Managerial Economics

An introduction
 What is economics?

Principles of economics

Themes of economics

What is a market?

Why study economics?

What is economics?
Scarcity – a basic human dilemma
Limited resources vs. unlimited wants
The human condition requires making choices

Definitions of Economics
Mankiw’s definition
Economics is the study of how society manages its
scarce resources

Hirshleifer’s definition
Economics concerns decisions – choices among actions

Alternative definitions
Economics is how society chooses to allocate its scarce
resources among competing demands to improve human
welfare
What is economics?
● microeconomics
Branch of economics that deals with the behavior of
individual economic units—consumers, firms, workers,
and investors—as well as the markets that these units
comprise.

● macroeconomics
Branch of economics that deals with aggregate economic
variables, such as the level and growth rate of national
output, interest rates, unemployment, and inflation.
Principles of economics?
1. People face trade-offs
2. The cost of something is what you give up to get it
3. Rational people think at the margin
4. People respond to incentives
5. Trade can make everyone better off
6. Markets are usually a good way to organize economic activity
7. Governments can sometimes improve market outcomes
8. A country’s standard of living depends on its ability to produce
goods and services
9. Prices rise when the government prints too much money
10. Society faces a short-run trade-off between inflation and
unemployment
Themes of economics
Prices and Markets

Microeconomics describes how prices are determined.

In a centrally planned economy, prices are set by the

government.

In a market economy, prices are determined by the

interactions of consumers, workers, and firms. These
interactions occur in markets—collections of buyers and
sellers that together determine the price of a good.
Themes of economics
Accounting cost vs. opportunity cost
Rationality and rational behavior of individuals
 Interdependence and gains from trade - basis of exchange,
division of labor & specialization
Role of the price system - Perfect market versus Imperfect market
Asymmetry of information
Non-unique prices
Transactions costs

Role of profits
Role of a government
Use of methodology: marginal analysis, use of models & positive
rather than normative analysis
Themes of economics
Theories and Models
Economics as a Science
Observation→Theory→Data→Testing

A model is a mathematical representation, based on economic

theory, of a firm, a market, or some other entity.

Positive versus Normative Analysis

● positive analysis describes relationships of cause and effect.

● normative analysis examines questions of what ought to be.

What is a market?
● Market A market is an institutional arrangement under
which buyers and sellers can voluntarily exchange some
quantity of a good or service at a mutually agreeable price.
It can, but need not be a specific place or location where
buyers and sellers actually come face to face for the
purpose of transacting their business – e.g. market for
professors has no physical location

● Law of one price

● Arbitrage Practice of buying at a low price at one
location and selling at a higher price in another.
What is a market?
Market Definition—The Extent of a Market
● extent of a market Boundaries of a market, both
geographical and in terms of range of products produced
and sold within it.
Market definition is important for two reasons:

• A company must understand who its actual and potential

competitors are for the various products that it sells or
might sell in the future.

• Market definition can be important for public policy

decisions.
Why managers to study economics?
Corporate Decision Making: Before launching ETIOS in Indian Market

The design and efficient production of ETIOS involved not only some
impressive engineering, but also understanding of the following;

First, Toyota had to think carefully about how the public would
react to the design and performance of its new products.
Second, Who are the existing players in the segment?
Next, Toyota had to be concerned with the cost of manufacturing
these cars – choice of production locations
Finally, Toyota had to think about its relationship to the
government and the effects of regulatory policies as Automobile
Emission Standards
Questions?