Managerial economics economic tools for todays decision makers 7th edtion by keat young and erfle
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Chapter 1
Introduction
Chapter Outline
• Economics and managerial decision making
• Review of economic terms and concepts
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1-2
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 company’s scarce resources.
• Compare the three basic economic questions
from the standpoint of both a country and a
company.
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1-3
Economics and Managerial Decision
Making
• Economics
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–
–
–
The study of the behavior of human
beings in producing, distributing and
consuming material goods and
services in a world of scarce resources.
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1-4
Economics and Managerial Decision
Making
• Management
– The science of organizing and allocating a
– firm’s scarce resources to achieve its
– desired objectives.
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1-5
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.
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1-6
Economics and Managerial Decision
Making
• Relationship to other business disciplines
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1-7
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?
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1-8
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.
1-9
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?
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1-10
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?
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1-11
Economics and Managerial Decision
Making
• Questions that managers must answer:
– What are the risks involved?
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•
•
•
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?
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1-12
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
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1-13
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
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1-14
Review of Economic Terms and
Concepts
• Macroeconomics is the study of the
aggregate economy, especially:
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•
•
•
•
national output (GDP)
unemployment
inflation
fiscal and monetary policies
trade and finance among nations
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1-15
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.
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1-16
Review of Economic Terms and
Concepts
• The Nature of Scarcity
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1-17
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?
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1-18
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
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1-19
Review of Economic Terms and
Concepts
• 3 Basic economic questions - Country and
company
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1-20
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
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1-21
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.
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1-22
