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
A
B
Not Possible
Possible
C
Guns
Managerial Economics
Lecture 1: Introduction
This production possibility
frontier sheds light on several
useful economic concepts:
Scarcity
Choice
Opportunity Cost
Positive versus Normative