Managerial Economics Overview

Managerial Economics Overview

• Managerial economics applies economic principles and methods to decision-making within firms or organizations.
• It operates under conditions of uncertainty.
• Key figures like Evan J. Douglas, Milton H. Spencer, and Louis Siegelman have defined and contributed to the field.
• This field integrates economic theory with business practices.
• It's a valuable tool for analyzing business situations and making informed decisions.
• It's well-integrated with other disciplines.

Topics Covered

• The study of economics, including why it's important
• Distinctions between macroeconomics and microeconomics
• Managerial economics itself as a specific branch
• The circular flow of economic activity
• The objectives of a firm
• Fundamental economic principles

Economics and Managerial Economics

• Economics deals with how individuals and societies choose to use scarce resources.
• Resources are limited.
• Resources that aren't scarce are called free goods.
• Scarce resources are called economic goods.
• Managerial economics is vital in decision-making, policy design, and understanding economic functions.

Micro vs. Macro Economics

• Microeconomics examines individual consumers or firms (also called the theory of the firm).
• Microeconomics looks at individual and smaller organization behavior.
• Macroeconomics studies a country's total economic activity.
• It assesses the flow of economic resources, such as land, labor, and capital, among factors of production and households.

Needs vs. Wants

• Needs are crucial for survival, like material and psychological needs.
• Human wants are unlimited.
• Economic choices are made because resources have limits, balancing limited resources with unlimited needs and wants.
• Different types of economies—household, local, national, and international—face the same basic economic problems (what to produce, how to produce, when to produce, for whom to produce.)

Circular Flow of Economics

• The circular flow of economics illustrates the movement of goods, services, and money within an economy (among households, firms, and the government).
• Firms produce goods and services, using factors of production.
• Households consume goods and services and provide factors of production.
• The government collects taxes and provides public goods and services.
• The circular flow model demonstrates interactions between these actors.

Definition of Managerial Economics

• Managerial economics utilizes economic principles, and methodologies for decision-making within organizations.
• It accounts for uncertainty in business environments
• It integrates economic concepts with business practices to guide business choices.
• Thought processes of economics are used to understand business situations.

Scope of Managerial Economics

• Managerial economics analyses production, costs, pricing, making or buying decisions, inventory, capital management, investment planning, and profit planning.
• It aims to create optimal solutions within the firm.

Main Areas of Managerial Economics

• Demand, input-output decisions, price-output decisions, profit-related decisions, investment decisions, and economic forecasting.

Chief Characteristics of Managerial Economics

• It's focused on the problems of a single business firm (microeconomics).
• It utilizes economic concepts and principles, like "theory of the firm."
• It uses pragmatic, practical business decisions and considers how market forces and business environment influence decision-making within an organization.
• It's an attempt to solve business problems and achieve organizational goals.
• Macroeconomics provides business intelligence.

Principles of Economics

• People face trade-offs.
• The cost of something is what you give up to get it (opportunity cost).
• Rational people think at the margin.
• People respond to incentives.
• Trade can improve everyone's well-being.
• Markets are typically effective for organizing economic activity.
• Government intervention can sometimes improve market outcomes.
• A country's standard of living is tied to its production capabilities
• Prices rise when a government prints too much money
• Society's short-term choices frequently balance inflation and unemployment.