LECTURE 1: INTRODUCTION TO MANAGERIAL ECONOMICS
Managerial economics
ME applies economic theory and methods to business and administrative decision making.
Managerial economics prescribes rules for improving managerial decisions. Managerial
economics also helps managers recognize how economic forces affect organizations and
describes the economic consequences of managerial behavior. It links economic concepts with
quantitative methods to develop vital tools for managerial decision making.
Evaluating Choice Alternatives
Managerial economics identifies ways to efficiently achieve goals. For example, suppose a small
business seeks rapid growth to reach a size that permits efficient use of national media
advertising. Managerial economics can be used to identify pricing and production strategies to
help meet this short-run objective quickly and effectively. Similarly, managerial economics
provides production and marketing rules that permit the company to maximize net profits once it
has achieved growth or market share objectives.
Uses of Managerial Economics in Business Decision Making
Managerial Economics Is a Tool for Improving Management Decision Making
1
,Importance of Managerial Economics to Managers
Managerial economics has applications in both profit and not-for-profit sectors. For example, an
administrator of a nonprofit hospital strives to provide the best medical care possible given
limited medical staff, equipment, and related resources. Using the tools and concepts of
managerial economics, the administrator can determine the optimal allocation of these limited
resources. In short, managerial economics helps managers arrive at a set of operating rules
that aid in the efficient use of scarce human and capital resources. By following these rules,
businesses, nonprofit organizations, and government agencies are able to meet objectives
efficiently.
2
, Making the Best Decision
To establish appropriate decision rules, managers must understand the economic environment in
which they operate. For example, a grocery retailer may offer consumers a highly price-sensitive
product, such as milk, at an extremely low markup over cost—say, 1 percent to 2 percent—while
offering less price-sensitive products, such as nonprescription drugs, at markups of as high as 40
percent over cost. Managerial economics describes the logic of this pricing practice with respect
to the goal of profit maximization. Similarly, managerial economics reveals that auto import
quotas reduce the availability of substitutes for domestically produced cars, raise auto prices, and
create the possibility of monopoly profits for domestic manufacturers. It does not explain
whether imposing quotas is good public policy; that is a decision involving broader political
considerations. Managerial economics only describes the predictable economic consequences of
such actions.
Managerial economics offers a comprehensive application of economic theory and
methodology to management decision making. It is as relevant to the management of
government agencies, cooperatives, schools, hospitals, museums, and similar not-for-profit
institutions as it is to the management of profit-oriented businesses. Although this course focuses
primarily on business applications, it also includes examples and problems from the government
and nonprofit sectors to illustrate the broad relevance of managerial economics.
THEORY OF THE FIRM
Theory of the firm is related to comprehending how firms come into being, what are their
objectives, how they behave and improve their performance and how they establish their
credentials and standing in society or an economy and so on. The theory of the firm aims at
answering the following questions:
• Existence – why do firms emerge and exist, why are not all transactions in the economy
mediated over the market?
• Which of their transactions are performed internally and which are negotiated in the
market?
3
Managerial economics
ME applies economic theory and methods to business and administrative decision making.
Managerial economics prescribes rules for improving managerial decisions. Managerial
economics also helps managers recognize how economic forces affect organizations and
describes the economic consequences of managerial behavior. It links economic concepts with
quantitative methods to develop vital tools for managerial decision making.
Evaluating Choice Alternatives
Managerial economics identifies ways to efficiently achieve goals. For example, suppose a small
business seeks rapid growth to reach a size that permits efficient use of national media
advertising. Managerial economics can be used to identify pricing and production strategies to
help meet this short-run objective quickly and effectively. Similarly, managerial economics
provides production and marketing rules that permit the company to maximize net profits once it
has achieved growth or market share objectives.
Uses of Managerial Economics in Business Decision Making
Managerial Economics Is a Tool for Improving Management Decision Making
1
,Importance of Managerial Economics to Managers
Managerial economics has applications in both profit and not-for-profit sectors. For example, an
administrator of a nonprofit hospital strives to provide the best medical care possible given
limited medical staff, equipment, and related resources. Using the tools and concepts of
managerial economics, the administrator can determine the optimal allocation of these limited
resources. In short, managerial economics helps managers arrive at a set of operating rules
that aid in the efficient use of scarce human and capital resources. By following these rules,
businesses, nonprofit organizations, and government agencies are able to meet objectives
efficiently.
2
, Making the Best Decision
To establish appropriate decision rules, managers must understand the economic environment in
which they operate. For example, a grocery retailer may offer consumers a highly price-sensitive
product, such as milk, at an extremely low markup over cost—say, 1 percent to 2 percent—while
offering less price-sensitive products, such as nonprescription drugs, at markups of as high as 40
percent over cost. Managerial economics describes the logic of this pricing practice with respect
to the goal of profit maximization. Similarly, managerial economics reveals that auto import
quotas reduce the availability of substitutes for domestically produced cars, raise auto prices, and
create the possibility of monopoly profits for domestic manufacturers. It does not explain
whether imposing quotas is good public policy; that is a decision involving broader political
considerations. Managerial economics only describes the predictable economic consequences of
such actions.
Managerial economics offers a comprehensive application of economic theory and
methodology to management decision making. It is as relevant to the management of
government agencies, cooperatives, schools, hospitals, museums, and similar not-for-profit
institutions as it is to the management of profit-oriented businesses. Although this course focuses
primarily on business applications, it also includes examples and problems from the government
and nonprofit sectors to illustrate the broad relevance of managerial economics.
THEORY OF THE FIRM
Theory of the firm is related to comprehending how firms come into being, what are their
objectives, how they behave and improve their performance and how they establish their
credentials and standing in society or an economy and so on. The theory of the firm aims at
answering the following questions:
• Existence – why do firms emerge and exist, why are not all transactions in the economy
mediated over the market?
• Which of their transactions are performed internally and which are negotiated in the
market?
3
