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Introduction Managerial Economics
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Chapter 1
Introduction
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-2
Chapter Outline
Economics and managerial decision making
Review of economic terms and concepts
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-3
Learning Objectives
Define managerial economics and discuss briefly its relationship to microeconomics and other related fields of study such as finance, marketing, and statistics.
Cite and compare the important types of decisions that managers must make concerning the allocation of a companys scarce resources.
Compare the three basic economic questions from the standpoint of both a country and a company.
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-4
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.
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-5
Economics and Managerial Decision Making
Management
The science of organizing and allocating a
firms scarce resources to achieve its
desired objectives.
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-6
Economics and Managerial Decision Making
Managerial economics
The use of economic analysis to make business decisions involving the best use (allocation) of an organizations scarce resources.
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-7
Economics and Managerial Decision Making
Relationship to other business disciplines
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-8
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?
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-9
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?
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-10
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?
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-11
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?
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-12
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?
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-13
Review of Economic Terms and Concepts
The economics of a business refers to the key factors that affect the firms ability to earn an acceptable rate of return on its owners investment.
The most important of these factors are
competition
technology
customers
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-14
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
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-15
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
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-16
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.
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-17
Review of Economic Terms and Concepts
The Nature of Scarcity
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-18
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?
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-19
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
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-20
Review of Economic Terms and Concepts
3 Basic economic questions - Country and company
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-21
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
Copyright 2014 Pearson Education, Inc. All rights reserved. 1-22
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 firms scarce resources.
The application of economic theory and concepts helps managers make allocation decisions that are in the best economic interests of their firms.