EM 501 Managerial Economics

(Lecture 2)

DR. ALI AHMAD

ASSISTANT PROFESSOR
DEPARTMENT OF INDUSTRIAL ENGINEERING
SCHOOL OF ENGINEERING
UNIVERSITY OF MANAGEMENT AND TECHNOLOGY, LAHORE
 Scarce Resources

 Economic resources are classified as:

 Land

 Labour

 Capital

 Entrepreneurial ability
 Land

 Land generally refers to all natural resources

 Included in this category are:
wildlife
minerals
timber
water
air
oil and gas deposits
arable land
mountain scenery
 Labour

 Labor refers to the physical and intellectual abilities

of people to produce goods and services
 Labour is not homogeneous
 Individuals have different physical and intellectual capabilities
 These capabilities may be inherent or acquired
 Thus some people will become fashion models,
professional athletes, or college professors; others
will work as clergymen, cooks, police officers, bus
drivers, and so forth
 Some of them are richly rewarded whereas others get
low wages
 Capital

 Capital refers to manufactured commodities that are

used to produce goods and services for final
consumption
 Machinery, office buildings, equipment, warehouse space,
tools, roads, bridges, research and development, factories, and
so forth are all a part of a nation’s capital stock
 These are referred to as economic capital
 Financial capital refers to such things as stocks, bonds,
certificates of deposits, savings accounts, and cash
 It should be noted, however, that financial capital is
typically used to finance a firm’s acquisition of
economic capital
 Entrepreneurial Ability

 Entrepreneurial ability refers to the ability to

recognize profitable opportunities, and the
willingness and ability to assume the risk associated
with investing in land, labour and capital to produce
the goods and services that are most in demand by
consumers
 People who exhibit this ability are called
entrepreneurs
 Economic Systems

 MARKET (CAPITALIST) ECONOMY

 COMMAND (SOCIALIST) ECONOMY

 MIXED ECONOMY
 Economic Systems

 Every society adopts an economic system to run its

economy
 An economic system defines the principles and rules
by which the scarce resources are allocated
 An economic system provides answers to three
fundamental questions
 What goods and services should be produced, and in
what amounts,
 how these goods and services should be produced
(i.e., the choice of the appropriate production technology), and
 for whom these goods and services should be produced
 Market (Capitalist) Economy

 In a pure market economy there is no government

involvement in economic decisions. The market
process (“like an invisible hand”) governs the
determination of:
 What?
Consumers decide what should be produced in a market
economy through the purchases they make
 How?
Production is left entirely up to businesses
 For whom?
The people who have more money are able to buy more goods
and services
 See next three slides for elaboration
 What Goods and Services Should be Produced?

 In market economies the goods and services demanded

by consumers are produced
 Consumers express their preferences through their purchases of
goods and services in the market
 Profit-maximizing firms produce only the goods and services that
their customers demand
 Firms that produce commodities that are not in demand by
consumers will not survive
 Consumer sovereignty:
The authority of consumers to determine what goods and
services are produced through their purchases in the
market
 Woe to the arrogant manager who forgets this fundamental
economic fact of life
 How are Goods and Services Produced?

 Firm’s management determines how goods and services

are produced by selecting the technology of production
 Production technology refers to
 the types of input used in the production process
 the organization of those factors of production
 the proportions in which those inputs are combined to produce
goods and services that are most in demand by the consumer
 The choice of production technology is guided by
management’s desire to maximize profits
 In competitive markets, firms that do not combine
productive inputs in the most efficient (least costly)
manner possible will quickly be driven out of business
For Whom are Goods and Services Produced?

 Those who are willing, and able, to pay for the goods
and services produced are the direct beneficiaries of
the fruits of the production process
 This, in turn, depends on the level of income
 Income comes from the sale of services of factors of
production:
 Rent for land
 Wages for labour
 Interest for capital
 Profit for entrepreneurial ability
 Command (Socialist) Economy

 In this type of economy the government is responsible

for providing answers to the three fundamental questions
 What?
A dictator or a central planning committee decides what
products are needed
 How?
Since the government owns all means of production in a
command economy, it decides how goods and services
will be produced
 For whom?
The government decides who will get what is produced in
a command economy.
 Mixed Economy

 Private sector
is allowed to use free market within the broader
political and economic policy framework

 Public sector
reserves certain trade / industry / services / activities
 References

 Thomas J. Webster. 2003. Managerial Economics:

Theory and Practice. Elsevier/Academic Press.
 Mark Hirschey. 2008. Managerial Economics 12th
edition. Cengage Learning.
 Christopher Thomas and S. Charles Maurice. 2016.
Managerial Economics 12th edition. Irwin/McGraw-
Hill.
 Samuelson & Marks. 2013. Managerial Economics 7th
edition. Wiley.