PPA 723: Managerial Economics Lecture 1: Introduction

Managerial Economics Lecture 1: Introduction Outline Course Requirements What is Policy Economics? Production Possibility Frontier

Managerial Economics Lecture 1: Introduction  Microeconomics provides a set of tools for understanding how people behave  as consumers  as workers  as business managers  and in a variety of other roles.  These tools are helpful in designing and evaluating public policies  but they are never the whole story.

Managerial Economics Lecture 1: Introduction  Microeconomics is a new way of thinking.  But it is logical and anyone who tries can figure it out.  The key is practice.  If you are having trouble, do as many problems as you can!  Learn to be patient: Go step by step.

Managerial Economics Lecture 1: Introduction  Some people think economics is too technical:  How can one shed light on policy issues with tools that are beyond the reach of elected officials?!  But the main insights of economics are often simple and logical.  We will not go beyond graphs and simple algebra.

Managerial Economics Lecture 1: Introduction  Ironically, some people think economics is too simple:  How can one gain insight into a complex policy issue with a simple graph?!  But a basic analytical principle is that one must start with the basics, then add complexity.  You must learn to decide how much complexity is needed for each decision.

Managerial Economics Lecture 1: Introduction  According to some popular reports economics is rigid and political.  “Markets are just fine on their own and the government should not interfere.”  In my judgment, economics is a flexible tool that can be applied to virtually any institutional setting, not just perfectly competitive markets,  It can be useful to people with virtually any set of values.

Managerial Economics Lecture 1: Introduction  This leads to the distinction between positive and normative analysis:  Positive analysis: Statements about human behavior that can be tested against the evidence.  Normative analysis: Statements about the best course of action that combine positive analysis and values.

Managerial Economics Lecture 1: Introduction  People who agree on the positive analysis may still choose different policies because they have different values.  Unfortunately, many people work backwards:  They select a policy on the basis of their values and then make behavioral arguments to support their conclusion.  This approach may undermine their own objectives!  Be as objective as you can when you do positive analysis!

Managerial Economics Lecture 1: Introduction  A Simple Economic Idea: The Production Possibility Frontier Food Guns Possible Not Possible A B C

Managerial Economics Lecture 1: Introduction  This production possibility frontier sheds light on several useful economic concepts:  Scarcity  Choice  Opportunity Cost  Positive versus Normative