Chapter 1 Introduction

Chapter Outline Economics and managerial decision making Review of economic terms and concepts

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.

Economics and Managerial Decision Making The study of the behavior of human beings in producing, distributing and consuming material goods and services in a world of scarce resources.

Economics and Managerial Decision Making Management The science of organizing and allocating a firm’s scarce resources to achieve its desired objectives.

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. This is a good point to discuss how the objectives of economic analysis provides valuable information for business decisions.

Economics and Managerial Decision Making Relationship to other business disciplines

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? These questions are consider the effects of consumer decisions, costs of production, and level of competition.

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?

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? This is a good place to discuss examples of each of these factors on a business. Students should be able cite business examples.

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? Another good slide for discussion of business cases. What are examples of each of these strategies?

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? Discussion of the risk and the financial crisis of 2008-2009 can be used to illustrate the importance of properly estimating risk.

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

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

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

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.

Review of Economic Terms and Concepts The Nature of Scarcity

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?

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

Review of Economic Terms and Concepts 3 Basic economic questions - Country and company

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

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.