Managerial economics: Exam
Part 1: Introduction to economics
CHAPTER 1: WHAT IS ECONOMICS? / 10 PRINCIPLES OF ECONOMICS
1. The economy and economic systems
- Economy oikonomos = one who manages a household
- Decisions = interaction with other people, governments and business organizations
o Interaction -> sort of exchange (f.e. money)
o Individuals; goods and services for final consumption
=> households
o Organizations buy these factors + produce goods and services
=>firms
o Level of economic activity = amount of interaction between households and firms
More buying and selling -> higher the level of econ activity
Economic activity= how much buying and selling goes on in the economy over a
period of time
Economy= all the production and exchange activities that take place
1.1. The economic problem
- 3 questions
o What G & S should be produced?
o How should these be produced?
o Who should get the G & S that have been produced?
- Resources;
land= all the natural resources of the earth
labour= the human effort both mental and physical that goes in to production
capital= the equipment and structures used to produce goods and services
1.2. Scarcity and choice
- People/ society: desires for G & S unlimited
- Resources are limited
Scarcity
- Scarcity= the limited nature of society’s resources
- Economics= the study of how
societies manage scarce
resources
- Idea of scarcity: questioned
o People who want to work but who can’t find a job -> labour is not scarce, but
job vacancies are
,2. How people make decisions
2.1. People face trade-offs
- To get one thing we like, we have to give up another thing that we like = trade-off,
or “There is no such thing as a free lunch”
- Examples trade- offs
o Spend all of their time studying, benefits for degree or spend their time enjoying
leisure activities
o Equity and efficiency
Efficiency; society gets the most it can from its scarce resources (size)
Equity; the benefits of those resources are distributed fairly among the
members of society (how to divide)
to increase equity, society may need to give up on efficiency to some
extent + vice-versa
2.2. Opportunity cost
- Face trade-offs & choices; comparing the costs and benefits of alternative courses
of action
- F.e.; going to university
o + intellectual enrichment non-economist
o – money you spend
o No uni -> still need a place to sleep economist
o Opportunity cost= the highest-valued alternative that must be given up to
obtain something
- Opportunity cost <-> direct monetary cost
Value of choice > opp cost of the choice
2.3. Rational people think at the margin
Rational behavior
- Consumers + producers behave rationally
o Consumers maximize their utility
o Producers maximize their profit
RB -> efficient market outcomes
- Having a framework/ principle -> to base decision-making
- Thinking at the margin= one such framework that economists adopt in making
decisions
o Marginal changes= small incremental adjustments to a plan/ action
Based around an assumption that economic agents are seeking to
maximize/ minimize outcomes when making decisions
individual, firm or organization that has an impact in some
way on an economy
, - Decision makers take an action if the marginal benefit of the action is equal to
marginal cost
o F.e.; study for another day for math
2.4. People respond to incentives
- Making decisions by comparing costs and benefits => behavior may change when
costs and/or benefits change
- F.e.; putting a price on plastic bags -> encourage to re-use bags
3. How people interact
3.1. Trade can make everyone better- off
- America + China <-> Europe =produce many of the same goods
- Thought; China increases its share of world trade at the expense of Europe => bad
news for people in Europe?
NOT, no winner no loser
Trade sports competition
Trade allows to specialize in activities they do best
Trade with others = improve their standard of living on average
= enjoys a greater variety of goods and services
3.2. Markets can be a good way to organize economic activity
- 3 questions society has to answer (what, how, who?)
o Capitalist economic system; questions are addressed
= a system which relies on the private ownership of factors of production to
produce goods and services which are exchanged through a price mechanism
and where production is operated primarily for profit
o Capable of raising the standard of living of millions of people over last 200
years
Income that people earn so they buy G & S they need
- Karl Marx
o Analyzed the CES + developed theories
- Market economy= an economy that allocates resources through the
decentralized decisions of many firms and households
o Firms decide: whom to hire + what to produce
o Households decide; what to buy and whom to work for
- Industrial Revolution 1700 & 1800
o Development: planned economic systems= command economies`
central planners could guide economic activity and
answer the 3 questions
Planned economic systems= economic activity organized by central planners who
decided on the answers to the fundamental economic questions
- Adam Smith - Invisible hand
o Households and firms interacting in markets act as if guided by invisible
hand
Households + firms look at prices when deciding what to buy and
sell, they take into account the costs of their actions
Prices guide decision makers to reach outcomes that tend to maximize the
welfare of society as a whole
Part 1: Introduction to economics
CHAPTER 1: WHAT IS ECONOMICS? / 10 PRINCIPLES OF ECONOMICS
1. The economy and economic systems
- Economy oikonomos = one who manages a household
- Decisions = interaction with other people, governments and business organizations
o Interaction -> sort of exchange (f.e. money)
o Individuals; goods and services for final consumption
=> households
o Organizations buy these factors + produce goods and services
=>firms
o Level of economic activity = amount of interaction between households and firms
More buying and selling -> higher the level of econ activity
Economic activity= how much buying and selling goes on in the economy over a
period of time
Economy= all the production and exchange activities that take place
1.1. The economic problem
- 3 questions
o What G & S should be produced?
o How should these be produced?
o Who should get the G & S that have been produced?
- Resources;
land= all the natural resources of the earth
labour= the human effort both mental and physical that goes in to production
capital= the equipment and structures used to produce goods and services
1.2. Scarcity and choice
- People/ society: desires for G & S unlimited
- Resources are limited
Scarcity
- Scarcity= the limited nature of society’s resources
- Economics= the study of how
societies manage scarce
resources
- Idea of scarcity: questioned
o People who want to work but who can’t find a job -> labour is not scarce, but
job vacancies are
,2. How people make decisions
2.1. People face trade-offs
- To get one thing we like, we have to give up another thing that we like = trade-off,
or “There is no such thing as a free lunch”
- Examples trade- offs
o Spend all of their time studying, benefits for degree or spend their time enjoying
leisure activities
o Equity and efficiency
Efficiency; society gets the most it can from its scarce resources (size)
Equity; the benefits of those resources are distributed fairly among the
members of society (how to divide)
to increase equity, society may need to give up on efficiency to some
extent + vice-versa
2.2. Opportunity cost
- Face trade-offs & choices; comparing the costs and benefits of alternative courses
of action
- F.e.; going to university
o + intellectual enrichment non-economist
o – money you spend
o No uni -> still need a place to sleep economist
o Opportunity cost= the highest-valued alternative that must be given up to
obtain something
- Opportunity cost <-> direct monetary cost
Value of choice > opp cost of the choice
2.3. Rational people think at the margin
Rational behavior
- Consumers + producers behave rationally
o Consumers maximize their utility
o Producers maximize their profit
RB -> efficient market outcomes
- Having a framework/ principle -> to base decision-making
- Thinking at the margin= one such framework that economists adopt in making
decisions
o Marginal changes= small incremental adjustments to a plan/ action
Based around an assumption that economic agents are seeking to
maximize/ minimize outcomes when making decisions
individual, firm or organization that has an impact in some
way on an economy
, - Decision makers take an action if the marginal benefit of the action is equal to
marginal cost
o F.e.; study for another day for math
2.4. People respond to incentives
- Making decisions by comparing costs and benefits => behavior may change when
costs and/or benefits change
- F.e.; putting a price on plastic bags -> encourage to re-use bags
3. How people interact
3.1. Trade can make everyone better- off
- America + China <-> Europe =produce many of the same goods
- Thought; China increases its share of world trade at the expense of Europe => bad
news for people in Europe?
NOT, no winner no loser
Trade sports competition
Trade allows to specialize in activities they do best
Trade with others = improve their standard of living on average
= enjoys a greater variety of goods and services
3.2. Markets can be a good way to organize economic activity
- 3 questions society has to answer (what, how, who?)
o Capitalist economic system; questions are addressed
= a system which relies on the private ownership of factors of production to
produce goods and services which are exchanged through a price mechanism
and where production is operated primarily for profit
o Capable of raising the standard of living of millions of people over last 200
years
Income that people earn so they buy G & S they need
- Karl Marx
o Analyzed the CES + developed theories
- Market economy= an economy that allocates resources through the
decentralized decisions of many firms and households
o Firms decide: whom to hire + what to produce
o Households decide; what to buy and whom to work for
- Industrial Revolution 1700 & 1800
o Development: planned economic systems= command economies`
central planners could guide economic activity and
answer the 3 questions
Planned economic systems= economic activity organized by central planners who
decided on the answers to the fundamental economic questions
- Adam Smith - Invisible hand
o Households and firms interacting in markets act as if guided by invisible
hand
Households + firms look at prices when deciding what to buy and
sell, they take into account the costs of their actions
Prices guide decision makers to reach outcomes that tend to maximize the
welfare of society as a whole
