presentation econ

1. Chapter One
Introducing Managerial Economics

2. What is Economics ?
• Economics is the study of how human beings coordinate their
wants and desires, given the decision-making mechanisms, social
customs, and political realities of the society.
• Economics is the social science that studies the choices that
individuals, businesses, governments, and entire societies make
as they cope with scarcity and the incentives that influence and
coordinate those choices.

3. What is Economics?
• Economics is the study of how societies use relatively scarce
resources to produce valuable products and distribute them
among different people.
• Economics is the study of how society manages its scarce
resources. In most societies, resources are allocated not by
governments but through the combined actions of millions of
households and firms.
Economics studies the use of relatively scarce resources to satisfy
unlimited needs and wants.

4. What is Managerial Economics ?
• Managerial economics is the application of economic theory
and the tools of decision science to examine how an
organization can achieve its aims or objectives most efficiently
• Managerial economics, according to Mark Hirschey and Eric
Bentzen, is the study of how economic forces affect
organizations and how their leaders can use economic
principles to achieve optimal outcomes. Found everywhere from
large corporations to nonprofits, in all sectors of the economy,
this concept is a profoundly useful tool that helps leaders make
sound business decisions.

5. Managerial
Economics

6. Coordination in Economics
Any economic system must solve three coordination problems:
• What, and how much, to produce.
• How to produce it.
• For whom to produce it.

7. Coordination in Economics
• What, and how much, to produce?
Products are the objects that people value and produce to satisfy
human wants. Products could be divided into goods and services.
• Goods are all tangible items being produced
• Services are intangible items produced.

8. Coordination in Economics
• How to produce it?
• Goods and services are produced by using productive Resources that
economists call Factors of Production.
• Factors of production are grouped into four categories:
 Land
 Labor
 Capital
 Entrepreneurship

9. Factors of Production
• The “gifts of nature” that we use to produce goods and services are land.
• The work time and work effort that people devote to producing goods and
services is labor.
• The quality of labor depends on human capital, which is the knowledge
and skill that people obtain from education, on-the-job training, and work
experience.
• The tools, instruments, machines, buildings, and other constructions that
businesses use to produce goods and services are capital.
• The human resource that organizes land, labor, and capital is
entrepreneurship. It is supplied by entrepreneur

10. Functions of Entrepreneur
• Take the initiative in combining the resources to produce a good or
service.
• Makes the strategic business decisions that set the course of an
enterprise.
• Innovates. He or she commercialize new products , new production
techniques, or even new forms of business organisations.
• Bears risk . Innovation is risky, as nearly all new products and ideas
are subject to failure or success.

11. Coordination in Economic
• For Whom to produce?
Who consumes the goods and services that are produced depends on
the incomes that people earn. People earn their incomes by selling the
services of the factors of production they own:
 Land earns rent.
 Labor earns wages.
 Capital earns interest.
 Entrepreneurship earns profit.

12. The Economic Problem
• Scarcity exists because individuals want more than can be
produced.
• Scarcity – the goods available are too few to satisfy
individuals’ desires.
• The degree of scarcity is constantly changing.
• The quantity of goods, services, and usable resources
depends on technology and human action.

13. Poverty
• Poverty is a state or condition in which a person or community
lacks the financial resources and essentials for a
minimum standard of living.
• Poverty means that the income level from employment is so
low that basic human needs can't be met.
• Poverty-stricken people and families might go without proper
housing, clean water, healthy food, and medical attention.
• Each nation may have its own threshold that determines how
many of its people are living in poverty.

14. Economic Way of Thinking
• A Choice Is a Tradeoff
• The economic way of thinking places scarcity and its implication, choice, at
center stage.
• Making decisions requires trading off one goal against another
• You can think about every choice as a tradeoff—an exchange—giving up one
thing to get something else.
• A trade-off society faces is between efficiency and equality.
Efficiency means that society is getting the maximum benefits from its scarce
resources.
Equality means that those benefits are distributed uniformly among society’s
members.
In other words, efficiency refers to the size of the economic pie, and equality
refers to how the pie is divided into individual slices.

15. Economic Way of Thinking
• Making a Rational Choice
• A rational choice is one that compares costs and benefits and
achieves the greatest benefit over cost for the person making the
choice.
• Only the wants of the person making a choice are relevant to
determine its rationality.
• The idea of rational choice provides an answer to the first
question: What goods and services will be produced and in what
quantities?
• The answer is: Those that people rationally choose to buy!

16. The Economic Way of Thinking
• How do people choose rationally?
• Economists normally assume that people are rational.
• Rational people systematically and purposefully do the best they can to
achieve their objectives, given the available opportunities. As you study
economics, you will encounter firms that decide how many workers to
hire and how much product to make and sell to maximize profits.
• Economists use the term marginal change to describe a small
incremental adjustment to an existing plan of action. Keep in mind that
margin means “edge,” so marginal changes are adjustments around the
edges of what you are doing. Rational people make decisions by
comparing marginal benefits and marginal costs

17. The Economic Way of Thinking
• Humans need water to survive, while diamonds are unnecessary. Yet people are willing to pay much
more for a diamond than for a cup of water. The reason is that a person’s willingness to pay for a
good is based on the marginal benefit that an extra unit of the good would yield. The marginal benefit,
in turn, depends on how many units a person already has. Water is essential, but the marginal benefit
of an extra cup is small because water is plentiful. By contrast, no one needs diamonds to survive, but
because diamonds are so rare, the marginal benefit of an extra diamond is large.
• suppose you are considering watching a movie tonight. You pay $40 a month for a movie streaming
service that gives you unlimited access to its film library, and you typically watch 8 movies a month.
What cost should you take into account when deciding whether to stream another movie? You might
at first think the answer is $40/8, or $5, which is the average cost of a movie. More relevant for your
decision, however, is the marginal cost—the extra cost that you would incur by streaming another
film. Here, the marginal cost is zero because you pay the same $40 for the service regardless of how
many movies you stream. In other words, at the margin, streaming a movie is free. The only cost of
watching a movie tonight, is the time it takes away from other activities, such as working at a job or
reading a book.
• A rational decision maker takes an action if and only if the action’s marginal benefit exceeds its
marginal cost.

18. The Economic Way of Thinking
• To make a choice at the margin, you evaluate the consequences of making
incremental changes in the use of your time.
• The benefit from pursuing an incremental increase in an activity is its
marginal benefit.
• The cost of pursuing an incremental increase in an activity is its marginal cost.
• If the marginal benefit from an incremental increase in an activity exceeds its
marginal cost, your rational choice is to do more of that activity.

19. The Economic Way of Thinking
• Cost: What you Must Give Up
• The opportunity cost of something is the highest-valued alternative that must
be given up to get it.
• What is your opportunity cost of going to a live concert?
• Opportunity cost has two components:
1. The things you can’t afford to buy if you purchase the concert ticket.
2. The things you can’t do with your time if you attend the concert.

20. Production Possibilities Frontier ( PPF)
• The production possibilities frontier (PPF) is the boundary between
those combinations of goods and services that can be produced and
those that cannot.
• To illustrate the PPF, we focus on two goods at a time and hold the
quantities of all other goods and services constant.
• That is, we look at a model economy in which everything remains the
same except the two goods we’re considering.
• It measures the maximum number of outputs that can be achieved
from a given number of inputs.

21. Production Possibilities Frontier ( PPF)
• Production Possibilities Frontier
• Figure 1.1 shows the PPF for two goods: cola and pizzas.

22. Production Possibilities Frontier ( PPF)
• Any point on the frontier such as E and any point inside the PPF such as Z are
attainable.
• Points outside the PPF are unattainable.

23. Production Efficiency
•We achieve production
efficiency if we cannot
produce more of one
good without producing
less of some other
good.
•Points on the frontier
are efficient.
Production Possibilities Frontier ( PPF)

24. •Any point inside the frontier,
such as Z, is inefficient.
•At such a point, it is possible
to produce more of one good
without producing less of the
other good.
•At Z, resources are either
unemployed or misallocated.
Production Possibilities Frontier ( PPF)

25. Tradeoff Along the PPF
•Every choice along the PPF
involves a tradeoff.
•On this PPF, we must give up
some cola to get more pizzas or
give up some pizzas to get more
cola.
Production Possibilities Frontier ( PPF)

26. Opportunity Cost
•As we move down along the
PPF,
•we produce more pizzas, but
the quantity of cola we can
produce decreases.
•The opportunity cost of a
pizza is the cola forgone.
Production Possibilities Frontier ( PPF)

27. •In moving from E to F:
•The quantity of pizzas increases
by 1 million.
•The quantity of cola decreases by
5 million cans.
•The opportunity cost of the fifth 1
million pizzas is
5 million cans of cola.
•One of these pizzas costs 5 cans
of cola.
Production Possibilities Frontier ( PPF)

28. •In moving from F to E:
•The quantity of cola increases by
5 million cans.
•The quantity of pizzas decreases
by 1 million.
•The opportunity cost of the first 5
million cans of cola is 1 million
pizzas.
•One of these cans of cola costs
1/5 of a pizza.
Production Possibilities Frontier ( PPF)

29. Using Resources Efficiently
• All the points along the PPF are efficient.
• To determine which of the alternative efficient quantities to produce, we
compare costs and benefits.
• The PPF and Marginal Cost
• The PPF determines opportunity cost.
• The marginal cost of a good or service is the opportunity cost of producing one
more unit of it.

30. Using Resources Efficiently
• Preferences and Marginal Benefit
• Preferences are a description of a person’s likes and dislikes.
• To describe preferences, economists use the concepts of marginal benefit and the
marginal benefit curve.
• The marginal benefit of a good or service is the benefit received from consuming
one more unit of it.
• We measure marginal benefit by the amount that a person is willing to pay for an
additional unit of a good or service.

31. Using Resources Efficiently
• It is a general principle that:
• The more we have of any good, the smaller is its marginal benefit and …
• the less we are willing to pay for an additional unit of it.
• We call this general principle the principle of decreasing marginal benefit.
• The marginal benefit curve shows the relationship between the marginal benefit
of a good and the quantity of that good consumed.

32. Efficiency and Inefficiency
COLA
10
8
6
4
2
0
2 4 6 8 10
PIZZA
C D
A
B
Efficient
points
Inefficient
point
Unattainable point,
given available technology,
resources and labor force

33. Economic Growth and Shifts in the PPC
To Conclude:
• The expansion of production possibilities(shift in PPC)—thus
increase in the standard of living—is called economic growth.
• Two key factors influence economic growth:
o Technological change
o Capital accumulation
• Technological change is the development of new goods and of better
ways of producing goods and services.
• Capital accumulation is the growth of capital resources, which
includes human capital.

34. Economic Growth
• The expansion of production possibilities—an increase in the standard of living—
is called economic growth.
• Two key factors influence economic growth:
 Technological change
 Capital accumulation
• Technological change is the development of new goods and of better ways of
producing goods and services.
• Capital accumulation is the growth of capital resources, which includes human
capital.

35. Economic Growth
• The Cost of Economic Growth
• To use resources in research and development and to produce new capital, we
must decrease our production of consumption goods and services.
• So economic growth is not free.
• The opportunity cost of economic growth is less current consumption.

36. •Figure 2.5 illustrates the tradeoff
we face.
•We can produce pizzas or pizza
ovens along PPF0.
•By using some resources to
produce pizza ovens today, the
PPF shifts outward in the future.
Economic Growth

37. 2-40
Economic Growth and Shifts in the PPC
Neutral Technological Change
A
Pepsi
0
Biased Technological Change
0
B
Cola
Pepsi
C
B D
C
A

38. Microeconomics vs Macroeconomics
•Microeconomics is the study of choices that
individuals and businesses make, the way those
choices interact in markets, and the influence of
governments.
•Macroeconomics is the study of the performance
of the national and global economies.

39. Microeconomics vs Macroeconomics
• Microeconomics studies such things as:
• the pricing policy of firms.
• households decisions on what to buy.
• how markets allocate resources among alternative ends.
• Macroeconomics deals with:
• inflation.
• unemployment.
• economic growth.