Managerial Economics

Topics: Economics, Microeconomics, Marginal cost Pages: 9 (2006 words) Published: September 21, 2013

Chapter 1: Introduction to Managerial Economics


Introduction to Managerial Economics
Managerial economics is the science of directing scarce resources to manage cost effectively. It consists of three branches: competitive markets, market power, and imperfect markets. A market consists of buyers and sellers that communicate with each other for voluntary exchange. Whether a market is local or global, the same managerial economics apply.

A seller with market power will have freedom to choose suppliers, set prices, and use advertising to influence demand. A market is imperfect when one party directly conveys a benefit or cost to others, or when one party has better information than others.

An organization must decide its vertical and horizontal boundaries. For effective management, it is important to distinguish marginal from average values and stocks from flows. Managerial economics applies models that are necessarily less than completely realistic. Typically, a model focuses on one issue, holding other things equal. KEY CONCEPTS

managerial economics
economic model
marginal value

average value
other things equal
vertical boundaries

horizontal boundaries
market power
imperfect market

1. Define managerial economics and introduce students to the typical issues encountered in the field.
2. Discuss the scope and methodology of managerial economics. 3. Distinguish a marginal concept from its average and a stock concept from a flow.

© 2001 I.P.L. Png and C.W.J. Cheng


Chapter 1: Introduction to Managerial Economics

4. Describe the importance of the "other things equal" assumption in managerial economic analysis.
5. Describe what constitutes a market, distinguish competitive from non-competitive markets, and discuss imperfect markets.
6. Emphasize the globalization of markets.
1. Definition. Managerial economics is the science of directing scarce resources to manage cost effectively.
2. Application. Managerial economics applies to:
(a) Businesses (such as decisions in relation to customers including pricing and advertising; suppliers; competitors or the internal workings of the organization), nonprofit organizations, and households.

(b) The “old economy” and “new economy” in essentially the same way except for two distinctive aspects of the “new economy”: the importance of network effects and scale and scope economies.
i. network effects in demand – the benefit provided by a service depends on the total number of other users, e.g., when only one person had email, she had no one to communicate with, but with 100 mm users on line, the demand for Internet services mushroomed.

ii. scale and scope economies – scaleability is the degree to which scale and scope of a business can be increased without a corresponding increase in costs, e.g., the information in Yahoo is eminently scaleable (the same information can serve 100 as well as 100 mm users) and to serve a larger number of users, Yahoo needs only increase the capacity of its computers and links.

iii. Note: the term open technology (of the Internet) refers to the relatively free admission of developers of content and applications. (c) Both global and local markets.
3. Scope.
(a) Microeconomics – the study of individual economic behavior where resources are costly, e.g., how consumers respond to changes in prices and income, how businesses decide on employment and sales, voters’ behavior and setting of tax policy.

(b) Managerial economies – the application of microeconomics to managerial issues (a scope more limited than microeconomics).
(c) Macroeconomics – the study of aggregate economic variables directly (as opposed to the aggregation of individual consumers and businesses), e.g., issues relating to interest and exchange rates, inflation, unemployment, import and export policies.


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