Managerial Economics and Strategy (3rd Edition)

Managerial Economics and Strategy (3rd Edition) Chapter 1: Introduction An Economist’s Theory of Reincarnation: If you’re good, you come back on a higher level. Cats come back as dogs, dogs come back as horses, and people—if they’ve been very good like George Washington—come back as money. If all the food, clothing, entertainment, and other goods and services we wanted were freely available, no one would study economics, and we would not need managers. However, most of the good things in life are scarce. We cannot have everything we want. Consumers cannot consume everything but must make choices about what to purchase. Similarly, managers of firms cannot produce everything and must make careful choices about what to produce, how much to produce, and how to produce it. Studying such choices is the main subject matter of economics. Economics is the study of decision making in the presence of scarcity.1 Managerial economics is the application of economic analysis to managerial decision making. It focuses on how managers make economic decisions by allocating the scarce resources at their disposal. To make good decisions, a manager must understand the behavior of other decision makers, such as consumers, workers, other managers, and governments. In this book, we examine decision making by such participants in the economy, and we show how managers can use this understanding to be successful. Learning Objectives 1. Describe the major business decisions managers face. 2. Explain how economic models are useful in managerial decision making. 3. Illustrate how a knowledge of economics can help your caree 1.1 Managerial Decision Making A firm’s managers allocate the limited resources available to them to achieve the firm’s objectives. The objectives vary for different managers within a firm but each managerial task is constrained by resource scarcity. At any moment in time, a production manager has to use the existing factory and a marketing manager has a limited marketing budget. Such resource limitations can change over time, but managers always face constraints.