economic principles and management decision making

8/13/2019 Economic Principles and Management Decision Making

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Lecture 3

Economic Principles and

Management Decision Making


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Session Outline

Defining Economics Why is Economics important?

Classifying Economic Systems

Economic Tools to Make Strategic Business

Decisions

Fundamental Concepts of Managerial

Economics

How the Principles of Economics Affect

Decision Making


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What is Economics about?

The study of economics is aboutmuch more than money

Economics provides insight notonly into financial matters, but the

world at large Economics is a powerful tool for

understanding how human beingsbehave

Economics helps peopleunderstand individual, businessand government decisions.


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Definition

Economics is the social science that examines theways in which individuals and entire societies

allocate scarce resources to meet their needs and

wants.

Resources are by nature limited. People do not havethe time, money or materials to do or acquire all of

the things they need and want.

This means individuals, families, companies and

entire nations have to prioritize their needs and

wants, deploying their available resources

accordingly.


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Lord Lionel Robbins

Definition

Economics is a social science which

studies human behaviour as a relationship

between ends and scarce means that

have alternative uses


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Why is Economics

important?


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Benefits

People make economic decisions daily.

Studying economics prepares you to be amore knowledgeable and informedparticipant in the modern economy.

A basic understanding of economics canmake you a smarter consumer, worker andinvestor

This understanding allows the projection of

future economic conditions based oncurrent indications.

News and Current Events


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Other Considerations

Life Decisions Household budgeting etc.

Informed citizens

A knowledge of economics helps a person

become a more knowledgeable participant in thepolitical process.

Nation Building

In building a nation, a national identity must becreated to unify the citizens.

Divide and Rule

Symbols

Cohesion


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Misconceptions

Economics is not solely about money. Thediscipline concerns itself with scarcity andallocation of resources, which haveapplications beyond monetary concerns.

However, economic theory is not foolproofbecause it is a social science based on theinterplay between culture and money.

Economic effects change as culturalcustoms change.


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Resource allocation

Type of resources

Labour (wage)

Land (rent)

Capital (interest)

Entrepreneur (profit)


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Different Ideologies

Social reformism & intervention

Laissez-faire economics

Marxist political economy


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Completely Planned SystemAll resources controlled by government

Completely Free (Capitalist) system

All resources controlled by private

sector

Mixed Market SystemResources controlled by both private

and public sectors in varying degrees


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Totally

planned

Economy

N.

Korea

CubaPoland France

UK

USA

Early 1980s

China Hong

Kong

Totally

Free-

market

Economy



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Totally

planned

econom

y

N. Korea

N. Korea

Cuba

China

Poland

Poland France

France UK

UKUSA

USA

Early 1980s

Early 2000s

China Hong

Kong

CubaChina

(Hong

Kong)

Totally

Free-

market

economy



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Economic Tools to Make

Strategic Business Decisions

Econometric Tools

Economic indicators

Economic Graphs

Shift-share Model

Location Quotient

Economic Base

Technique


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Fundamental Concepts of

Managerial Economics

Microeconomic

Principles

Scarcity, choice andopportunity cost

Production possibility

frontier

Marginal Analysis


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Microeconomics

What to Produce and where

How to Produce

How to Finance the Production

Who will get what is produced -

Distribution

Achieving the three Es Efficiency, Effectiveness and

Equity


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Scarcity and choice

Human wants, e.g. housing, clothing food,transport

Relatively unlimited wants-insatiable

Limited resources, e.g. land & finance Scarcity and need to choose

Choosing among alternatives


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Choice

Rationalise choices Making judgements about relative worth

of alternative resources

Scale of preference Utility-satisfaction from good or resource


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Opportunity cost

Opportunity costs Sacrifice of alternative use

Sacrifice of next best

Real cost measure


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Production possibility curve

Illustrates economic concepts (e.g.scarcity, choice, OC)

Factor combination

Attainable and unattainable output Sacrificing present for future consumption


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Production Possibilities Curve


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Marginal Analysis

Total utility (TU) Marginal utility (MU)

Diminishing Marginal Utility

TU & MU from consuming water

No of Glasses TU MU

1 30 30

2 43 13

3 50 74 54 4

5 54 0

6 49 -5

Figure 1.1: Marginal Utility

-10

-5

0

5

10

15

20

25

30

35

1 2 3 4 5 6

No of Glasses of wa ter

Utils


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Optimal Allocation of Resources

Deciding on conversion of a dual carriageway to

motorway: How many miles should be converted?

1

mile

2

miles

3

miles

4

miles

5

miles

6

miles

Total benefit

(m)

5 8 11 15 16 16.5

Total cost(m)

3 4.5 6 8 10 12


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Weighing Marginal Benefits

& Marginal Costs

1 mile 2 miles 3 miles 4 miles 5 miles 6 miles

Total benefit m 5 8 11 15 16 16.5

Total cost (m) 3 4.5 6 8 10 12

Marginal benefit (m) 3 3 4 1 0.5Marginal cost (m) 1.5 1.5 2 2 2


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Decision Making Trade-off

Choosing entails trading off a target against anotherand is a fundamental issue of the decision-making

process.

Marginal Benefits and Costs

Adjustments to the existing status quo. e.g. changingjobs for higher wages

Response to Incentives

Indices of elasticity show changes in people's

behaviour as a response to certain incentives.

Opportunity Cost

The decision-making process requires comparing the

costs and benefits of alternative courses of action


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Decision Making

Making Capital Investments Using the Laws of

Supply and Demand

Assessing a Companys Investment Potential

Using Price Elasticity

Determine Whether to Enter a New Market

Using Marginal Analysis


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Seminar Questions

How to Make a Decision at the Margin inEconomics

Calculating marginal utility

economic principles and management decision making

Documents