MANAGERIAL ECONOMICS: An

Introduction

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 Chapter 1: The
Definition and Scope of Managerial
Economics
Objectives:
After studying the chapter, you should
understand:
1. the subject matter of Managerial Economics
2. the analytical approach used in Managerial
Economics

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 What is Managerial Economics?
Douglas - “Managerial economics is .. the
application of economic principles and
methodologies to the decision-making process
within the firm or organization.”
Pappas & Hirschey - “Managerial economics
applies economic theory and methods to business
and administrative decision-making.”
Salvatore - “Managerial economics refers to the
application of economic theory and the tools of
analysis of decision science to examine how an
organisation can achieve its objectives most
effectively.” 3

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 What is Managerial Economics?

Howard Davies and Pun-Lee Lam -

“It is the application of economic analysis to
business problems; it has its origin in
theoretical microeconomics.”

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 What is Managerial Economics?

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 What is Managerial Economics?

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 These Definitions Cover a Number of
Different Approaches

1. Analysis based on the theory of the firm

2. Analysis based upon management sciences
3. Analysis based upon industrial economics

Related to, but not the same as management science

and industrial economics.

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 Economic Analysis
n Comparative Statics
– begin with an initial equilibrium position - the starting point
– change something
– identify the new equilibrium, e.g:in neo-classical model of the firm
• When demand increases?
• When costs rise?
• When a fixed cost increases?
– This is the main purpose of the model -what it was designed to do
n Normative prescriptions
– it will cost me $30 per unit to supply something which will give me $20
per unit in revenue- should I do it?
– I must pay $20 billion to set up in my industry. Should I charge higher
prices to get that money back?
n Positive and Normative are linked by “if?” IF the aim of the firm is to
maximise profit what will it do/what should it do?
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 What is the purpose of economic analysis?
Why do we want to apply economic analysis to
business problems?
For the academic economist: to understand, to make
predictions about firm’s behavior The
“positive” approach to theory: What is?
For the businessperson: “to assist decision-making”,
to provide decision-rules which can be applied
The “normative” approach to theory: What should be?
These purposes are different, they can lead to
misunderstanding, and economists are not always
honest about the limitations of their approach for
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practical purposes.

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 What are these limitations?

If the aim is prediction, unrealistic assumptions

are acceptable and may be needed;
for instance, the firm may be assumed to behave “as if”
its managers had perfect knowledge of its environment

If the aim is to produce decision-rules which can

be applied by practising managers, unrealistic
assumptions will produce decision-rules which
are not operational
for instance, set output and price by MC=MR
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 How Can Managerial Economics Assist
Decision-Making?

1. Adopt a general perspective, not a sample

of one
2. Simple models provide stepping stone to
more complexity and realism
3. Thinking logically has value itself and can
expose sloppy thinking

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 Why Managerial Economics?
n A powerful “analytical engine”.
n A broader perspective on the firm.
• what is a firm?
• what are the firm’s overall objectives?
• what pressures drive the firm towards profit and
away from profit
n The basis for some of the more rigourous analysis
of issues in Marketing and Strategic Management.

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