managerial econ chapter 1

8/11/2019 Managerial Econ Chapter 1

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ECO 16Faculty of Arts and LettersUniversity of Santo Tomas


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Economics and ManagerialDecision Making

The Economics of a BusinessReview of Economic Terms andConcepts


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Economics is the study of thebehavior of human beings in

producing, distributing andconsuming material goods andservices in a world of scarce

resources. (McConnell, 1993)


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Management is the discipline oforganizing and allocating a firmsscarce resources to achieve its desired

objectives.Managerial Economics is the use ofeconomic analysis to make business

decisions involving the best use(allocation) of an organizations scarceresources.


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Questions that managers must answer:What are the economic conditions in aparticular market?

Market structure Supply and demand conditions Technology Government regulations International dimensions Future dimensions Macroeconomic factors


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Questions that managers mustanswer:Should the firm be in business?If so, what price and output levelsachieve our goals?


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Questions that managers mustanswer:How can we maintain a competitiveadvantage over our competitors? Cost-leader Product differentiation Focus on market niche Outsourcing, alliances, mergers and

acquisitions

International dimension (regional or


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Questions that managers mustanswer:What are the risks involved?Risk is the chance or possibility thatactual future outcomes will differ fromthose expected today (unfavorable

results)


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Types of risks: Changes in the supply and demand

conditions; Technological changes and the effect

of competition; Changes in the interest rate and the

inflation rate; Exchange rate changes for firms

involved in international trade; Political risks for companies with

foreign operations


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The economics of a business refers tothe key factors that affect the abilityof a firm to earn an acceptable rate of

return on its owners investment; The most important of these factorsare: Competition Technology Customers


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Stage 2 Cost management

Cost-cutting, downsizing andrestructuring, andreengineering


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Stage 3 Limits to growth in profits Top line growth or revenue

growth Revenue management

Stage 4 Revenue plus


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Microeconomics is the study of individualconsumers and producers in specificmarkets. Supply and demand Pricing of outputs and inputs (also

called the factors of production orresources)

production processes Cost structure Distribution of income and output


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Macroeconomics is the study of theaggregate economy. National income analysis Unemployment Inflation Fiscal policy Monetary policy Trade and investments


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Scarcity is the condition in whichresources are not available to satisfyall the needs and wants of a specified

group of people.Opportunity cost is the amount orsubjective value that must be

sacrificed in choosing one activity overthe next- best alternative.


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Because of scarcity, an allocationdecision must be made. The allocationdecision of a society is comprised of

three separate choices What and how many goods and

services should be produced?

How should these goods andservices be produced? (land, labor,capital and entrepreneurial efforts)

For whom should these goods and


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For the firm, these allocation choicescan be restated as follows: What: the product decision How : The hiring, staffing,

procurement, and capital budgetingdecisions.

For whom : The market segmentationdecision.


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Entrepreneurship is the willingness totake certain risks in the pursuit ofgoals.

Management is the ability to organizeand administer various tasks inpursuit of certain objectives.


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Business Ethics Unethical conduct is inconsistent with the

goal of value maximization and contrary

to the enlightened self interest ofmanagement and its employees. To become successful in business, a set of

ethical rules should be adopted:


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To become successful in business, a set ofethical rules should be adopted:

Above all else, keep your word. Say whatyou mean and mean what you say;Do the right thing. A handshake with anhonorable person is worth more than a tonof legal documents from a corruptindividual;


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To become successful in business, a set ofethical rules should be adopted:

Accept responsibility for your mistakes, andfix them. Be quick to share credit forsuccess;Leave something on the table. Profit withyour customer and not off your customer.

Stick by your principles. Principles are notfor sale at any price.

managerial econ chapter 1

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