Econs

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INTRODUCTION TO
MANAGERIAL ECONOMICS
Dr. Gong Jie
National University of Singapore

Why Do We Study Economics
 People have to “Choose”
♦ Resources are scarce.
♦ There is No Such Thing as Free Lunch!

 Economics: the science of Rational Choice
♦ Rationality: the basic assumption
♦ Rational Choice: Economic agents use all the information available to make decisions that most efficiently satisfy their needs and achieve stated objectives.
♦ How do people make rational choice? This is the subject of
Economics!

Paul A. Samuelson’s definition of Economics
 “Economics is the study of how men and society choose, with or without the use of money, to employ scarce productive resources, which could have alternative uses, to produce various
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What is the cost if you run you own restaurant?  Suppose that you own a house on Orchard Road, and you decide to run a restaurant, your total cost would include: Explicit Cost:

Implicit Cost

Utility: electricity, water and gas

The rental income you give up

Material

Your possible employment income

Furniture and Equipment
Wage paid to employees

Economic Modeling
 Models are simplifications…like maps
 Resemble reality
 Abstract from the rich details
 Help understand the fundamental forces

Endogenous vs Exogenous Variables
 Exogenous variables: Variables that have values that are taken as given in the model.
 Endogenous variables: Variables whose value is determined within the model being studied.
 Analyze the business of a lemonade stand:
Exogenous

Endogenous

Customer volume

Price

Input price

Quantity

Temperature

Product Quality

# of competitors

Advertisement

Decision making has two components
 First, there is a goal
♦ Basic Managerial Objective: to maximize net benefits


Net Benefits = Total Benefits - Total Costs
 Profits = Revenue – Costs

♦ Objective function: functional relationship between the value of the goal, and the values of endogenous variables and exogenous variables.

 Second, there is a set of options taken to achieve the goal: ♦ How much of the endogenous variable should be used to maximize net benefits?

Find the optimal choice:
Marginal (Incremental) Analysis
 Marginal Benefits (MB): Change

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