Managerial Economics MBA 1 W E L C O M E T O T H E C O U R S E! L E T S G E T S T A R T E D.
1-2 Preamble to the Course Managerial Economics builds on the basic concepts and principles of Undergraduate Economics. It introduces the business manager to the use of economic principles to be used in decision-making. Students are expected to master the technical aspects of reasoning and analysis used in the various aspects of economics and learn how to apply them in the decision making process. Students are encouraged to draw on their own experience and general reading
1-3 Prescribed Textbook The prescribed textbook is: Schiller, Bradley: Economics The recommended textbooks are: Davies, Howard and Lam, Pun-Lee (2001) MANAGERIAL ECONOMICS: AN ANALYSIS OF BUSINESS ISSUES (3 rd Ed) Prentice Hall Financial Times Cape Town.
1-4 Learning Outcomes After completion of this chapter the student will: Understand the relationship between economics and management. Relate use of economic principles in making managerial decisions. Appreciate the use of economic models in managerial decision making Why is the Study of Economics useful? The study of economics indicates how scarce resources can be allocated among a variety of desires. The concept of scarcity implies that choices must be made. For every decision we take, we incur opportunity costs. It is simply, giving up something to gain something else. Understanding economics and employing economic tools can help you solve many business problems
1-5 Scarcity and Factors of Production Scarcity is the lack of enough resources to satisfy all desired uses of those resources. LO1
1-6 Factors of Production Labour refers to the skills and abilities to produce goods and services. Land refers to all natural resources such as crude oil, water, air, and minerals. Capital includes the final goods produced for use in the production of other goods, e.g., equipment, structures. Entrepreneurship is the assembling of resources to produce new or improved products and technologies.
1-7 The Production Possibility Frontier So how can we allocate our scarce resources to our unlimited wants, and still attain effective and efficient outcomes for society as a whole? A simple answer to the question can be illustrated by the production possibility frontier (PPF) The PPF indicates various combinations of two goods or services that can be attained when society s scarce resources are fully and efficiently employed.
1-8 The Production Possibility Frontier 1.8
1-9 The Production Possibility Frontier The PPF shows a trade-off between the two goods, and implies, if we produce more of one good we have to produce less of the other good. For example, by increasing the production of Product A we will have to decrease our production Product B. Any point outside the PPF, such as point e denotes an unattainable outcome of output.
1-10 PPF and Economic Growth
1-11 FOOD OUTPUT The Cost of North Korea s Military North Korea s inability to feed itself is due in part to its large army. Resources used for the military aren t available for producing food. A G C Reduced food output P Military buildup N O H MILITARY OUTPUT D B
1-12 The Military Share of Output
1-13 Unemployment Countries may end up inside their production possibilities curve if all available resources are not used.
1-14 OUTPUT OF TRUCKS Unemployment 5 4 3 2 1 A Unemployment B Y C 0 1 2 3 4 5 OUTPUT OF TANKS
1-15 The Invisible Hand of a Market Economy The market mechanism is the use of market prices and sales to signal desired outputs (or resource allocations). The market decides the mix of output in an economy. Laissez faire is the doctrine of leave it alone of nonintervention by government in the market mechanism. LO3
1-16 Government Intervention & Command Economies Karl Marx argued that the government not only had to intervene but had to own all the means of production. Markets permit capitalists to enrich themselves while the proletariat toil long hours for subsistence wages. LO3
1-17 Government Intervention & Command Economies John Maynard Keynes offered a less drastic solution. In Keynes view, government should play an active but not an all-inclusive role in managing the economy. LO3
1-18 A Mixed Economy A mixed economy is one that uses both market signals and government directives to allocate goods and resources. Most economies use a combination of market signals and government directives to select economic outcomes. LO3
1-19 Microeconomics vs Macroeconomics Microeconomics deals with the study of how consumers & firms behave and make decisions, and how they interact in particular markets. Macroeconomics studies the aggregate economy, which includes aspects of unemployment, inflation, economic growth, and government policies.
1-20 The Circular Flow Model The circular flow model illustrates how an economy operates, identifies key economic participants, and highlights the interrelationships between them. There are three basic economic flows, namely; production, income and spending. We also introduce economic sectors: households, firms, government, and financial and foreign sectors. There are two markets: Goods & factor markets.
1-21 Circular Flow Model
1-22 Key Macroeconomic Policy Objectives Mohr and Fourie (2004) addresses the 5 macroeconomic goals of A s economic policy. Economic growth Full employment Price stability Balance of Payments stability Equitable distribution of income
1-23 Economic Growth Economic growth of an economy is measured by the GDP. GDP refers to the total value of goods & services produced within the boundaries of a country in a specific year. It is important to differentiate between Real and Nominal GDP. Nominal GDP is the value of final goods and services produced in the economy in a certain year measured at current prices.
1-24 Economic Growth Real GDP is the value of final goods and services produced in the economy deflated by the CPI or measured at constant prices. A rise in the real GDP growth rate is an indication that the economy is growing an vice versa SA has experienced jobless growth. This means that although the economy has been growing marginally at around 2% per annum, the increase in economic growth is not sufficient, and thus unemployment remains high.
1-25 Full Employment Full employment: implies that the level of unemployment must be kept as low as possible. The unemployment level in South Africa is among the highest in the world, and has been rapidly rising since the 1990s. There are many measures and definitions of unemployment. Depending on the definition used, the unemployment rate is in range of 27% to 37% (Hodge, 2002).
1-26 Full Employment A broad definition of unemployment is: The labour force participation rate. Structural Unemployment occurs when there is a mismatch between the number of jobs available in the labour market and those who want to work. Other types of unemployment include: cyclical unemployment seasonal unemployment and frictional unemployment.
1-27 Price Stability Price stability refers to the level of overall prices in the economy, i.e. the inflation rate, which is measured by the overall CPI. For purposes of monetary policy the SARB uses the CPIX (consumer price inflation excluding mortgage rate) as its measure for inflation targeting. The two main government policy targets by most countries, including South Africa are price stability and full unemployment.
1-28 Balance of Payments (BoP) The BoP account shows all transactions between South Africa with the rest of the world. The two main accounts are: the current account and the financial account. The current account refers to the difference between a country s imports and exports. If exports exceed imports, then the country is experiencing a trade surplus. On the other hand, a trade deficit exists when a country s imports exceed its exports.
1-29 Balance of Payments The financial account reflects capital asset and liability flows in and out of the country. The difference between the financial account and the current account reflects the change in the country s gold and foreign exchange reserves. The performance of SA s BoP reflects the level of foreign reserves (our holdings of various foreign currencies). The level of foreign reserves is particularly important to prevent large fluctuations in the domestic exchange rate.
1-30 Personal distribution of Income Personal distribution of income in SA is skewed. There are two measures of the income distribution; the Gini-coefficient, which is numerical measure and the Lorenz curve, which is a graphical representation. South Africa s Gini-coefficient is 0.68. implying an acute unequal distribution that reflects society s standard of economic welfare. This objective is regarded as a development and social objective strongly correlated with poverty and malnutrition, and infant mortality.
1-31 End of Chapter 1