Download Lecture-Chapter 1, Keat and Young

Lecture-Chapter 1, Keat and Young
The book is written to establish the importance of economic analysis and managerial
decision-making in a typical problem. Our fictional company, Global Foods, is considering entry
into the soft drink market. The book details the role economic analysis plays in this complicated,
multi-faceted decision. The question for Global Foods is, “Do we enter the sofy drink market?”
Our text describes economics as “the study of the behavior of human beings in producing,
distributing, and consuming material goods and services in a world of scarce resources.” Managerial
economics is defined to be “the use of economic analysis in the determination of business policy.”
Economics is really just a framework for making decisions, and the application of economic analysis
usually involves data and measurement. Economic theory will usually provide some information as
to the direction of the expected effect, but more precise prediction require data. For example, you
are all probably familiar with the concept of demand. We know already that if the price of umbrellas
increases by, say, 10 percent, the quantity of umbrellas demanded by consumers will fall. If we want
to know exactly how much the quantity demanded will fall, more information (data) is required to
answer the question. The use of data allows a precise connection between theory and reality to be
established. Economics offers a variety of quantitative methods to assist in making sound economic
decisions. Two important methods are econometric methods (regression models) and linear
programming methods.
In providing and answer to the entry question, Global Foods will use the economic
framework and the quantitative tolls of the economist to investigate, among other issues,
1) the anticipated market demand for soft drinks
2) the degree of competition in the soft drink market
3) the extent of the market power of the existing soft drink producers
4) the importance of establishing product differentiation
This list is certainly not comprehensive. There are many legal issues, labor issues, and capital issues
that we have not mentioned, but economic analysis is helpful in these areas as well.
Review of Economic Terms and Concepts
The first important distinction is between microeconomics and macroeconomics. Macro
deals with the entire economy. Issues like unemployment and inflation. Microeconomics deals with
the allocation of scarce resources. This course in managerial economics is based, primarily, on
microeconomic principles but macroeconomics has a role as well. Any manager must be interested
in macro forecasts for purpose of borrowing, lending, investment decisions, and future supply and
demand conditions.
Let us examine the definition of microeconomics in detail. We see the words allocation and
scarce resources. The first emphasizes that micro, as we previously mentioned, is concerned with
decision-making. Scarce resources deserves some explanation. Economists divide all resources into
free resources and economic resources. Free resources are resources with a zero price, like air, for
example. There are few commodities as vital to one’s existence as air, yet the price is zero. The
consequence of this low price is that every person can have as much air as he or she would like. For
free resources there is no allocation problem to solve. Economic resources, on the other hand, are
scarce, which means limited with respect to the desires of the population. There are not enough of
these scarce resources for everyone to have as much of everything as he of she would like. This fact
forces decisions to be made and gives rise to the allocation problem mentioned above. These scarce
resources are subdivided into categories;
1) Land-plots of land and minerals.
2) Labor-Human efforts, both mental and physical.
3) Capital-Plant and equipment used to produce other goods.
4) Entrepreneurship and management skills-entrepreneurs are associated with risk-taking and owning
the means of production. Managers are the actual resource allocators.
Technology also plays a role in determining the number and kind of goods which can be produced
from the resources available.
Because there are these resource constraints faced by all decision-makes, choices must be
made. Though constraints are present, one typically has several options from which to choose. If an
option is selected, the other options are forsaken. This gives rise to the opportunity cost of the
decision. Any decision can be evaluated in terms of the highest valued alternative not chosen.
Opportunity cost is what you give up to do what you do. Managerial and other examples.
Opportunity cost is the concept of cost we will use this quarter. Our successful manager must surely
pay attention to opportunity cost if sound decisions are to be made.
Any economic system or country should be paying attention to this concept of opportunity
cost in answering the three economizing questions; What? How? And For Whom?
Three methods have evolved to answer these questions. They are;
1) Market Process-relying on supply, demand, and the decsions of private property owners to answer
the questions
2) Command-uses government or some central authority to answer the questions. Do have a marketlike voting mechanism at work here.
3) Tradition-relying on customs and traditions to answer the questions.
The first two are most important. The economic systems in the world today rely, in some measure,
on both the market and command. Differences in the so-called “isms” are really matters of degree.
There are managerial counterparts to the three economizing questions.
Country
Firm
What
Product Decision
How
Hiring and capital budgeting decisions
For Whom
HOMEWORK 1: pg.20-21, #1, #6
NO
Market segmentation decision-only a target