Chapter 1

Introduction
Chapter Outline

• Economics and managerial decision making

• Review of economic terms and concepts

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Learning Objectives

• Define managerial economics and discuss

briefly its relationship to microeconomics and
other related fields of study such as finance,
marketing, and statistics.
• Cite and compare the important types of
decisions that managers must make concerning
the allocation of a company’s scarce resources.
• Compare the three basic economic questions
from the standpoint of both a country and a
company.

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Economics and Managerial Decision
Making

• Economics

– The study of the behavior of human

– beings in producing, distributing and
– consuming material goods and
– services in a world of scarce resources.

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Economics and Managerial Decision
Making

• Management

– The science of organizing and allocating a

– firm’s scarce resources to achieve its
– desired objectives.

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Economics and Managerial Decision
Making

• Managerial economics

– The use of economic analysis to make business

decisions involving the best use (allocation) of an
organization’s scarce resources.

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Economics and Managerial Decision
Making

• Relationship to other business disciplines

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Economics and Managerial Decision
Making

• Questions that managers must answer:

– What are the economic conditions in our
particular market?
• market structure?
• supply and demand?
• technology?

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Economics and Managerial Decision
Making

• Questions that managers must answer:

– Should our firm be in this business?
• if so, at what price?
• at what output level?
• can the firm achieve a sustainable competitive
advantage?

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Economics and Managerial Decision
Making

• Questions that managers must answer:

– What are additional economic conditions in our
particular market?
• government regulations?
• international dimensions?
• future conditions?
• macroeconomic factors?

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Economics and Managerial Decision
Making

• Questions that managers must answer:

– What is our strategy to maintain a competitive
advantage in the market?
• cost-leader?
• product differentiation?
• market niche?
• outsourcing, alliances, mergers?
• international perspective?

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Economics and Managerial Decision
Making

• Questions that managers must answer:

– What are the risks involved?
• changes in demand and supply conditions?
• technological changes and the effect of competition?
• changes in interest and inflation rates?
• exchange rate changes for companies engaged in
international trade?
• political risk for companies with foreign operations?

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Review of Economic Terms and
Concepts

• The economics of a business refers to the

key factors that affect the firm’s ability to
earn an acceptable rate of return on its
owners’ investment.

The most important of these factors are

• competition
• technology
• customers

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Review of Economic Terms and
Concepts

• Microeconomics is the study of individual

consumers and producers in specific
markets, especially:
• supply and demand
• pricing of output
• production process
• cost structure
• distribution of income

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Review of Economic Terms and
Concepts

• Macroeconomics is the study of the

aggregate economy, especially:
• national output (GDP)
• unemployment
• inflation
• fiscal and monetary policies
• trade and finance among nations

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Review of Economic Terms and
Concepts

• Scarcity is the condition in which resources

are not available to satisfy all the needs and
wants of a specified group of people.

• Opportunity cost is the amount (or

subjective value) that must be sacrificed in
choosing one activity over the next best
alternative.

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Review of Economic Terms and
Concepts

• The Nature of Scarcity

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Review of Economic Terms and
Concepts

• Allocation decisions must be made because of

scarcity. Three choices:

What should be produced?

How should it be produced?

For whom should it be produced?

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Review of Economic Terms and
Concepts

• 3 Systems to answer the what, how and for whom

questions

• Market process: The use of supply, demand,

and material incentives
• Command process: The use of the
government or some central authority
• Traditional process: The use of customs and
traditions

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Review of Economic Terms and
Concepts

• 3 Basic economic questions - Country and

company

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Review of Economic Terms and
Concepts
• Entrepreneurship is the willingness to take
certain risks in the pursuit of goals

• Management is the ability to organize resources

and administer tasks to achieve objectives

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Summary

• Managerial economics is a discipline that combines

microeconomic theory with management practice.

• An important function of a manager is to decide

how to allocate a firm’s scarce resources.

• The application of economic theory and concepts

helps managers make allocation decisions that are
in the best economic interests of their firms.

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