and
sold in a market economy
 The branch of economics that focuses on the overall level of economic activity,
Macroeconomics - changes in the price level, and the amount of unemployment by analyzing
groups or aggregate behavior in different sectors of the economy.

Managers must be familiar with the underlying macroeconomic models the

economic forecasters use to predict the changes in the macro economy and with
how different firms and industries respond to these changes.

Perspective Summary

In essence, macroeconomic analysis can the thought viewing the economy from a
airplane 30,000 feet in the air, where as with microeconomics the observer is on the
ground walking among the firms and consumers. While on the ground, the observer can
see the interaction between individual firms and consumers and the competitive
strategies the various firms develop. At 30,000 feet however, the observer doesn’t see
the same level of detail. In macroeconomics we analyze the behavior of individuals
aggregated into different sectors in the economy to determine the impact of the changes
in this behavior to the overall economic activity.
Microeconomic
influences on
Managers
 Influenced by Demand, Supply, Production, and
Microeconomic decision Market structure

Influenced by Consumer behavior and

willingness of consumers to purchases a firms
product vs competitor

The price of one good in

relation to the price of
Relative prices- another, similar goo,
which is the way prices
are defined in
Influenced by the underlying microeconomics.
technology of each production
process

Influenced by cost of production

 The institutions or mechanisms use for buying and selling goods and
services.

Vary in structure that influence strategic decision

Market
Affects both the ability of a given firm to influence the price of its
product and the amount of independent control the firm has over its
actions

4 Major types of Market Structure

1. Perfect 2. Monopolistic 3. Oligopoly 4. Monopoly

Competition Competition
Market Structure Continuum Figure 1.1

Large number of Firms Single Firm

Perfect Competition …. Monopolistic Competition …. Oligopoly …. Monopoly

Major characteristics that distinguish Market Structure :

1. Number of Firms competing with each other

2. Whether the products sold in the markets are

differentiated of undifferentiated

3. Whether entry into the market by other firms

is easy or difficult

4. The amount of information available on to all

market participants
Market Structure Continuum Figure 1.1

Large number of Firms Single Firm

Perfect Competition …. Monopolistic Competition …. Oligopoly …. Monopoly

Perfect Competition Model

1. Large number of firms in the market

2. An undifferentiated products

Characteristics:
3. Ease of entry into the market

4. Complete information available to all

market participants
Market Structure Continuum Figure 1.1

Large number of Firms Single Firm

Perfect Competition …. Monopolistic Competition …. Oligopoly …. Monopoly

Perfect Competition Model

Perfectly competitive firms are characterized as:

The firm cannot influence the price of the

Price-taker - product, but can sell any amount of its output at
the price established by the market

Perfectly competitive firms have no

The ability of a firm to influence the prices of

Market power - its products and develop other competitive
strategies that enables it to earn large profits
over longer periods of time
 Market Structure Continuum Figure 1.1

Large number of Firms Single Firm

Perfect Competition …. Monopolistic Competition …. Oligopoly …. Monopoly

Monopoly Model
A Market structure characterized by a single
firm producing a product with no close
substitute.

Structural, Legal, or regulatory characteristics

Barriers to entry- of a firm and its market that keep other firms
from easily producing the same or similar
products at the same cost.
Market Structure Continuum Figure 1.1

Large number of Firms Single Firm

Perfect Competition …. Monopolistic Competition …. Oligopoly …. Monopoly

Monopolistic Competition
A Market structure characterized by large number of
small firms that have some market power as a result
of producing differentiated products. This market
power can be competed away over time.

Oligopoly
A Market structure characterized by
competition among a small number of larger
firms that have market power, but that must
take their rivals’ actions into account when
developing their own competitive strategies
The Goal of Profit Maximization

The Assumed Goal of firms, which is to develop

strategies to earn the largest amount of profit possible.
Profit Maximization -
This can be accomplished by focusing on revenue, costs,
or both.

The difference between the total revenue that a firm

Profit - receives for selling its product and the total cost of
producing that product.

Is the standard by which firms are judge in a market

Profitability - economy. It affects stock prices and investor decisions.
 Managerial Rule of Thumb
Microeconomic influences on Managers
To develop a competitive advantage and increase their firm’s
profitability, managers need to understand:

• How consumer behavior affects their revenues.

• How production technology and input prices affect

their cost.

• How the Market environment in which they operate

influences their ability to set prices and to respond
to the strategies of their competitors.
Macroeconomic
influences on
Managers
 Influenced by changes in unemployment,
Macroeconomic decision exports, and consumer spending.

The macroeconomic model that portrays the level of economic

Circular flow model - activity as a flow of expenditures from consumers to firms, or
Figure 1.2 producers, as consumers purchase goods and services produced
by these firms. This flow then returns to consumers as income
received from the production process
Circular flow model - Used by Economists to analyze the spending behavior of
different sectors of the economy including:

Personal consumption expenditures (C) by all

households on durable goods, non durable goods, and
services.

Gross private domestic investment spending (I) on

non-residential structures, equipment, software, residential
structure and inventories

National and local government consumption

expenditures and gross investments (G).

Net export spending (F) or total export spending

(X)minus total import spending (M)
 Circular flow model (C) is largely influenced by Consumer income (Y)
Figure 1.2
(I) Is derived from borrowing from Financial Markets. Affected by interest rates.

Consumer savings (S) influences the availability of funds for borrowing.

Some (Y) is also used to pay Tp and is used by the government sector to finance
its purchase of goods and services. The government also imposes tax on business
Tb

If (G) exceeds total taxes collected (T = Tp + Tb), the resulting deficit will be
financed by barrowing to Financial Markets. The borrowing will then affect the
funds available for business investments.

Foreign sectors also play a role on the a countries circular flow thru (X) and (M).
Net export spending (F) is equal to (X) minus (M) or (F = X-M).

Spending by all these sectors equals to Gross Domestic Products (GDP) or (GDP
= C+I+G+F).

The comprehensive measure of the total market value of all currently produced
GDP - final goods and services within a country in a given period of time by domestic
and foreign –supplied resources
Factors Affecting Macro Spending Behaviors

1. Changes in the consumption and investment behavior of

individuals in the private sector of the economy.

2. New directions taken by a country’s monetary or fiscal

policy-making institutions (its central bank and national
government).
3. Developments that occur in the rest of the world that influence
the domestic economy.
 Managerial Rule of Thumb
Macroeconomic influences on Managers
Changes in the Macro environment affect individual firms and industries through
the microeconomic factors of demand, production, cost, and profitability.
Managers don’t have control over these in the larger macroeconomic
environment. However, managers must be aware of the developments that will
have a direct impact on their businesses. Managers sometimes hire outside
consultants for reports on macroeconomic environment or they ask in-house staff
to prepare forecasts. In any case, they need to be able to interpret these forecasts
and then project the impact of these macroeconomic changes on the competitive
strategies of their firms. Although overall macroeconomic changes may be the
same, their impact on various firms and industries is likely to be quite varied.
Summary
We tackled the reasons why microeconomic and macroeconomic analyses are
significant for managerial decision making. Microeconomics focuses on the
decisions that individual consumers, firms, and industries make as they produce,
buy and sell goods in a market economy while Macroeconomics analyzes the
overall level of economic activity, changes in the price level an unemployment,
and the rate of economic growth for the country. All of these factors affect the
decisions managers make in developing competitive strategies for their firms.

We also briefly discussed the concept of Market structure and Circular flow
model; defining as well, the basic spending components of that model.

We illustrated these issues by looking by analyzing a Wall street journal article

on brazil..
 Thank you so much!

"Economic growth without social

progress lets the great majority of
people remain in poverty, while a
privileged few reap the benefits of
rising abundance."
 Foreign sector

M X

Domestic Markets for

Currently produced
Goods and services Revenue
C

I
G

Tp Tb
Household Sector Government sector Firm Sector

S Barrowing
Barrowing Barrowing
Financial Markets
Y
Income: Expenses
Wages,
Interests, Resource Markets
Rent,
Profit