1. Chapter 1
Introduction

2. Introduction Economics and Managerial Decision Making
The Economics of a Business
Review of Economic Terms

3. Learning Objectives Define managerial economics
Relationship to microeconomics and related fields
Cite important types of decisions regarding allocation of scarce resources
Provide examples of how changes affect company’s ability to earn an acceptable return
Cite and compare the three basic economic questions from the standpoint of a country and a company

4. Economics and Managerial Decision Making
Economics is “the study of the behavior of human beings in producing, distributing and consuming material goods and services in a world of scarce resources.” (McConnell, 1993)

5. Economics and Managerial Decision Making
Management is the discipline of organizing and allocating a firm’s scarce resources to achieve its desired objectives. Involves the ability to organize and administer various tasks in pursuit of certain objectives.

6. Economics and Managerial Decision Making
Managerial economics is the use of economic analysis to make business decisions involving the best use (allocation) of an organization’s scarce resources.

7. Economics and Managerial Decision Making
Relationship to other business disciplines
Marketing: Demand, Price Elasticity
Finance: Capital Budgeting, Break-Even Analysis, Opportunity Cost, Economic Value Added
Management Science: Linear Programming, Regression Analysis, Forecasting
Strategy: Types of Competition, Structure-Conduct-Performance Analysis
Managerial Accounting: Relevant Cost, Break-Even Analysis, Incremental Cost Analysis, Opportunity Cost

8. Economics and Managerial Decision Making
Questions that managers must answer:
What are the economic conditions in a particular market?
Market Structure?
Supply and Demand Conditions?
Technology?
Government Regulations?
International Dimensions?
Future Conditions?
Macroeconomic Factors?

9. Economics and Managerial Decision Making
Questions that managers must answer:
Should our firm be in this business?
If so, what price and output levels achieve our goals?

10. Economics and Managerial Decision Making
Questions that managers must answer:
How can we maintain a competitive advantage over our competitors?
Cost-leader?
Product Differentiation?
Market Niche?
Outsourcing, alliances, mergers,
acquisitions?
International Dimensions?

11. Economics and Managerial Decision Making
Questions that managers must answer:
What are the risks involved?
Risk is the chance or possibility that actual future outcomes will differ from those expected today.

12. Economics and Managerial Decision Making
Types of risk
Changes in demand and supply conditions
Technological changes and the effect of competition
Changes in interest rates and inflation rates
Exchange rates for companies engaged in international trade
Political risk for companies with foreign operations

13. The Economics of a Business
Economics of a business refers to the key factors that affect the ability of a firm to earn an acceptable rate of return on its owners’ investment.
The most important of these factors are
competition
technology
customers

14. The Economics of a Business
Four Stage Model of Change
Stage I
“The good old days”
Market Dominance
High Profit Margins
Cost Plus Pricing
Changes in Technology, Competition, Customers forced into Stage II

15. The Economics of a Business
Four Stage Model of Change
Stage II
Cost management
Cost Cutting
Downsizing
Restructuring
“Reengineering” to deal with changes

16. The Economics of a Business
Four Stage Model of Change
Stage III
Revenue Management
Cost cutting has limited benefit
Focus on “top-line growth”

17. The Economics of a Business
Four Stage Model of Change
Stage IV
Revenue Plus
Grow revenues profitably

18. Review of Economic Terms
Microeconomics is the study of individual consumers and producers in specific markets.
Supply and demand
Pricing of output
Production processes
Cost structure
Distribution of income and output

19. Review of Economic Terms
Macroeconomics is the study of the aggregate economy.
National Income Analysis (GDP)
Unemployment
Inflation
Fiscal and Monetary policy
Trade and Financial relationships among nations

20. Review of Economic Terms
Scarcity is the condition in which resources are not available to satisfy all the needs and wants of a specified group of people.

21. Review of Economic Terms
Resources are factors of production or inputs.
Examples:
Land
Labor
Capital
Entrepreneurship

22. Review of Economic Terms
Opportunity cost is the amount or subjective value that must be sacrificed in choosing one activity over the next best alternative.

23. Review of Economic Terms
Because of scarcity, an allocation decision must be made. The allocation decision is comprised of three separate choices:
What and how many goods and services should be produced?
How should these goods and services be produced?
For whom should these goods and services be produced?

24. Review of Economic Terms
Economic Decisions for the Firm
What: The product decision – begin or stop providing goods and/or services.
How: The hiring, staffing, procurement, and capital budgeting decisions.
For whom: The market segmentation decision – targeting the customers most likely to purchase.

25. Review of Economic Terms
Three processes to answer what, how, and for whom
Market Process: use of supply, demand, and material incentives
Command Process: use of government or central authority, usually indirect
Traditional Process: use of customs and traditions

26. Review of Economic Terms
Entrepreneurship is the willingness to take certain risks in the pursuit of goals.