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 market-like 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 NO	Market segmentation decision-only a target

HOMEWORK 1: pg.20-21, #1, #6