Finding the Opportunity Costs

• Situations are;
• Monique quits her $50,000 per-year job as an accountant to become a full-
time volunteer at a women’s shelter.
• The Agrizone Corporation invests $12 million in a new inventory tracking
system.
• Taylor receives $500 from his grandmother for his birthday and uses it all to
buy shares of stock in Harley- Davidson, Inc.
• Hector decides to spend the summer backpacking across Europe after he
graduates from Tulane University.
• After receiving her master’s degree, Molly chooses to enter the doctoral
program in Behavioural Science at the University of Texas.
• Nasir chooses to use his vacation time to paint the exterior of his house.
Finding Average Cost and Marginal Cost
• Every month, Frank pays an $80 membership fee at a fitness centre so
he can avail himself of the unlimited use of its facilities. On average,
he goes to the centre 10 times a month. What is the average cost of
each trip he makes to the centre?
Managerial Economics
• After defining and studying Scope and Method of Economics, it is
good to know about Managerial Economics:
• Management is the discipline of organizing and allocating a firm’s
scarce resources to achieve its desired objectives.
• If the firm (in definition of management) were replaced with
automobile, aerospace, sports, and chemical industries then the
terms Management might be called as Engineering Management.
• From now on, firm will be assumed as an engineering firm.
Managerial Economics
• In the words of Peter Drucker, who has been called “the founding
father of the science of management,” Management may be defined
as:
• It is “management” that determines what is needed and what has to
be achieved [in an organization]. . . . Management is work. Indeed, it
is the specific work of a modern society, the work that distinguishes
our society from all earlier ones. . . . As work, management has its
own skills, its own tools, its own techniques.
Managerial Economics
• Managerial Economics can be defined by combining definitions of
Economics and Management.
• Therefore, managerial economics is defined as the use of economic
analysis to make firm’s business decisions involving the best use of an
firm’s scarce resources.
• Managerial Economics has strong tendencies towards the applied
micro-economics.
Theories and Models
• A model is a formal statement of a theory.
• It is usually a mathematical statement of a presumed relationship between
two or more variables.
• A variable is a measure that can change from time to time or from
observation to observation.
• For example, Income is a variable. It has different values for different
people.
• Abstraction is usually associated with models, since all models simplify the
reality by stripping part of it away which is called the Abstraction.
• Critics of economics see abstraction as a weakness while most economists
see it as strength of a model.
Theories and Models::Abstraction
• Abstraction can be helpful when considering the example of map.
• Map is a representation of reality that is simplified and abstracted.
• A city or state appears on a piece of paper as a series of lines and colours.
• The amount of reality that the mapmaker can strip away before the map
loses something essential depends on what the map will be used for. For
example, for driving, for walking around, etc.
• Like maps, economic models are abstractions that strip away detail to
expose only those aspects of behaviour that are important to the question
being asked.
• The principle that irrelevant detail should be cut away is called the
principle of Ockham’s razor after the fourteenth-century philosopher
William of Ockham.
Theories and Models::Abstraction
• Although abstraction is a powerful tool for exposing and analysing
specific aspects of behaviour (how individual make choices), it is
possible to oversimplify.
• The appropriate amount of simplification and abstraction depends on
the use to which the model will be put.
• From the map example: You do not want to walk around San
Francisco with a map made for drivers, since there are too many very
steep hills.
How a Theoretical Model is expressed?
• A model can be expressed in words, graphs and equations.
• For example, following are the simple Model Words or Statements:
1. Lower airline ticket prices cause people to fly more frequently.
2. Higher gasoline prices cause people to drive less and to buy more
fuel-efficient cars.
• These statements are interesting, however, a firm and government
need to know more to make good decisions!
• For instance, How much does driving fall when prices rise?
• Therefore, graphs and equations are used for answering this question.
Theories and Models:: Empirical Economics
• In science, a theory is rejected when it fails to explain what is
observed or when another theory better explains what is observed.
• The collection and use of data to test economic theories and models
is called empirical economics.
• For Example; economists studying the labour market can now test
behavioural theories and models against the actual working of
thousands of randomly selected people who have been surveyed
continuously since the 1960s.
How a Theoretical Model works?
• William Baumol, a highly respected economist and industry
consultant, stated that an economist can use his or her ability to
build theoretical models and apply them to any business problem,
no matter how complex, break it down into essential components,
and describe the relationship among the components, thereby
facilitating a systematic search for an optimal solution.
• In his extensive experience as a consultant to both industry and
government, he found that every problem that he worked on was
helped in some way by “the method of reasoning involved in the
derivation of some economic theorem”.
A Situations Involving Economic Decision
• Can part-time job affect the academic performance of students?
• Majority of students intend to do part-time job.
• Parents sometimes allow their child to work or otherwise prevent them!
• What are difficulties which students may face as a result of doing part-time
jobs?
1. Stressed
2. No Social Life
3. Absence from attending classes
4. Learning Engagement
5. Motivation to perform better in Academics
6. Assignments remain incomplete and don’t meet deadlines etc.
A Situations Involving Economic Decision
• Marsha Barber, a professor at Ryerson University, Canada, and Julia Levitan,
a psychology student at the University of Guelph, Canada.
• used data on final-year journalism students’ academic achievements and
number of working hours to test the part-time employment effects from
various types of part-time jobs.
• The overall results revealed strong negative employment effects,
predominant in those who worked for more than 20 hours a week, on the
academic performance.
• Economic Decision Guideline: These studies lead to one common
conclusion—a student should choose their employment wisely and not
allow their performance to suffer as a consequence of the part-time job.