MANAGERIAL ECONOMICS

What is Economics?

It comes from the Greek word “oikonomia” meaning “household management”

The efficient allocation of scarce means of production toward the satisfaction of human
wants.

Managerial Economics – is concerned with identifying and solving business problems.

Principle 1: People Face Tradeoffs

“There is no such thing as a free lunch”

• To get something we like we usually have to give up something we don’t like.

(e.g.) studying vs. napping

Principle 2: The Cost of Something is what you Give Up

• Making decisions requires comparing the costs and benefits of alternative courses
of actions.

Opportunity Cost: Whatever must be given up to obtain some item.

Principle 3: Rational People Think at the Margin

• Marginal Changes: small incremental adjustment to marginal changes.

• Individuals and firms can make better decisions by thinking at the margin
• By comparing the marginal benefits (MB) with the associated marginal cost (MC) of
a decision

Principle 4: People Respond to Incentives

• Marginal changes in cost or benefits motivate people to respond

- When the price of apple rise…
• The decision to choose one alternative over another occurs when that alternative's
marginal benefits exceed its marginal cost.
Principle 5: Trade can Make Everyone Better Off

• People gain from their ability to trade with one another

• Competitions result in gains from trading
• Trade allows people to specialize in what they do best.

Principle 6: Markets are Usually a Good Way to Organize Economic Activity

Market Economy: An economy that allocates resources through the decentralized

decisions of many firms and households as they interact in market for goods and services.

• Firms decide whom to hire and what to make.

• Households decide which firms to work for and what to buy with income.

Principle 7: Government can Sometimes Improve Market Outcomes

When the invisible does not work

Invisible hand – limited intervention

• Market Failure: A solution in which a market left on its own fails to allocate
resources efficiently.
• Externality: The impact of one person's actions on the well-being of a bystander.
• Market Power: The ability of a single economic actor (or small group of actors) to
have a substantial influence on market prices.

Type of Economics

Communism – produce military guns

Capitalism – produce consumer goods

Principle 8: A Country’s Standard of Living Depends on its Ability to Produce Goods

and Services

• Standard living may be measured in different ways (e.g. personal income or total
market value of a nations production)
- Differences in standard of living between countries or even provinces is
attributable to the productivity of the country or service.
Productivity – The amount of goods and services produced from each hour at a worker’s
time.

Productivity – standard of living

Principle 9: Prices Rise when the Government Prints too Much Money

• In Germany

In January 1921, a daily newspaper cost 0.30 marks

In November 1922, the same newspaper cost 70 000 000 marks

• Inflation: An increase in the overall level of prices in the economy.

• One cause of inflation is the growth in the quantity of money.
• When the government creates large quantities of money, the value of the money
falls.

Principle 10: Society Faces a Short-Run Tradeoff Between Inflation and

Unemployment

• Philip Curve: A curve that shows the short run tradeoff between inflation and
unemployment.

8 Goals of Economics

a. Economic growth
b. Full employment
c. Economic efficiency
d. Price level stability
e. Economic freedom
f. Equitable distribution of income
g. Economic security
h. Balance of trade

Branches of Economics

Macroeconomics - Macroeconomics is the branch of economics that studies the behavior,

performance, and structure of an entire economy. It focuses on large-scale economic
factors such as:
 • National income and output (e.g., GDP)

• Unemployment rates

• Inflation and deflation

• Government fiscal and monetary policies

• Economic growth

• International trade and finance

Microeconomics - Microeconomics is the branch of economics that studies the behavior

and decision-making processes of individual units, such as households, firms, and
industries. It examines how these entities allocate limited resources. Key topics include:

• Supply and demand

• Pricing of goods and services

• Consumer behavior

• Production and cost

• Market structures (e.g., monopoly, competition)

Divisions

Production - Production is the process of creating goods and services by combining

various resources such as land, labor, capital, and entrepreneurship. It is the starting point
of all economic activity.

Distribution - Distribution is the process through which the income or output produced in
an economy is shared among the people. It determines who gets what portion of the goods
and services produced, typically in the form of wages, rent, interest, and profit.

Consumption - This refers to the proper utilization of economic goods

Exchange - This is a process of transferring goods and services to a person or persons in

return for something.

EXAMPLES:

Principle 1: People Face Tradeoffs

Studying vs. Napping: If you choose to study for an exam, you forgo the opportunity to take
a nap. Conversely, if you nap, you lose study time.

Buying vs. Saving: If you spend money on a new gadget, you have less money saved for
future needs. If you save the money, you don’t get the new gadget.

Working vs. Leisure: Working extra hours means less time for hobbies or relaxing. Choosing
leisure means missing out on additional income.

Principle 2: The Cost of Something is What You Give Up

Buying a Concert Ticket: If you spend P50 on a concert ticket, you give up the chance to
spend that P50 on a nice dinner or a new book.

Going on Vacation: Spending P1,000 on a vacation means you give up the ability to invest
that money or save it for future expenses.

Attending a Workshop: Choosing to attend a workshop means giving up time that could be
spent working or relaxing.

Principle 3: Rational People Think at the Margin

Deciding on Extra Study Time: If you’re considering studying an additional hour, you weigh
the extra benefit of potentially improving your grade against the cost of losing an hour of
free time.

Increasing Production: A factory might decide to produce one more unit of a product if the
additional profit from that unit outweighs the cost of production.

Ordering More Food: When deciding whether to order a larger meal, you compare the extra
satisfaction from more food with the additional cost.

Principle 4: People Respond to Incentives

Discounts on Items: If a store offers a 20% discount on clothing, customers are more likely
to buy more items.

Bonus for Performance: Employees may work harder if they know they will receive a bonus
for exceeding their sales targets.
Gas Price Increase: If gas prices rise, people might drive less or switch to more fuel-
efficient cars to save money.

Principle 5: Trade Can Make Everyone Better Off

Specialized Jobs: A farmer trades vegetables for a carpenter’s furniture, benefiting both by
allowing each to specialize in what they do best.

International Trade: A country that produces a lot of wheat trades it for electronics from
another country, benefiting both from access to goods they produce less efficiently.

Skill Exchange: A graphic designer trades services with a writer, allowing each to focus on
their strengths and benefit from each other’s skills.

Principle 6: Markets are Usually a Good Way to Organize Economic Activity

Grocery Stores: Stores stock products based on what consumers want to buy, efficiently
meeting demand through a market system.

Stock Market: Companies raise funds and investors make decisions based on market
prices and demand, guiding resources to where they are most valued.

Real Estate: The housing market allocates properties to buyers who are willing to pay the
most, efficiently distributing housing based on consumer preferences.

Principle 7: Government Can Sometimes Improve Market Outcomes

Environmental Regulations: A carbon tax reduces pollution by making it more costly for
companies to emit carbon dioxide, leading to cleaner air.

Public Health : Vaccination programs funded by the government reduce the spread of
diseases, benefiting public health even when some individuals might not get vaccinated on
their own.

Antitrust Laws: Regulations prevent monopolies from exploiting their market power,
ensuring fair competition and better prices for consumers.

Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and
Services
Technology Sector: A country with advanced technology and efficient production methods
has higher living standards due to increased productivity and higher wages.

Manufacturing Efficiency: Countries with high productivity in manufacturing can produce

more goods with less labor, leading to higher incomes and better living standards.

Education and Training: Countries investing in education and skill development improve
productivity, which contributes to a higher standard of living.

Principle 9: Prices Rise When the Government Prints Too Much Money

Hyperinflation in Germany: During the Weimar Republic, excessive money printing led to
extreme inflation, where prices soared dramatically.

Zimbabwe’s Crisis: In the late 2000s, Zimbabwe experienced hyperinflation due to the
government printing large amounts of money, causing prices to skyrocket.

Venezuela: The Venezuelan government’s excessive money printing in recent years led to
massive inflation, drastically increasing prices and reducing the value of currency.

Principle 10: Society Faces a Short-Run Tradeoff Between Inflation and Unemployment

Stimulus Spending: In an effort to reduce unemployment, governments might increase

spending, which can lead to higher inflation.

Interest Rate Adjustments: Central banks might lower interest rates to boost employment,
which can increase inflation as more money circulates in the economy.

Economic Policies: Policies aimed at reducing inflation, such as increasing interest rates,
can lead to higher unemployment in the short run as businesses cut back on hiring.