Lecture #1.

INTRODUCTION

Every manager of any business entity makes an economic decision almost every day.
Deciding on how much to spend on production of goods and services and many more are only
some situations where one applies economics. Thus, it is very important to understand the
various issues and intricacies concerning economics.
Definition of Economics
“Economics is concerned with humanity’s well-being or welfare. It encompasses the social
relationships or social organizations involved in allocating scarce resources among alternative
human wants and in using those resources toward the end of satisfying wants as fully as
possible.” Richard Leftwich (1979)
“Economics is the study of how societies use scarce resources to produce valuable commodities
and distributes them among different groups.” Paul Samuelson and William Nordhaus (1989)
“Economics is the study of how people make their living, how they acquire the food, shelter,
clothing and other material necessities and comfort of this world. It is a study of the problems
they encounter and of the ways in which these problems can be reduced.” Paul Wonnacott and
Ronald Wonnacott (1986)
“Economics is a scientific study which deals with how individuals and society generally make
choices. Individuals and groups in society have innumerable wants. To satisfy those wants,
there are resources that can be used. These resources, however, are not freely available. They
are scarce and furthermore have other alternative uses. Dimensions of choice include present
and future use of available resources. Moreover, the uses of these resources carry with them
costs and corresponding benefits. Concerns with costs and benefits require efficiency in
resources use.” Gerardo Sicat (1983)
Generally, Economics can be defined as a social science which deals with the proper allocation
and efficient use of available resources for the maximum satisfaction of human wants and needs.
(Fajardo, 1990).
Divisions of Economics

1. Microeconomics – Deals with the problems and analysis of behavior of individual

economic unit such as the consumer (household), seller (firm) and owners of factors
of production.
2. Macroeconomics – Deals with the problems of the whole economy and how aggregated
economic units or sectors such as consumer, business, government, and foreign
sectors are interrelated.

Opportunity Cost- foregone opportunity or alternative benefit.

Classification of resources
 1. Land – This pertains to the natural resources, not man-made. It includes everything
found on or under land, including mountains, bodies of waters (like rivers, lakes,
oceans), minerals, air and sunlight.
2. Labor – It consists of labor power or the capacity for human being, both physically
and mentally, used in producing goods and services. This applies not only to workers,
farmers, or laborers but also to professionals like accountants, economists, or
scientists.
3. Capital – It is anything that is used to produce other goods and services.
4. Entrepreneurship – It is the ability to organize and coordinate land,
labor and capital.
Characteristics of Resources
1. Limited or scarce
2. Versatile
3. Can be combined in varying proportion to produce goods and services.
Basic Economic Problems
1. What goods and services to produce?
2. How to produce the goods and services and how much?
3. For whom are these goods and services?
Economic System
A system is a structure. Hence, an economic system is the economic structure of a given
economy.
Models of Economic System
1. Capitalism – Refers to a free enterprise or laissez faire economy (no government
intervention).
2. Communism – This is the opposite of capitalism wherein the government controls the
economy. This is also called a command economy.
3. Socialism – It is a mixture of capitalism and communism. It contains the
characteristics of both capitalism and communism
The Tools of Economics
Economic theories are used to explain the nature of economic activity and to predict what
will happen to the economy. The tools used in making these explanations and predictions
include:
1. Logic – It pertains to reasoning and drawing of conclusion.
2. Mathematics – It means conceptualizing and quantifying economic principles.
3. Statistics – It means describing behaviors quantitatively and testing hypothesis in
making inferences.
Definition of Management
Management is a process of planning, organizing, staffing, directing, and controlling
(POSDICON) of the human resources, financial, physical, and information resources of an
organization to reach its goals efficiently and effectively (https://www.iedunote.com ›
management).
Managerial Economics
Managerial Economics can be defined as amalgamation of economic theory with business
practices to ease decision-making and future planning by management. Managerial Economics
assists the managers of a firm in a rational solution of obstacles faced in the firm’s activities. It
makes use of economic theory and concepts. It helps in formulating logical managerial decisions
(info@managementstudyguide.com).
The key of Managerial Economics is the micro-economic theory of the firm. It lessens the gap
between economics in theory and economics in practice. Managerial Economics is a science
dealing with effective use of scarce resources. It guides the managers in taking decisions relating
to the firm’s customers, competitors, suppliers as well as relating to the internal functioning of a
firm. It makes use of statistical and analytical tools to assess economic theories in solving
practical business problems.

The following figure tells the primary ways in which Managerial Economics correlates to
managerial decision-making.