Chapter Introduction Chapter Outline • Economics and managerial decision making Review of economic terms and concepts Copyright â2014 Pearson Education, Inc All rights reserved 1-2 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 Copyright ©2014 Pearson Education, Inc All rights reserved 1-3 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 Copyright ©2014 Pearson Education, Inc All rights reserved 1-4 Economics and Managerial Decision Making • Management – The science of organizing and allocating a – firm’s scarce resources to achieve its – desired objectives Copyright ©2014 Pearson Education, Inc All rights reserved 1-5 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 Copyright ©2014 Pearson Education, Inc All rights reserved 1-6 Economics and Managerial Decision Making • Relationship to other business disciplines Copyright ©2014 Pearson Education, Inc All rights reserved 1-7 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? Copyright â2014 Pearson Education, Inc All rights reserved 1-8 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? Copyright ©2014 Pearson Education, Inc All rights reserved 1-9 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? Copyright ©2014 Pearson Education, Inc All rights reserved 1-10 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? Copyright ©2014 Pearson Education, Inc All rights reserved 1-11 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? Copyright ©2014 Pearson Education, Inc All rights reserved 1-12 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 owners’ investment The most important of these factors are • competition • technology • customers Copyright ©2014 Pearson Education, Inc All rights reserved 1-13 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 Copyright ©2014 Pearson Education, Inc All rights reserved 1-14 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 Copyright ©2014 Pearson Education, Inc All rights reserved 1-15 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 Copyright ©2014 Pearson Education, Inc All rights reserved 1-16 Review of Economic Terms and Concepts • The Nature of Scarcity Copyright ©2014 Pearson Education, Inc All rights reserved 1-17 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? Copyright ©2014 Pearson Education, Inc All rights reserved 1-18 Review of Economic Terms and Concepts • 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 Copyright ©2014 Pearson Education, Inc All rights reserved 1-19 Review of Economic Terms and Concepts • Basic economic questions - Country and company Copyright ©2014 Pearson Education, Inc All rights reserved 1-20 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 Copyright ©2014 Pearson Education, Inc All rights reserved 1-21 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 Copyright ©2014 Pearson Education, Inc All rights reserved 1-22 ... Outline • Economics and managerial decision making • Review of economic terms and concepts Copyright ©2014 Pearson Education, Inc All rights reserved 1-2 Learning Objectives • Define managerial economics. .. three basic economic questions from the standpoint of both a country and a company Copyright ©2014 Pearson Education, Inc All rights reserved 1-3 Economics and Managerial Decision Making • Economics. .. reserved 1-6 Economics and Managerial Decision Making • Relationship to other business disciplines Copyright ©2014 Pearson Education, Inc All rights reserved 1-7 Economics and Managerial Decision