Chapter 1: 1 Introduction to Managerial Economics

Summary

This session introduces managerial economics, focusing on the need for its study, scope, and key concepts. It covers the role of a manager in optimizing inputs and maximizing profits through decision-making processes. The transcript discusses economic concepts like scarcity, opportunity cost, and the distinction between micro and macroeconomics. Practical examples illustrate managerial challenges such as product selection, production methods, pricing strategies, and competition response. The session emphasizes the importance of applying economic theories and quantitative methods to address managerial decision problems effectively.

Takeaways

• 📚 Managerial economics focuses on applying economic concepts, theories, and tools to solve business problems.
• 💼 The key goal of a manager is to maximize profits by making optimal decisions about input production, volume, and pricing.
• ⚙️ There is a conversion process in every organization where inputs (labor, capital, land) are turned into outputs (goods or services).
• 🏭 Decision-making in managerial economics includes whether to produce inputs in-house or buy them, choosing the right production methods, and determining production volumes.
• 📊 Overproduction can lead to high inventory costs, while underproduction results in lost sales and dissatisfied customers.
• 💡 Economic concepts like scarcity, opportunity cost, and the relationship between limited resources and unlimited needs drive managerial decision-making.
• 🏦 Managerial economics is largely based on microeconomics, which studies individual behavior like demand, supply, and pricing.
• 📈 Macroeconomics studies aggregate economic behavior such as national GDP, unemployment, and inflation, but managerial economics mainly uses microeconomic tools.
• 🔄 Opportunity cost refers to the sacrifice of the next best alternative when making a choice between competing uses of limited resources.
• 🔍 Tools and methods like forecasting, statistical analysis, and numerical analysis help managers make informed decisions to solve economic problems.

Q & A

What is managerial economics?

Managerial economics deals with the application of economic concepts, theories, tools, and methods to solve practical problems in business. It is sometimes called applied economics.

Why is there a need to study managerial economics?

Studying managerial economics helps managers make optimal decisions in business by applying economic theories and concepts to manage the conversion of inputs into outputs efficiently, maximizing profits while addressing various challenges.

What are some key decisions managers need to make to maximize profits?

Managers need to decide on producing inputs internally or purchasing them, the combination and method of production, the volume of production, pricing strategies, and how to react to competitors' decisions.

What happens if a company produces too much or too little?

Overproduction can lead to high inventory costs, wastage, and tied-up capital, while underproduction may result in lost sales and customer dissatisfaction, potentially driving customers to competitors.

How does managerial economics help with decision-making?

Managerial economics provides tools, concepts, and theories to help managers make proper and optimal decisions about inputs, production methods, pricing, and other key areas to maximize profits.

What is the difference between microeconomics and macroeconomics?

Microeconomics focuses on individual economic behavior, such as the demand and supply of a company, while macroeconomics deals with the aggregate economic behavior, like national GDP, inflation, and unemployment.

Why does economics exist, according to the transcript?

Economics exists because of the scarcity of resources and the unlimited wants of individuals and businesses. If resources were unlimited, there would be no need for economics.

What is opportunity cost in managerial economics?

Opportunity cost is the benefit lost from choosing one option over another. It represents the value of the next best alternative that must be sacrificed when making a decision.

How does opportunity cost affect decision-making in businesses?

Opportunity cost forces businesses to make choices between competing alternatives, such as investing in new computers versus hiring new workers, as they cannot afford both with limited resources.

What are some of the key problems managers face in decision-making?

Managers face various problems, including selecting the right products, determining the optimal volume of production, setting the correct price, deciding on strategies for organizational design, and responding to competitors.

Outlines

00:00

📚 Introduction to Managerial Economics

The first paragraph introduces managerial economics and its importance in decision-making for managers. It discusses the conversion process of inputs (labor, capital, land) into outputs (goods and services) in various types of organizations, including academic institutions and manufacturing companies. The role of managers is emphasized, particularly in maximizing profit by making optimal decisions about input production, method selection, and determining the optimal volume of production to avoid overproduction or underproduction.

05:01

🔄 Impact of Production Decisions on Profit

The second paragraph continues the discussion on how managerial decisions affect production and profit. It highlights the consequences of underproduction (leading to dissatisfied customers and loss of market share to competitors) and overproduction (leading to inventory costs and capital being tied up in unsold products). The importance of reacting strategically to competitors' pricing decisions is also mentioned as a key managerial challenge.

10:05

📈 Tools and Theories in Managerial Economics

This paragraph introduces the application of economic concepts, tools, and theories in business to solve practical problems, referred to as managerial economics or applied economics. The term 'management' is defined as a continuous process involving planning, organizing, staffing, directing, and controlling. Economics is defined as a social science that studies how society allocates limited resources to meet unlimited needs. This scarcity of resources creates the foundation for economic studies and managerial decision-making.

15:07

⚖️ Economics and Resource Scarcity

The fourth paragraph delves deeper into the core concepts of economics, especially the implications of resource scarcity. It explains that economics would not exist if resources were unlimited. The distinction between microeconomics (study of individual consumers and firms) and macroeconomics (study of aggregate economic behavior) is introduced, with managerial economics relying primarily on microeconomic theories for decision-making. It also touches on economic problems arising from the imbalance between scarce resources and unlimited wants.

20:08

📊 Economic Problems and Opportunity Cost

The fifth paragraph focuses on decision-making in the context of scarce resources. It introduces the concept of opportunity cost—the value of the next best alternative that is foregone when making a choice. Examples are provided from businesses, governments, and individuals, demonstrating how decisions involve trade-offs, with opportunity costs being the benefits missed by not choosing the other options. This concept is critical for managers in making informed decisions that optimize resource use.

Keywords

💡Managerial Economics

Managerial economics is the application of economic concepts, theories, tools, and methods to solve practical problems in a business context. It is a crucial part of decision-making for managers aiming to optimize resources and maximize profit. In the video, it is discussed as a tool used by managers to make optimal decisions regarding production, pricing, and other management issues.

💡Scarce Resources

Scarce resources refer to the limited availability of inputs necessary for production, such as labor, capital, and land. These resources are not abundant, and their scarcity necessitates careful allocation to meet unlimited human wants. The video highlights that the scarcity of resources is a fundamental reason for the existence of economics and managerial economics, as it forces managers to make choices and prioritize needs.

💡Opportunity Cost

Opportunity cost is the value of the next best alternative that must be foregone when a decision is made. It is a critical concept in economics that helps managers evaluate the cost of choosing one option over another. The video illustrates this with examples, such as choosing between producing a certain product or investing in another venture, where the unchosen option represents the opportunity cost.

💡Microeconomics

Microeconomics is the branch of economics that studies the behavior of individual consumers and firms in making decisions regarding the allocation of limited resources. It focuses on supply and demand, pricing, and the behavior of individual markets. The video discusses microeconomics as a key component of managerial economics, emphasizing its role in analyzing individual economic behaviors and decision-making within a firm.

💡Macroeconomics

Macroeconomics is the branch of economics that studies the behavior and performance of an economy as a whole. It deals with aggregate economic variables such as national income, GDP, unemployment, and inflation. The video contrasts macroeconomics with microeconomics, noting that while managerial economics primarily draws on microeconomic theories, an understanding of macroeconomic conditions is also important for managers.

💡Input-Output Conversion Process

The input-output conversion process refers to the transformation of inputs (like labor, capital, and materials) into outputs (goods and services) within an organization. This process is managed by managers who aim to optimize the use of resources to maximize output and profit. The video emphasizes the importance of this process in various types of organizations, from manufacturing companies to academic institutions.

💡Profit Maximization

Profit maximization is the primary goal of most businesses, involving strategies to increase the difference between total revenue and total cost. In the video, it is discussed as a key objective of managerial decisions, where managers use economic theories and quantitative methods to make decisions that maximize profit, such as optimal production levels and pricing strategies.

💡Decision-Making

Decision-making in managerial economics involves choosing the best course of action among various alternatives to achieve the organization's objectives, primarily profit maximization. The video outlines several key areas where managers must make decisions, such as input sourcing, production methods, pricing, and responses to competitors' actions, all of which are guided by economic principles.

💡Economic Problem

An economic problem arises due to the scarcity of resources and the unlimited nature of human wants, forcing individuals and organizations to make choices about how to allocate resources effectively. The video explains that this fundamental problem is at the heart of economics and managerial economics, driving the need for careful decision-making and prioritization.

💡Applied Economics

Applied economics refers to the practical application of economic theories and principles to real-world situations. In the context of the video, managerial economics is described as a form of applied economics, where managers use economic tools to address business challenges, such as optimizing production processes and making strategic decisions to improve the firm's performance.

Highlights

Introduction to managerial economics covering its scope, importance, and basic concepts.

Managerial economics helps managers optimize decisions related to production, pricing, and profit maximization.

There is a conversion process from inputs (labor, capital, land) to outputs (goods and services) in all organizations.

Managers face challenges like choosing between producing inputs themselves or purchasing from external parties.

Proper decision-making by managers can help avoid overproduction (leading to high inventory costs) or underproduction (leading to reduced sales).

Managerial economics applies economic theories, tools, and concepts to solve practical business problems.

The study of economics is essential due to the scarcity of resources and unlimited human wants.

Microeconomics focuses on individual economic behavior, while macroeconomics looks at aggregate economic behavior.

Managerial economics heavily relies on microeconomic theories like demand, production, pricing, and profit analysis.

Economic problems arise due to the existence of scarce resources and unlimited wants.

Managers must make choices, often involving opportunity cost, which is the foregone benefit of the next best alternative.

Examples of opportunity costs are presented, such as choosing between new computers or new workers for businesses.

Economic decision-making requires the use of both economic concepts and quantitative methods for optimal solutions.

Management is defined as a continuous process involving planning, organizing, staffing, directing, and controlling.

Economics is a social science that deals with the allocation of scarce resources to meet unlimited human needs.

Transcripts

hello everybody and welcome to

managerial economics

discussion this is chapter one

in this session we are going to discuss

about introduction

or overview part of managerial economics

under this topic we will specifically

discuss

what is the need of managerial economies

why

we need to study why

we learn managerial economics the reason

behind

why we learn managerial economics

definition of managerial economics scope

of managerial economics and

basic concepts of or some basic concept

of managerial economics

proceeding to the main discussion let us

discuss about

what is happening in the organization

in any organization whatsoever the case

that means whether it is private

government or non-government

like nho there is a converging process

of

input to the output

inputs can be called as factor of

production

such as labor capital

land and interplanner and the output may

be categorized into

two major division that is goods and

services

so

whatever the company is

there is still a conversion process of

those

inputs to the outputs

for example if we take academic

institutes

there is a conversion of

the input to the output that is service

they provide service educational service

and if we consider manufacturing

companies

they convert those inputs into

physical goods

in any way there is a conversion process

from inputs output that conversion

process

will be managed by a manager

a manager in the meanwhile one of the

main

one of the main goals of a manager is to

maximize

the output in the conversion process

a manager is aimed to maximize the

profit of the organization

maximizing the profits

the profit of the organization can be

achieved by doing the following

or deciding or making a decision

making proper decision on the following

points

in order to maximize the organization

profit

we need we need to

decide we need to make optimum decisions

on the following points

the points are either to produce

all inputs by ourselves or part of the

inputs

by ourselves or purchase those inputs

from

the external parties

or the external market we can say

and the next is combination of inputs

the input combination and the method

that we are going to use

the method of manufacturing for example

mass production we can use our job shop

production

or batch production or even the

technology that we are using in the

production

and they are the next is the amount of

production

volume of production and the price

we need to decide the optimum volume of

production

that can reduce balls

that can reduce over production

and also avoid under production

it should be optimal

should be optimum volume of production

in order to

avoid both of our production in under

production because both

over and under production results

negative impact for the factory if we

consider overproduction

it may result inventory cost higher

inventory cost

wastage of some products

and even our capital will be tied to

that product that goods in the case of

under production

it reduced sales which is obvious

our customers may not get sufficient

amount of product from us so

they become dissatisfied and ultimately

they will go to another competitors

so it is a negative impact for our

organization

and the other is making single product

or producing several different types of

products

we need to decide and the other is

the reaction of our firmness to the

decision made by the competitors

for example if our competitors increase

their products price so what will be our

discussion

well sorry what will be our decision

our decision should be either

increasing similarly or decreasing or

it may be other measures

in general these are not the challenges

faced by the manager

while the manager is trying to maximize

the profit

the manager may face much more

challenges

among those challenges these are the

main challenges that the manager need to

make proper decision

in order to make proper decision

there is a main point by the way in

order to make

proper or optimum or near to correct

decision

a manager need to use

tools concepts

and theories of managerial economics

here is a point

a manager need to use

through this conceptus principle stories

of managerial economies of economics

in order to make proper or optimum

decision making on the above listed

issues

next let us see now

the definitions of managerial economics

managerial economics deals with

application of economic concepts

theories tools and methods to solve

practical problems in a business

there is there are problems in a

business so

we adopt those concept stories tools and

methods

to solve that specific problem this is

what you call

managerial economics sometimes we call

applied

economics applied economics applied

economics in a business

as you know managerial economics is a

combination of

two words two terms that is

management and economics let us see each

term

one by one management is a process

it is a continuous process by the way it

is a continuous never ending process

process of fire functions we start from

planning

then organizing then staffing

then directing and the final step is

controlling

controlling what we have planned before

or we can say management is doing

through

others or both art and

science we can't define management as

both art and science

and the managers in dawn as you know a

manager is a person

who directs resourceful achievement

aesthetic goals or a manager

manages the converging process input to

the output

in order to achieve the stated goals

management is a process and manager is a

person it's a noun and it's a person

on the other side economics is a science

or we can say it is a social science

categorized under social science

which is organizing and allocating of

scarce resources to achieve

the desert objectives or it is a study

how the society uses limited resources

to achieve their unlimited needs

by the way here there are there is

limited needs no no limited resources i

mean limited

resources limited inputs and on the

other hand we have

unlimited needs

it is a social science that deals with

the behavior of human beings in the

production distribution consumption of

goods and services in a world of scarce

resources

now let me take a pause and let me ask

you one question that is

what if what will be economics if

resources are sufficiently available or

if we have unlimited resources

okay if we have unlimited resources in

general

there is no need to study economics

economics can't exist if there is

unlimited

resources if there is unlimited resource

there is no economy

no need to study economics

moving forward

economics can be majorly categorized

into macroeconomics

microeconomics and macroeconomics

microeconomics as the name indicates

it is a study of individual economic

behavior for example

the study of someone's demand or an

individual's demand or

study about the supply of one company or

a fear

or the demand of that company can be

termed as microeconomics

is a study of individual consumers and

producers in a specific

market for example supplement demand

price of output costs and incomes can be

categorized

into microeconomics when those

individuals

will be aggregated will will be summed

up and they can

form the aggregate level of economy that

is

macroeconomics macroeconomic study about

the economy behavior

of the market the aggregate economic

behavior

study was agriculture because the agreed

can be obtained from the individual

economic behavior for example national

output can be

aggregated those individuals living in

some specified specific nation is

aggregated

and when we aggregate the ethiopians for

example

we can get the national level variables

like national gdp unemployment inflation

physical and monetary policy trade and

finance among

nations can be termed as micro economics

macro economics in general

managerial economy is majorly based on

microeconomics theories and concepts

let us see some more details about

microeconomics and macro economics

by the way sometimes we can say

macroeconomics and microeconomics are

the scope of managerial economics

as you see microeconomics have different

tools of demand can be

categorized into theories of demand or

microeconomics include story of demand

euro production

pricing tourism parasinga profit

analysis and theory of capital

investment

about a single firm

or a single individual thesis are

concerned about the individuals

whereas the economic environments

shall invariably political environments

are the aggregate level of economic

behavior and majorly

as we said in the previous slide

managerial economics is concerned about

or uses

those theories of micro economics

measures

the next section as we said before

for the economics to exist

there should be a scarce resource scarce

resource on the

one hand and unlimited

wants on the other hand unlimited ones

on the other hand

so economic problem arises because of

the scarce resource

in one hand the scarce resource

scarce resource in one hand and

unlimited wants which is

very more or which is greater than

that of the scarce resource by the way

our needs are unlimited if we

fulfill one need we also extend our

needs to the other

needs so our needs are unlimited but

our resources are limited

so the economic problem arises because

of these

two issues scarce resources on the wall

on hand

and it is

by the way there is managerial problems

because of

the scarce resource managerialization

problems

among managerialization problems one is

product selection selecting what we are

going to produce

the output volume of output pricing

what price should be

stated for making the profit and

to be competitive in the market

internet strategy organization design

the design of your organizations

the layout of the organization product

development promotion strategy

work worker hiring and training

investment and financing

these all are the management decision

problems

that needs good decision by the manager

and there are economic concepts

marginalized

theories due to the fear ministerial

public choice theory these are the

concepts

from economics and on the other side

there is quantity meters like numerical

analysis statistical estimation

forecasting procedure and so on so

the manager uses both these economic

concepts and quantity methods to solve

the management decision problems

in order to get on the optimal

decision in order to arrive

the optimal to

the upper management decision problems

the manager uses

economic concepts and quantity method to

get the problems to get

the answer for the problems to get

optimal solution for the problems

this is all about the definitions of

managerial

economics there are some common terms

in economics like scarcity unlimited

resources and wants these are important

terms

frequently used in economics

this one is the let's move to the last

section

and these are some basic concepts about

managerial economics

as you know because of the scarce

resources because of the resources are

already scarce or limited by the way

whatever the country is or

whatever the individual is

if we take the wealthiest individual or

the wealthiest country

in the world still there is a gap

between needs and

resources in general there is scarce

resources

our resources are scarce and that scares

resources

make us to choose

or make us

to prioritize our problems or our

needs we need to prioritize our needs

according to our maybe criteria clarity

operating the list

so there is a need to choose

to choose between different use of

scarce resource maybe different use of

combinations economic choice is

a must because of scarce resources

economic choice is deciding

deciding between different use of scarce

resource

here is the main point that is

opportunity cost it is the amount of

other products that

must be foregone for gun

or sacrifice to produce a unit of a

product

for example if i have 100

and if i have two needles that is

bank item a

or buying item b

with my handlebar

i have to choose either bank item a or

bank item b

but hundred bill is not sufficient to

buy both

so i need to choose one if i want to

choose one

b will be the opportunity cost that is

the foregone or the sacrifice

if i choose a b is the second best

alternative for good

the second best alternative for code

that is

the opportunity cost the opportunity

cost

of using or selecting product

a bank product a

b can be the benefit that is lost in

making a choice between two competing

use of scarce resources

so when i choose a

i miss b because of choosing

a so b is an opportunity

cost the missed cost or the sacrifice

or the foregone let us see some more

examples about the opportunity cost in

the next slide

these are the decision maker by the way

in the first column there are decision

makers the business

the government the individuals

they have to choose either of the two

products

for example for the business new

computers

new computer or fax

new worker or delivery man office party

or pay

for both and the government is also

two alternatives unemployment benefits

new roads

weapons more hospital beds individuals

can also

make a choice between mass bar using

mars bar

or to use in to get service in 2x bar

whether to buy a t-shirt or to buy dvd

to go beach holiday or fixing the roof

these are the alternatives and the

business

chooses this column the business

government and the individuals

chooses this column this column

thus these are the missed one

these are the missed one they didn't

choose this

so these are the opportunity cost

the opportunity cost what they could

have

done what they could have done these are

the opportunity cost

because the business selected the

government select

and the individual selectors this column

this column because they choose this

column the last column is an opportunity

cost in general everything has an

opportunity cost everything has an

opportunity

cost and this is all about

today's discussion if you have comment

suggestions or question you can put it

by the comments you can put it either in

telegram on

or on youtube channels

so i will respond to you later and if

you want to read more use this reference

book so thank you for listening have a

good time

bye