Managerial Economics Flashcards
application of economic theory and tools of analysis of
decision science to examine how an organization can achieve its aims or objectives most efficiently
Managerial Economics
a science of directing scarce resources to manage cost effectively
managerial economics
3 branches of economics
competitive market, market power and imperfect markets
relationship to economic theory
organization can solve its management decision problems by the application of economic theory and the tools of decision science.
is the study of economic behavior of individual decision-making units such as individual consumers, resource owners, & business firms in a free enterprise system
microeconomics
study of the total/aggregate level of output, income, employment, and prices for the economy viewed as a whole.
macroeconomics
seek to predict and explain economic behavior
economic theories
usually begin with model & this abstracts from the many details surrounding & event and seeks to identify a few of the most important determinants of of the event
economic theories
This use the tools of mathematical economics and econometrics to construct and estimate decision models aimed at determining the optimal behavior of the firm.
decision sciences
used to formalize economic models postulated by economic theory
mathematical economics
applies statistical tools to real-world data to estimate the models postulated by economic theory
econometrics
includes accounting, finance, marketing,
human resource & production.
business administration
Reasons for the Existence of Firms and
their Functions
Firms exist because it would be very inefficient and costly for the entrepreneurs to enter into and enforce contracts with workers and owners of capital, land, and other resources for each separate step of production and distribution process.
Such a general contract is much less costly than numerous specific contracts and is highly advantageous both the entrepreneurs and to the workers and other resource owners.
organization that combines and organizes resources for
the purpose of producing goods and services for sale.
firms
forms of business organizations exist in the economy
sole proprietorship, partnership, corporation, & cooperatives.
the firm exist…
in order to save on such transaction costs.
establishing a number of semiautonomous divisions
decentralizing
Functions of the Firm
Purchase resources or inputs of labor service, capital, and
raw materials in order to transform them into goods and
services for sale.
Resource owners then use the income generated from the
sale of their service or other resources to firms to purchase
the goods and services produced by firms.
Objective and Value of the Firm
Managerial economics begins by postulating a theory
of the firm ,which it uses to analyze managerial decision making.
The theory of the firm is based on the assumption that the goal or objective of the firm was to maximize current or short-term profits.
Firms, however, are often observed to sacrifice short term profits for the sake of increasing future & longterm
profits.
Since both short-term as well as long-terms profits are clearly important,
the theory of the firm now postulates that the primary goal
or objective of the firm is to maximize the wealth of the value of the
firm.
Management decision problems arise in any organization-be it a firm, a not-for-profit organization (ex. hospitals, universities or government agency- when
it seeks to achieve some goal or objective
subject to some constraints it faces.
may differ from case to case, but the basic
decision-making process is the same.
goals and contsraints
Application- managerial economics applies to
a. Businesses-decisions in relation to customers including pricing and advertising ; suppliers; competitors or the internal workings of the organization, nonprofit
organizations and households
b. “Old economy” & “new economy” in essentially the same
way except for 2 distinctive aspects of the “new economy”:
the importance of network effects and scale scope economies
c. Network effects in demand-benefit provided by a service
depends on the total number of other users
the degree to which scale and scope of a business can be
increased without a corresponding increase in cost.
Scale and scope economies scalability
