Chapter 1 Introduction. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-2 Chapter...

Chapter 1

Introduction

Copyright ©2014 Pearson Education, Inc. All rights reserved. 1-2

Chapter Outline

• Economics and managerial decision making

• Review of economic terms and concepts


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.


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.



• Management

– The science of organizing and allocating a– firm’s scarce resources to achieve its– desired objectives.



• Managerial economics

– The use of economic analysis to make business decisions involving the best use (allocation) of an organization’s scarce resources.



• Relationship to other business disciplines



• Questions that managers must answer:– What are the economic conditions in our

particular market?• market structure?• supply and demand?• technology?



• 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?



• Questions that managers must answer:– What are additional economic conditions in our

particular market?• government regulations?• international dimensions?• future conditions?• macroeconomic factors?



• 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?



• 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?


Review of Economic Terms and Concepts

• The economics of a business refers to the key factors that affect the firm’s ability to earn an acceptable rate of return on its owners’ investment.

The most important of these factors are• competition• technology• customers



• 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



• Macroeconomics is the study of the aggregate economy, especially:

• national output (GDP)• unemployment• inflation• fiscal and monetary policies• trade and finance among nations



• 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.



• The Nature of Scarcity



• 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?



• 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



• 3 Basic economic questions - Country and company



• 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


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 firm’s scarce resources.

• The application of economic theory and concepts helps managers make allocation decisions that are in the best economic interests of their firms.

Chapter 1 Introduction. Copyright ©2014 Pearson Education, Inc. All rights reserved.1-2 Chapter...

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