Chapter 1

Economics and Managerial

Decision Making
 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.
 Economics and Managerial
Decision Making
Management

The science of organizing and allocating

a
firms 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 organizations
scarce resources.
 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?
 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?
 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?
 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?
Review of Economic Terms and
Concepts
The economics of a business refers
to the key factors that affect the firms
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 firms scarce resources.

The application of economic theory and concepts

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