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Chapt-1 ECON 675

Chapter – 1
By Dr. Nadia
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.
 Illustrate how economic changes affect a firm’s ability to
earn an acceptable return.
 Compare the three basic economic questions from the
standpoint of both a country and a company.
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 firm’s scarce
resources to achieve its desired objectives.
Economics+ Management = Managerial Economics
 Managerial Economics:
The use of economic analysis to make business
decisions involving the best use (allocation) of an
organization’s scarce resources.
Economics and Managerial
Decision Making
 Manager:
A manager is a person who directs resources to achieve
a stated / targeted goal, of a company.
 Economics:
The science of making decisions in the present scarce
 Managerial Economics:
the study of how to direct scarce resources in the way
that most efficiently achieves a managerial goal.
Economics and Managerial
Decision Making
 In making key business decisions the ‘Manager’ must
answer the following questions:
1.What are the economic conditions of a particular
market? Like:
A.Market Structure?
B.Supply and Demand?
Economics and Managerial
Decision Making
D. Government Regulation?
E. Future Conditions?
F. Macroeconomic Factors?
Economics and Managerial
Decision Making
 Other questions are:
2. Should our firm be in this business?
A.If yes, then at what price?
B.At what output?
C.How to maximize our economic profit or minimize
our losses in the short-run?
Economics and Managerial
Decision Making
3. How can we organize and invest in our resources
(land, labor, capital, managerial skills) in such a way that
we maintain a competitive advantage over other firms in
this market? By
B.Product Differentiation?
C.Outsourcing, alliances, mergers, acquisitions?
D.International dimension – regional or country focus or
Economics and Managerial
Decision Making
4. What are the risk involved?
A.Changes in demand and supply conditions
B.Technological changes and the effect of competition
C.Changes in interest rates and inflation rates
D.Exchange rate changes for companies engaged in
international trade
E.Political risk for companies with foreign operations
Risk is the chance that actual future outcomes will differ
from those that were expected.
The Economics of a Business
 The economics of a business refers to the key factors
that affect the firm’s ability to earn an acceptable rate of
return on investment.
The most important of these factors are
 competition
 technology
 customers
Review of Economic Terms and
 Microeconomics is the study of the choices made by
consumers, firms, and government, and how these
decisions affect the market for a particular good. It
focuses on the analysis of individual economic units.
 supply and demand
 pricing of output
 production process
 cost structure
 distribution of income
Review of Economic Terms and
 Macroeconomics is the study of the performance of
the national and global economies.
 national output (GDP)
 unemployment
 inflation
 fiscal and monetary policies
 trade and finance among nations
Review of Economic Terms and
 Resources: Also referred to as factors of production or
 Economic analysis usually include four basic types of
resources: land, labor, capital, and entrepreneurship.
Review of Economic Terms and
 Scarcity is the condition in which resources are not
available to satisfy all the needs and wants of a specified
group of people.
 Because we face scarcity, we must make
 Opportunity cost is the amount that must be sacrificed
in choosing one activity over the next best alternative.
Review of Economic Terms and
 The nature of Scarcity:
Land, Labor, Capital,
Needs & wants
Entrepreneurship &
of the population
Management Skills
Review of Economic Terms and
 In the presence of limited supplies compared to
demands, countries must decide how to allocate their
scarce resources.
 Allocation decisions must be made because of scarcity.
Three choices:
What should be produced and in what quantity?
How should it be produced?
For whom should it be produced?
Review of Economic Terms and
Q 1. What should be produced and in what quantity?
If a country produces guns and butter, then in this case
the above question should be answerable to – Should a
country with scarce resources should produce guns or
butter? And how much should it produce?
Review of Economic Terms and
Q 2. How should it be produced?
Suppose a country decides to produce butter. Then what
amount of resource (land, labor, capital and
entrepreneurial efforts should it devote for this
Review of Economic Terms and
Q 3. For whom should it be produced?
The meaning of this question is a decision that must be
made for the distribution of a country’s output of goods
and services among the members of its population.
All countries must deal with these three questions
because all have limited resources.
Review of Economic Terms and
 Entrepreneurship is the willingness to take certain risks
in the pursuit of goals.
The effort to coordinate the production and sale of goods and services.
Entrepreneurs take risk and commit time and money to a business
without any guarantee of profit.
Global Application
Global Application: Reinventing the Corporation through
Strategy and Ownership.
 Western Union began over a 100 years ago, when long
distance communication by telegraph had just begun.
 Since then the changes in technology are quite obvious,
therefore the company branched out from telegraph
business, else it would have soon be out of business.
 Diversified into money transfer business.
Global Application
 Today western union is the leading provider of money
transfer services, including transactions over the
 Their services is spurred on by increasing number of
immigrant workers in countries throughout the world
who send their hard-earned money back home to their
 Western Union illustrates that a company which has
experienced so much changes in its economics, can no
longer rely on the corporate support of a larger entity.
Global Application
 Another example is VNU, a Dutch publishing company.
 It transformed itself over the past decade into a leading
global provider of marketing and media information.
 Publications of yellow pages, etc.
 VNU illustrates that it was difficult to sustain the
reinvention and growth of a company operating in
markets with changing customers, technology, and
 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.
 Examples of such decisions are the selection of a firm's
products or services, the hiring of personnel, the
assigning personnel to particular tasks or function, the
purchase of materials and equipment, and the pricing of
products and services.
 The application of economic theory and concepts helps
managers make allocation decisions that are in the best
economic interests of their firms.
Chapter – 1
Thanking you
Dr. Nadia