Managerial Economics

Introduction
 Chapter Outline

• Economics and managerial decision

making

• Review of economic terms and concepts

BM033-3-M Managerial Economics-Introduction

 Economics and Managerial
Decision Making
• Economics

– The study of the behavior of human

– beings in producing, distributing and
– consuming material goods and
– services in a world of scarce resources.

BM033-3-M Managerial Economics-Introduction

 Economics and Managerial
Decision Making
• Management

– The science of organizing and allocating a

– firm’s scarce resources to achieve its
– desired objectives.

BM033-3-M Managerial Economics-Introduction

 Economics and Managerial
Decision Making
• Managerial economics

– The use of economic analysis to make

business decisions involving the best use
(allocation) of an organization’s scarce
resources.

BM033-3-M Managerial Economics-Introduction

 Economics and Managerial
Decision Making
• Relationship to other business disciplines

BM033-3-M Managerial Economics-Introduction

 Economics and Managerial
Decision Making
• Questions that managers must answer:
– What are the economic conditions in our
particular market?
• market structure?
• supply and demand?
• technology?

BM033-3-M Managerial Economics-Introduction

 Economics and Managerial
Decision Making
• Questions that managers must answer:
– Should our firm be in this business?
• if so, at what price?
• at what output level?
• can the firm achieve a sustainable competitive
advantage?

BM033-3-M Managerial Economics-Introduction

 Economics and Managerial
Decision Making
• Questions that managers must answer:
– What are additional economic conditions in
our particular market?
• government regulations?
• international dimensions?
• future conditions?
• macroeconomic factors?

BM033-3-M Managerial Economics-Introduction

 Economics and Managerial
Decision Making
• Questions that managers must answer:
– What is our strategy to maintain a competitive
advantage in the market?
• cost-leader?
• product differentiation?
• market niche?
• outsourcing, alliances, mergers?
• international perspective?

BM033-3-M Managerial Economics-Introduction

 Economics and Managerial
Decision Making
• Questions that managers must answer:
– What are the risks involved?
• changes in demand and supply conditions?
• technological changes and the effect of
competition?
• changes in interest and inflation rates?
• exchange rate changes for companies engaged in
international trade?
• political risk for companies with foreign operations?

BM033-3-M Managerial Economics-Introduction

 Review of Economic Terms and
Concepts
• The economics of a business refers to
the key factors that affect the firm’s ability
to earn an acceptable rate of return on its
owners’ investment.

The most important of these factors are

• competition
• technology
• customers

BM033-3-M Managerial Economics-Introduction

 Review of Economic Terms and
Concepts
• Microeconomics is the study of individual
consumers and producers in specific
markets, especially:
• supply and demand
• pricing of output
• production process
• cost structure
• distribution of income

BM033-3-M Managerial Economics-Introduction

 Review of Economic Terms and
Concepts
• Macroeconomics is the study of the
aggregate economy, especially:
• national output (GDP)
• unemployment
• inflation
• fiscal and monetary policies
• trade and finance among nations

BM033-3-M Managerial Economics-Introduction

 Review of Economic Terms and
Concepts
• Scarcity is the condition in which
resources are not available to satisfy all
the needs and wants of a specified group
of people.

• Opportunity cost is the amount (or

subjective value) that must be sacrificed in
choosing one activity over the next best
alternative.
BM033-3-M Managerial Economics-Introduction
 Review of Economic Terms and
Concepts
• The Nature of Scarcity

BM033-3-M Managerial Economics-Introduction

 Review of Economic Terms and
Concepts
• Allocation decisions must be made because of scarcity.
Three choices:

What should be produced?

How should it be produced?

For whom should it be produced?

BM033-3-M Managerial Economics-Introduction

 Review of Economic Terms and
Concepts
• 3 Systems to answer the what, how and for whom
questions

• Market process: The use of supply, demand,

and material incentives
• Command process: The use of the
government or some central authority
• Traditional process: The use of customs and
traditions

BM033-3-M Managerial Economics-Introduction

 Review of Economic Terms and
Concepts
• 3 Basic economic questions - Country and
company

BM033-3-M Managerial Economics-Introduction

 Review of Economic Terms and
Concepts
• Entrepreneurship is the willingness to take certain
risks in the pursuit of goals

• Management is the ability to organize resources and

administer tasks to achieve objectives

BM033-3-M Managerial Economics-Introduction

 Summary

• Managerial economics is a discipline that combines

microeconomic theory with management practice.

• An important function of a manager is to decide how to

allocate a firm’s scarce resources.

• The application of economic theory and concepts helps

managers make allocation decisions that are in the best
economic interests of their firms.

BM033-3-M Managerial Economics-Introduction