ECONOMICS

the ‘Study of allocation of scarce resources, among

alternative uses’.
the social science that studies the behavior of individuals,
households, and organizations (called economic actors,
players, or agents), when they manage or use scarce
resources, which have alternative uses, to achieve desired
ends. (Wikipedia)
a social science concerned with man’s problem
of using scarce resources to satisfy human wants. (Pagoso,
et al)
겚 Study of how people use their scarce resources to satisfy
their unlimited wants;
겚 About making choices.
겚 The problem is that wants or desires are virtually unlimited
while the resources available to satisfy these wants are
scarce. Economics studies how people use their scarce
resources in an attempt to satisfy their unlimited wants.

SCARCITY
Occurs when the amount of people’s desire exceeds the
amount available at a price of zero.
A resource is scarce when it is not freely available or when
its price exceeds zero.
 Goods and services that are truly free are not the subject matter of economics.
Without scarcity, there would be no economic problem and no need for prices.

ECONOMICS
겚 Resources are always scarce;
겚 They are not only scarce, but also have alternative uses.
겚 Optimum allocation is required;
겚 It is about making of choices or decision-making.

겚 Allocation problems are faced by individuals,

organizations and nations

ECONOMICS DEALS WITH:

겚 How an individual consumer

allocates his scarce resources
among alternative uses?
To get the maximum satisfaction
겚 How will an individual producer will
attain its aim of least cost
combination of inputs to get a given
quantities of output.
To achieve efficiency
겚 How an individual firm/Industry
attains equilibrium.
To attain profit maximizing level of output;
Maximize profit or minimize cost
Maximize wealth or value
겚 How a country reach equilibrium
To allocate limited resources in a
way that desired goals are
achieved

RESOURCES
The inputs, or factors of production, used to produce the
goods and services that humans want.

LABOR- 겚 The physical and mental effort

used to produce goods and
services.
CAPITAL- 겚 Physical capital
겚 Manufactured items (tools, buildings) used
to produce goods and services.
겚 Human capital
겚 Knowledge and skills people acquire to
increase their labor productivity.

NATURAL RESOURCES-  All “gifts of nature” used to produce

goods and services; which
includes bodies of water, trees, oil
reserves, minerals, and animals;
 These can be renewable or
exhaustible

ENTREPRENEURIAL ABILITY- 겚 Managerial and organizational skills

needed to start a firm. The talent,
combined with the willingness to take
risk of profit or loss.
GOOD-겚 A tangible product used to
satisfy human wants.

SERVICE- An activity, or intangible

product, used to satisfy
human wants

ECONOMIC DECISION MAKERS

HOUSEHOLDS-
 Consumers- Demands goods and services
 Resource Owners- Supply the resources

FIRMS
GOVERNMENT
REST OF THE WORLD
 Demands goods and services
 Supply the resources

MARKET
겚 A set of arrangements by which buyers and sellers carry out
exchange of mutually agreeable terms
겚 Bring together buyers and sellers
겚 Determine price and quantity

PRODUCT MARKET - Market where goods and services are sold or

exchanged

RESOURCE MARKET Market where resource is bought or sold

CIRCULAR FLOW MODEL
겚 Diagram that traces the flow of resources, product income,
and revenue among economic decision makers;
겚 Shows the flow of the following among the economic
decision makers:
겚 Resources
겚 Products
겚 Income
겚 Revenue
겚 Shows interaction between the households and firms
MICROECONOMICS- behavior in particular
겚 The study of economic markets;
겚 Individual economic choices; Positive economic statement
겚 Markets coordinating the Assertion about economic
choices of the economic reality
decision makers; Supported or rejected by
겚 Individual pieces of the puzzle evidence
True or false
MACROECONOMICS- ‘What is’
겚 The study of economic
behavior of entire ECONOMICS- applied
economies;
겚 Performance of the economy MANAGERIAL ECONOMICS-
as a whole; Special branch of economics bridging
겚 Big picture the
gap between the abstract theory and
NORMATIVE ECONOMICS- managerial practice
A normative economic statement
concerns what should be; it “It is the application of economic
reflects an opinion and cannot analysis to business problems;
be shown to be true or false by it has its origin in theoretical
reference to the facts. microeconomics.”
– Howard Davies and Pun-Lee Lam
Normative economic “Integration of economic theory with
statement business practice for the
Opinion purpose of facilitating decision-making
‘What should be’ and forward planning”
-Milton H. Spencer
POSITIVE ECONOMICS- A positive “ Price theory in the service of business
economic statement executives is known as
concerns what is; it can be Managerial economics”
supported or rejected by - Donald Stevenson Watson
reference to facts.
Economics in general takes a ‘positive’ and predictive approach not
prescriptive or ‘normative’
◦ trying to explain “what is” not what “should be”
◦ the main objective is to understand how a market economy works
Not very concerned about the descriptive realism of assumptions:
“I assume X” does not mean “I believe X to be true”
Some real tension if the models are used for prescription
◦ assume “perfect knowledge”: OK for model-building
◦ cannot say to a manager: “behave AS IF you had perfect knowledge”
겚 Simple models provide stepping
겚 Adopt a general perspective, not a stone to
sample of one ; more complexity and realism ;
겚 Thinking logically has a value itself
and
can expose sloppy thinking

MANAGERIAL ECONOMICS
(ASSIST IN DECISION MAKING) -
겚 Adopt a general perspective, not a
sample of one ;
겚 Simple models provide stepping
stone to
more complexity and realism ;
겚 Thinking logically has a value itself
and
can expose sloppy thinking
WHY WE STUDY MANAGERIAL
ECONOMICS?

A powerful “analytical engine”.

A broader perspective on the firm.
what is a firm?
what are the firm’s overall objectives?
what pressures drive the firm towards
profit and
away from profit
The basis for some of the more
rigorous analysis of
issues in Marketing and Strategic
Management.

겚 Managerial economics is the

application of economic theory
(particularly
microeconomic theory) to practical
problem solving.
겚 Managerial economics can be used
to make better management decisions.
겚 Managerial economics pertains to
decision making about the optimal
allocation of scare resources to
competing activities both the private &
public
sectors.
겚 Managerial economics incorporates
elements of both micro and macro
economics. It uses both descriptive and
prescriptive models and the
analytical tools of mathematical
economics and econometrics
(prescriptive
models).
겚 The rapid internationalization of the
marketplace makes the decision-making
tools of managerial economics more
valuable than ever