1-2 Chapter Outline • Economics and managerial decision making • Review of economic terms and concepts... 1-4 Economics and Managerial Decision Making • Economics – The study of the beha
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Introduction
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Chapter Outline
• Economics and managerial decision making
• Review of economic terms and concepts
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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.
• Compare the three basic economic questions
from the standpoint of both a country and a
company.
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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
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Economics and Managerial Decision Making
• Management
– The science of organizing and allocating a
– firm’s scarce resources to achieve its
– desired objectives
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Economics and Managerial Decision Making
• Managerial economics
– The use of economic analysis to make business decisions involving the best use (allocation) of an organization’s scarce resources
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Economics and Managerial Decision Making
• Relationship to other business disciplines
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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?
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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?
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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?
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Economics and Managerial Decision Making
• Questions that managers must answer:
– What is our strategy to maintain a competitive advantage in the market?
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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?
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Review of Economic Terms and
Concepts
• The economics of a business refers to the
key factors that affect the firm’s ability to
earn an acceptable rate of return on its
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Review of Economic Terms and
Concepts
• Microeconomics is the study of individual
consumers and producers in specific
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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
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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.
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Review of Economic Terms and
Concepts
• The Nature of Scarcity
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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?
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Review of Economic Terms and
Concepts
• 3 Systems to answer the what, how and for whom questions
and material incentives
government or some central authority
traditions
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Review of Economic Terms and
Concepts
• 3 Basic economic questions - Country and company
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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
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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 firm’s scarce resources
• The application of economic theory and concepts
helps managers make allocation decisions that are
in the best economic interests of their firms