intro economics business doc

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MICRO ECONOMICS

INTRODUCTION TOMANAGERIAL ECONOMICS


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The Scope and Role of Economics Economics is the study of how individuals and

societies choose to use the scarce resources that

nature and previous generations have provided.

An important reason for studying economics is tolearn a way of thinking.

Three fundamental concepts: Opportunity cost

Marginalism, and

Efficient markets


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Opportunity cost Opportunity costis the best alternative that we

forgo, or give up, when we make a choice or a

decision.

Nearly all decisions involve trade-offs.


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Marginalism In weighing the costs and benefits of a decision, it

is important to weigh only the costs and benefits

that arise from the decision.

For example, when a firm decides whether to

produce additional output, it considers only theadditional(or marginal cost), not the sunk cost.

Sunk costs are costs that cannot be avoided,regardless of what is done in the future, becausethey have already been incurred.


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Efficient Markets An efficient marketis one in which profit

opportunities are eliminated almost

instantaneously.

There is no free lunch! Profit opportunities arerare because, at any one time, there are many

people searching for them.


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More Reasons to Study Economics The study of economics is an essential part of the

study of society.

Economic decisions often have enormousconsequences.

During theIndustrial Revolution, new

manufacturing technologies and improvedtransportation gave rise to the modern factorysystem.


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The Scope of Economics Microeconomics is the branch of economics

that examines the behavior of individual decision-

making unitsthat is, business firms andhouseholds.

Macroeconomics is the branch of economicsthat examines the behavior ofeconomicaggregates income, output, employment, andso onon a national scale.


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The Method of Economics Positive economics studies economic behaviorwithout making judgments. It describes what

exists and how it works.

Normative economics, also called policy

economics, analyzes outcomes of economicbehavior, evaluates them as good or bad, and mayprescribe courses of action


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Positive economics includes: Descriptive economics, which involves the

compilation of data that describe phenomena and

facts. Economic theory, which involves building

models of behavior.

An economictheory is a general statement ofcause and effect, action and reaction.


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Theories and Models

Theories involve models, and models involvevariables.

Amodelis a formal statement of a theory.Models are descriptions of the relationshipbetween two or more variables.

Avariable is a measure that can change from

observation to observation. The ceteris paribus device is part of the

process of abstraction.

Using the ceteris paribus, or all else equal,assum tion economists stud the relationshi


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Theories and Models Pitfalls to avoid in formulating economic theory:

Thepost hoc, ergo propter hoc fallacyrefers to a common error made in thinking aboutcausation: If event A happened before event B, it isnot necessarily true that A caused B.

Thefallacy of composition is the erroneousbelief that what is true for a part is also true for thewhole.


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The Method of Economics Empirical economics refers to the collection

and use of data to test economic theories.

Many data sets are available to facilitate economicresearch. They are collected by both governmentagencies and private companies,


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Economic Policy

Criteria for judging economic outcomes:

Efficiency, or allocative efficiency. An efficienteconomy is one that produces what people wantat the least possible cost.

Equity, or fairness of economic outcomes.


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Economic Policy

Criteria for judging economic outcomes:

Economic growth, or an increase in the totaloutput of an economy.

Economic stability, or the condition in whichoutput is steady or growing, with low inflation

and full employment of resources.


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Managerial Decision Problems

Economic theoryMicroeconomicsMacroeconomics

Decision SciencesMathematical

EconomicsEconometrics

MANAGERIAL ECONOMICSApplication of economic theory

and decision science tools tosolve

managerial decision problems

OPTIMAL SOLUTIONS TOMANAGERIAL DECISION PROBLEMS


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Definitions

Spencer and Siegalman: Managerialeconomics is the integration of economic

theory with business practice for thepurpose of facilitating decision making andforward planning by management.

Douglas - Managerial economics is .. theapplication of economic principles andmethodologies to the decision-makingprocess within the firm or organization.


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How to Read and UnderstandGraphs Agraph is a two-dimensional representation of a

set of numbers or data.


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How to Read and UnderstandGraphs Atime series graph shows how a singlevariable changes over time


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The Cartesiancoordinate system isthe most common

method of showingthe relationshipbetween two

variables.

The horizontal line istheX-axis and thevertical line the Y-

axis. The point atwhich the horizontaland vertical axesintersect is called theorigin.


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The point at which theline intersects the Y-axis(point a) is called the Y-intercept.

The Y-intercept, is thevalue ofYwhenX= 0.


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The slope of the lineindicates whether therelationship between thevariables is positive ornegative.

The slope of the line iscomputed as follows:

b =

Y

X

Y Y

X X=

1 0

1 0


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This line slopesupward, indicatingthat there seems to be

a positive relationshipbetween income andspending.

Points A and B, above

the 45 line, show thatconsumption can begreater than income.


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A downward-slopingline describes anegative relationshipbetween X and Y.

An upward-slopingline describes a

positive relationshipbetween X andY.


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b = =5

1 00 5. b = =

7

1 00 7.

b = =0

1 00

b = =

1 0

0


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intro economics business doc

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