Managerial Economics

Topics: Economics, Theory, Microeconomics Pages: 8 (2651 words) Published: July 30, 2014
The Rolling Stones once said: "You can't always get what you want.' T IS IS as well as the markets that true. For most people (even Mick Jagger), that there are limits to what you can these units comprise. have or do is a simple fact of life learned in early childhood. For economists, however, it can be an obsession.

Much of microeconomics is aboutdimu-s-the limited incomes that consumers can spend on goods and services, the limited budgets and technical know-how that firms can use to produce things, and the limited number of hours in a week that workers can allocate to labor or leisure. But microeconomics is also about 'ays to make the most of these limits. More precisely, it is about the allocatiOn of Bearce resources. For example, microeconomics explains how consumers can best allocate their limited incomes to the various goods and services available for purchase. It explains how workers can best allocate their time to labor instead of leisure, or to one job instead of another. And it explains how firms can best allocate limited financial resources to hiring additional workers versus buying new machinery, and to producing one set of products versus another. In a planned economy such as that of Cuba, North Korea, or the former Soviet Union, these allocation decisions are made mostly by the government. Firms are told what and how much to produce, and how to produce it; workers have little flexibility in choice of jobs, hours worked, or even where they live; and consumers typically have a very limited set of goods to choose from. As a result, many of the tools and concepts of microeconomics are of limited relevance in those countries.

•macroeconomics Branch
of economics that deals with
aggregate economic variables,
such as the level and growth
rate of national output, inter·
est rates, unemployment, and
In modern market economies, consumers, workers, and firms have much more flexibilityand choicewhen it comes to allocating scarceresources.Microeconomics describes thf4;[aae-6ffs that consumers, workers, and firms face,and shows how these trade-offs are best made.

The idea of I"ijlaking optimal trade-offs is an important theme in microeconomics-one that you will encounter throughout this book. Let's look at it in more detail.
Consumers Consumers have limited incomes, which can be spent on a wide variety of goods and services, or saved for the future. Consumer theory, the subject matter of Chapters 3, 4, and 5 of this book, describes how consumers, based on their preferences, maximize their well-being by trading off the purchase of more of some goods for the purchase of less of others. We will also see how consumers decide how much of their incomes to save, thereby trading off current consumption for future consumption.

Workers Workers also face constraints and make'ifst, people must decide whether and when to enter the workforce. Because the kinds of jobsand corresponding pay scales-available to a worker depend in part on educational attainment and accumulated skills, one must trade offworking now (and earning an immediate income) for continued education (and the hope of earning a higher future income). 5eCQnd.,-.wQI"kw-s..£;Q[is,£.o..;f.hoice :emplo¥mennF-.or example, while some people choose to work for large corporations that offer job security but limited potential for advancement, others prefer to work for small companies where there is more opportunity for advancement CHAPTER 1 • Preliminaries 5

but less security. J'iinaILyW, Ollers must som€times deciae flow manx hours j2@r e.ekthey' wish to wor thereby trading off labor for leisure. Firms-Firms also face limits in terms of the kinds of products that they can produce, and the resources available to produce them. General Motors, for example, is very good at producing cars and trucks, but it does not have the ability to produce airplanes, computers, or pharmaceuticals. It is also constrained in...
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