Chapter 1

Introduction
Chapter Outline

Economics and managerial decision making

Review of economic terms and concepts

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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.

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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.

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Economics and Managerial Decision
Making

Management

The science of organizing and allocating a

firms scarce resources to achieve its
desired objectives.

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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.

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Economics and Managerial Decision
Making

Relationship to other business disciplines

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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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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?

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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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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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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?

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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

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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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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

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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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Review of Economic Terms and
Concepts

The Nature of Scarcity

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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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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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Review of Economic Terms and
Concepts

3 Basic economic questions - Country and

company

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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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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.

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