- Economics studies how people allocate scarce resources to satisfy as many of their wants and desires

as possible.

- Part 1 establishes the foundation for business decision-making that simultaneously satisfies consumer
wants and desires while generating maximum profit.

Chapter 1: Managerial Economics: Taking Care of Business

Basic economic problem: scarcity of resources versus virtually unlimited human wants and desires

Economic theory

Generally, this describes how things work

In managerial economics, this provides tools managers use to make decisions

Two major subdivisions of economics:

1. Macroeconomics – is the area of economics that studies the behaviour of the national
economy
2. Microeconomics – is the areas of economics that studies the behaviour of individual
economic agents, such as the firm or a consumer

Decision sciences - provide methods for analyzing the impact of alternative decisions

- Include the optimization technique associated with calculus and statistical

techniques

Adam Smith

– author of The Wealth of Nations, published in 1776 (establishes the foundation for modern
economics

- he states that individuals are motivated by self interest

Firms – the primary instrument used to allocated scarce resources among competing activities in a
market economy

Three basic economic questions:

1. What commodities should be produced?

2. How should those commodities be produced?
3. For whom are those commodities be produced?

Three major areas of a manager’s tasks:

1. First, managers help develop the firm’s goals.

 2. After the goals are established, managers must establish strategies for achieving those
goals.
3. Finally, managers must acquire and direct the resources necessary for achieving the firm’s
goals.

Opportunity Cost – is the cost of an action or decision as measured by the best alternative you give up.

NOTE: Opportunity Cost is just the best alternative you give up – it’s not every alternative.

Five Major Steps of Decision-Making Process

1. Establish objectives
2. Identify the problem or problems that prevent the fulfilment of the objectives.
3. Specify and evaluate possible solutions to the problem(s).
4. Select the best possible solution based upon the information available.
5. Implement the solution and subject it to ongoing evaluation

Market Share – is the percentage an industry’s total sales that are held by a single firm.

Maximize profit through recognizing all cost

Three categories of constraints:

1. Resource Constraints – results in limitation in the availability of certain inputs

2. Constraints on Output Quantity and Quality – the result of contractual obligations the firm
has
3. Legal Constraints – working conditions, health and safety concerns, child-labor laws, and
minimum-wage legislation

Constrained Optimization – the term referred to the goal of managerial decision-making as a result of
constraints

DEMAND, SUPPLY, EQUILIBRIUM

Market Structures – reflect differing characteristics related to the number of rival firms and product
characteristics

4 Market Structure (form most competitive to least competitive)

1. Perfect Competition – the market structure with the highest competition

- have a large number of firms producing identical products

- price is determined by supply and demand in the market

2. Monopolistic Competition – has a large number of firms but the good produced is not
identical
 3. Oligopoly – characterized by a small number of firms

- you know who your rivals are leading to mutual interdependence

(your actions affect every other firm)

4. Monopoly – has a single firm producing a commodity for which there are no close
substitutes

Time Value of Money – the fact that money you hold today can earn interest

Present Value – is the value of a future stream of revenue or costs in terms of their current value