Managerial Economics

Chapter 1 Introduction to Managerial Economics

Economics

- Came from two Greek words: Oikos and Nomus.

- Nomus ( Management )
- Oikos ( Household )
- Oikos + Nomus = Oikonomia or Oikonomus
- Management of Household
- A branch of social science that is concerned with the allocation of scarce resources used in the
production of goods and services to satisfy unlimited human wants.

Branches of Economics

1) Microeconomics
- Analysis dealing with the behavior of individual elements in an economy such as the
determination of the price of a single product or the behavior of a single consumer or business
firm.
2) Macroeconomics
- Analysis dealing with the behavior of the economy as a whole with respect to output, income,
the price level, foreign trade, unemployment, and other aggregate economic variables.

Economic Resources

1) Labor
- Refers to the time and effort of human beings (both physical and mental) used in the production
process.
- Remunerated in the form of salaries or wages.
2) Land
- Refers to all the resources whether in land, sea or air, or more generally natural resources.
- Remunerated in the form of rent.
3) Capital
- Consists of durable produced goods that are in turn used in production.
- Remunerated in the form of interest.
4) Entrepreneurship
- Refers to the person called entrepreneurs who organize the enterprise and assume risks.
- Remunerated in the form of profit.

Management

- The process of planning, organizing, leading, and controlling the work of organization members
and of using available organizational resources to reach stated organizational goals.

PowerPoint of Dr. Frederick Halcon

Handout by Abraham D. Chin
 Managerial Economics

Managerial Economics

- Also known as business economics, industrial economics and industrial organization.

- Deals with the application of the economic concepts, theories, tools and methodologies to
solve practical problems in a business particularly in decision making.

Manager

- A person who directs resources to achieve a stated goal.

- What they seek: To identify the alternative means of achieving given objectives, and then to
select the best alternative that accomplishes the objective in the most resource efficient
manner, taking into account the constraints and the likely actions and reactions of
interdependent rival decision makers.

The Economics of Effective Management

1) Identify goals and constraints

2) Recognize the nature and importance of profits
3) Understand Incentives
4) Understand Markets
5) Recognize the time value of money
6) Understand the Marginal Analysis

Opportunity Cost

- The cost of forgoing an alternative

Ex: John studies all night for his exam. Next day John is very sleepy.
- Opportunity cost: A good night’s sleep.

Economic v Accounting Profits

1) Accounting - the total amount of money takin in from sales less Cost of goods sold or services.

2) Economic - difference between total revenue and total opportunity cost.

Incentives

- Something that induces or influences a person to act (such as the prospect of a punishment or
reward).
- Affects how resources are used and how hard workers work.

PowerPoint of Dr. Frederick Halcon

Handout by Abraham D. Chin
 Managerial Economics

Market

- A group of buyers and sellers of a particular good or service.

Competitive Market

- A market in which there are many buyers and sellers so that each has a negligible impact on the
market price.

Time Value of Money

1) Net Present Value

- The present value of the income stream generated by a project less the current cost of the
project.
2) Compounding
- The accumulation of a sum of money in say, a bank account, where the interest earned remains
in the account to earn additional interest in the future.

Marginal Analysis

1) Marginal Analysis
- States that optimal managerial decisions involve comparing the marginal (incremental or
difference) benefits of a decision with the marginal cost.
2) Marginal Benefit
- The change in total benefits arising from a change in the managerial control variable, Q.
3) Marginal Cost
- The change in the total costs arising from a change in the managerial control variable, Q.

Note

To maximize net benefits, manager should increase the managerial control variable to the point where
marginal benefits = marginal costs.

PowerPoint of Dr. Frederick Halcon

Handout by Abraham D. Chin