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?

Copyright 2014 Pearson Education, Inc. All rights reserved.

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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?

Copyright 2014 Pearson Education, Inc. All rights reserved.

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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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