Chapter 1

Introduction
 Chapter Outline

• Relationship between 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 company’s 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

Managerial Economics is one of the most important

and useful course in your curriculum of studies.
It will provide you with a foundation for studying
other courses in finance, marketing, operations
research, and managerial accounting.
It will also provide you with a theoretical framework
for tying together courses in the entire curriculum,
so you can have a cross-functional view of your
studies.

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 Economics and Managerial
Decision Making

• Economics:

– The study of the human-being’s behavior 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

firm’s 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 organization’s scarce
resources.

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 Economics and Managerial
Decision Making
• Managerial economics:

– In this course: we show the linkages of economics

with other business functions, while focus on the
heart of managerial economics, the microeconomic
theory of the behavior of consumers and firms in
competitive markets.
– Microeconomic theory provides managers with
basic framework for making key business decisions
about the allocation of their firm’s scarce
resources.

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 Economics and Managerial
Decision Making
• Relationship to other business disciplines:

Marketing
Finance
Demand
Price elasticity Capital budgeting
Break-even analysis
Opportunity cost
Economic value added
Managerial Accounting
Relevant cost
Break-even analysis Managerial Management Science
Incremental cost analysis Economics
Opportunity cost Linear programming
Regression analysis
Forecasting

Strategy
Types of competition
Structure-conduct-
performance analysis

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 Economics and Managerial
Decision Making
• Questions that managers must answer:
1. What are the economic conditions in our
particular market?
 Market structure?

 Supply and demand conditions?

 Technology?

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 Economics and Managerial
Decision Making

• Questions that managers must answer:

2. Should our firm be in this business?

3. If so, at what price? what output level to

maximize economic profit?

4. How can the firm organize and invest in its

resources to achieve a sustainable competitive
advantage?

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 Economics and Managerial
Decision Making
• Questions that managers must answer:
5. 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:
6. 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:
7. 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

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 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

Resources

 Land
 Labor  Needs and wants of
 Capital the population
 Entrepreneurship and
management skills

SUPPLY DEMAND

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 Review of Economic Terms and
Concepts

• Allocation decisions must be made because of

scarcity.
Three separate questions must be answered:

1. What goods and services should be produced and in what

quantities?

2. How should these goods and services be produced?

3. For whom should these goods and services be produced?

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 Review of Economic Terms and
Concepts

3 Systems to answer the three basic questions

(what, how and for whom)?

 Market process: The use of supply, demand,

and material incentives

 Command process (political 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

From the Standpoint of From the Standpoint of

a Country a Company

1. What goods and services 1. The product decision

should be produced?
2. The hiring, staffing,
2. How should these goods and procurement, and capital
services be produced? budgeting decisions

3. For whom should these goods 3. The market segmentation

and services be produced? decision

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 Review of Economic Terms and
Concepts
Entrepreneurship is:
 The ownership of the means of production

 The willingness to take certain risks in the pursuit of

goals

Management is:
The ability to organize resources and administer tasks to
achieve objectives

Monitor and guide people in an organization

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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 firm’s scarce resources.

• The application of economic theory and concepts

help managers make allocation decisions that are
in the best economic interests of their firms.

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