Managerial Economics Scope

Mario Rosario Wisnu Aji

Email: mario.aji@dsn.dinus.ac.id
Universitas Dian Nuswantoro Semarang
 Introduction
Subject Managerial Economics
Code B11.5206
Credits 3
This course studies the application of economic theory to managerial decisions.
The principle of economic theory is optimization or efficiency. Optimization is
Subject Description maximizing or minimizing an objective function, for example profit maximization
or cost minimization with certain constraints. The right managerial decisions will
increase the value of the company
First Meeting Goals Students are able to explain managerial economics along with the scope of
managerial economics discussion

Scoring
Activity Percentage
Assignment 20 %
Group Presentation 20 %
Midterm Exam 30 %
Final Exam 30 %
Total 100 %
 Books

N Gregory Mankiw
(2008) Principles of Microeconomics, 5 ed, Mason, Ohio: South-
Western Cengage Learning

Dominick Salvatore
Managerial Economics, 7 edition

Walter Nicholson;
Christopher Snyder
2008). Microeconomic Theory: Basic Principles and Extensions, 10th
ed, Ohio: Thomson South-Western
 Topics

The nature and scope of economic analysis

Pattern of activity and system of economic regulation
The theory of demand, theory of supply and equilibrium
Elasticity of demand and elasticity of supply
Application of the theory of demand and theory of supply
Consumer behavior analysis (cardinal approach)
Consumer behavior analysis (ordinal approach)
Production cost theory
Perfect competition market
Monopoly market
Monopolistic competition market
Oligopoly market
 Managerial Economics Scope

• Important elements in microeconomic theory

• Analytical Tools in Economics
• The problem of scarcity and choice making
• Goods and services
• An important element in economic activity
What is Economy?
 Economy

“ The term economics comes from the Greek. Oikos means

“family, household” and Nomos means “rules and laws”

Broadly speaking, the economy is defined as “One who

manages a household” or “household rules or
household management”

7
 Economics

Manage limited resources so that they can be used efficiently.

(Samuelson dan Nordhaus, 2004)

Human behavior in managing very limited resources to achieve certain

goals in life. (Smith, 2004)

“The study of how society manages resources that are always limited and
scarce”. (Mankiw, 2012)
What is Managerial Economics?
 Managerial Economics

“ Managerial Economics is the application of economic

theory to managerial decisions. The principle of economic
theory is optimization or efficiency. Optimization is
maximizing or minimizing an objective function, for
example profit maximization or cost minimization with
certain constraints. The right managerial decisions will
increase the value of the company.

10
 Making Choices

Scarcity is a problem of imbalance between (i) community needs and (ii)

available production factors in society.

Limited
production Limited factors of production
allocation
Unlimited wants of economic actors
because
Scarcity Limited ability to manage resources in the
production process
Solution

Economics the study how society manages its scare

resources
 Making Choices

Choices in production
Producers will carry out their Choices in Government
production activities in order to Activities
Choices in Consuming
obtain maximum profit on the use Each country will make choices in
The goal is to use the income
of the factors of production used carrying out economic activities
you have to get resources
to produce goods and services to with the aim of increasing economic
(goods and services) that are
be sold.. growth, overcoming unemployment
able to provide maximum
problems, improving people's living
satisfaction.
standards and so on by using
limited resources.
• In the production process, the
producer will determine the level
of production that will provide
maximum profit
• In the use of factors of production, To that end, the use of available
producers will determine the resources is regulated so as to
combination that will be used by maximize government goals and to
considering the cost of production regulate the economic activities of
used individuals and companies
Factors of Production
Objects provided by nature or created by humans that can be used to produce goods and
services

1. Land and natural resources are factors provided by nature, including land and various
types of mining goods and forest products.
2. Labor, plays a role in managing other resources, including the number of workers and the
expertise or skills possessed by these workers.
3. Capital, are objects created by humans to produce the goods and services they need, play
a role in accelerating and assisting production processes, including machinery, buildings,
fuel.
4. Entrepreneurship skills in the form of expertise and the ability of entrepreneurs to
establish and develop various business activities, including: planning, organizing,
actuating controlling (POAC).
 Types of Economic Analysis
Variables

• The theory of how a factor of production
affects other factors whose nature of
relationship is explained in theory
• a quantity whose value can change
• In price theory, there is a law of demand, where
the price of an item changes, the quantity
demanded will change
• In this theory consider two variables Price and
Quantity of goods to be purchased

Assumption

• A simpler picture of how various • For example, known as Ceteris Paribus

factors can affect an event (other things do not change or are
• Why is it necessary? assumed to be constant)

It is necessary because economic

activity and economic life are very
complex, so a simple picture must be
drawn
 Types of Economic Analysis
Hypothesis
• A general statement about how the variables in question relate to one another

• Type of Hypothesis
direct hypothesis  where the change in the value of the variable in question moves in the same
direction (income increases, consumption increases)
indirect hypothesis  where the change in the value of the variable in question moves in the
opposite direction (the price of good x increases, the demand decreases)

Making predictions
Forecasting can be used as a basis in formulating steps in the economy
1. Explain why certain events occur, why events take the way they are, how an economy
functions
2. On the basis of certain assumptions, forecasting the prevailing conditions as a basis in
formulating steps to improve conditions in the economy
 Analysis Tools
1. Graph - Serves to show the relationship of
economic variables visually

2. Mathematics - Functions to express the

relationship between variables related to a
mathematical function  Qd = f (Px, Py, I, T)

3. Statistics - Act as an analytical tool to gather facts

and test the truth of economic theory
 Y = X1 + X2 + ... + Xn
 Types of goods
Types of items based on how to get them

1. Economic goods 2. Free goods

Goods that can be obtained only if you are Goods that can be enjoyed without sacrificing
willing to sacrifice (buy them) – are not free – anything (goods can be obtained for free) – goods in
goods in limited quantities (need to produce) ex: abundance (without the need to produce)
industrial production goods ex: oxygen, water, sunlight

Types of Goods Based on Relationships with Other Goods

1. Substitute goods
Goods that can be used as a substitute for 2. Complementary goods
other goods that have (almost) the same Items whose function will appear when used
function. Use of substitute goods because the together with other items
main item is in abnormal condition ex: fuel on motorbike
ex: pencil with pen
 Types of goods
Types of Goods Based on Goods Interest
1. Inferior Goods - Goods that are in high demand by low-income people. So if income increases, the
demand for inferior goods will decrease (ex; used goods).

2. Normal Goods– goods whose demand will decrease when the price increases or our income decreases,
vice versa (ex: clothing)

3. Luxury Goods– goods that can increase the social status of its users. This type of goods is purchased
when people with upper or middle incomes (ex: cars, motorcycles)

4. Essential goods– goods that are urgently needed by the community (the elasticity of demand is inelastic
– whatever the price is, the goods will still be purchased) (ex: rice, basic necessities)

Types of Goods Based on How It Works

1. Raw goods- Unprocessed goods – in their original form taken from nature. Usually called raw materials,
because they will be used to make other goods (ex; cotton, wood, rubber)

2. Semi-finished goods– goods that are not yet in the form of finished goods, so they still require a further
production process (ex: yarn, wooden boards, cloth)

3. Final goods/Finished goods – goods that are ready for consumption by consumers. The final stage in
the production process (ex: clothes, wardrobe)
 Economic Principles

Guidance in economic activities to achieve a rational comparison between the sacrifices

incurred and the results obtained
Minimize input, maximize output
“With a certain cost we hope to get the maximum profit” , or “with the smallest cost we
hope to get a certain profit.”

Production Consumption Distribution

Activities that create,
process, seek added value
in producing goods and
services
Activities of using, using The activity of distributing
and spending (value) goods goods produced (producing
and services parties) from producers to
consumers (consuming
parties)
 Next meeting:
10 Principles of Economics (Mankiw, 2012)

How people make decisions

#1 People face tradeoff problems
#2 Cost is what you have to sacrifice to get something
#3 Rational people think with marginal concepts
#4 People response to incentives
How people interact
#5 Trading benefits all parties
#6 The market is the best place to organize economic activity
# 7 The government is sometimes able to improve the final outcome of the market mechanism
How the economy works as a whole
#8 The country's standard of living depends on its ability to produce goods
#9 Prices go up when the government prints a lot of money
#10 Society faces a tradeoff problem of inflation and unemployment
Any Questions?