Managerial Economics

After mid • Case each lecture

• 10 principles
• Models -15%
• Cost • Project -15%
• Market forces
• Monopoly • Mid term 30%
• Elasticity
• Oligopoly • Final 40%

Before mid Assessments

 Sciences

• Facts
Finance • Opportunity cost
• Recording • Estimation • Assumptions on
• Financial • Manage money economic
statements variable
• Manage liquidity

Accounting Economics
Prof. Doaa Salman 7
6
Macro economics
Why we study economics?
Here are five reasons why studying economics is important.

1. Updates decisions. Economists provide information and

forecasting to inform decisions within companies and
governments.

2. To address economic problems such as poverty & inequality

3. To inform policymakers in making decisions about

taxation, public spending, and monetary policy

4. To gain a deeper understanding of the world around us

and the forces that shape our lives to take rational
decision.

5. To understand how International arrangement affects our

lives that impacts our decisions

3
 Decision

Political
• Cost • Cost
• Benefit • Cost • Benefit
• benefit
Economy Social
Ten Principles of Economics

9
 10 principles

• 1- Trade off
Macro • 9- Increase money supply
• 2- opportunity cost ????
• 3- Rational • 5- Trade • 10 – inflation increases
• 4- Incentives • 6- Markets and unemployment
• 7- Government decreases
• 8- Standard of living

Economic
Decision
problems
 Ten Principles of Economics
• Economy – “oikonomos” (Greek)
– “One who manages a household”
• Household - many decisions
– Allocate scarce resources
• Ability, effort, and desire
• Society - many decisions
– Allocate resources
– Allocate output
 Ten Principles of Economics
• Resources are scarce
• Scarcity
– The limited nature of society’s resources
• Economics
– Study of how society manages its scarce
resources
 Ten Principles of Economics
• Economists study:
– How people make decisions
– How people interact with one another
– Analyze forces and trends that affect the
economy as a whole
 How People Make Decisions
Principle 1: People face trade-offs
• Making decisions
– Trade off one goal against another
– Student – time
– Parents – income
– Society
• National defense vs. consumer goods
• Clean environment vs. high level of
income
• Efficiency vs. equality
 How People Make Decisions
• Efficiency
– Society getting the most it can from its
scarce resources
– Size of the economic pie
• Equality
– Distributing economic prosperity uniformly
among the members of society
– How the pie is divided into individual slices
 How People Make Decisions
Principle 2: The cost of
something is what you
give up to get it
• People face trade-offs
– Make decisions
• Compare cost with
benefits of alternatives
• Opportunity cost
– Whatever must be given
up to obtain one item
 How People Make Decisions
Principle 3: Rational people think
at the margin
• Rational people
– Systematically & purposefully do
the best they can to achieve
their objectives
• Marginal changes
– Small incremental adjustments
to a plan of action
 How People Make Decisions
• Marginal benefits
– Additional benefits
• Marginal costs
– Additional costs
• Rational decision maker
– Take action only if:
– Marginal benefits > Marginal
costs
 How People Make Decisions
Principle 4: People respond to
incentives
• Incentive
– Something that induces a
person to act
– Higher price
• Buyers - consume less
• Sellers - produce more
– Public policy
• Change costs or benefits
• Change people’s behavior
 The Incentive Effects of Gasoline Prices
• 2005 to 2008, price of oil
in world oil markets
skyrocketed
– Limited supplies
– Surging demand from
robust world growth
– Price of gasoline in the
United States rose from
about $2 to about $4 a
gallon

20
 How People Interact

Principle 5: Trade can

make everyone
better off
• Trade
– Allows each person
to specialize in the
activities he or she
does best
– Enjoy a greater
variety of goods and
services at lower cost
 How People Interact
Principle 6: Markets are usually a good way
to organize economic activity
• Communist countries – central planning
– Government officials (central planners)
• Allocate economy’s scarce resources
– What goods & services were produced
– How much was produced
– Who produced & consumed these goods &
services

You can check it on

►►►
Economic systems - YouTube
 How People Interact
• Market economy -
allocates resources
– Through decentralized
decisions of many firms
and households
– As they interact in
markets for goods and
services
– Guided by prices and
self interest
 How People Interact
• Adam Smith’s “invisible hand”
– Households and firms interacting in
markets
• Act as if they are guided by an “invisible
hand”
• Leads them to desirable market outcomes
– Result: Government intervention
• Prevents the invisible hand’s ability to
coordinate the decisions of the households
and firms that make up the economy
 How People Interact
Principle 7: Governments can sometimes
improve market outcomes
• We need government
– Enforce rules and maintain institutions
• Enforce property rights
– Promote efficiency
• Avoid market failure
– Promote equality
• Avoid disparities in economic wellbeing
How People Interact
 How People Interact
• Causes for market failure
• Externality
– Impact of one person’s actions on the
well-being of a bystander
 How People Interact
• Causes for market failure
• Market power
– Ability of a single economic actor (or small group of actors) to have
a substantial influence on market prices
 How People Interact
• Disparities in economic wellbeing
– Market economy rewards people
• According to their ability to produce things
that other people are willing to pay for
– Government intervention: Public policies
• May diminish inequality
• Process far from perfect
 10 principles

• 1- Trade off
Macro • 9- Increase money supply
• 2- opportunity cost ????
• 3- Rational • 5- Trade • 10 – inflation increases
• 4- Incentives • 6- Markets and unemployment
• 7- Government decreases
• 8- Standard of living

Economic
Decision
problems
 How the Economy as a Whole Works
Principle 8: A country’s
standard of living depends
on its ability to produce
goods and services
• Large differences in living
standards
– Among countries
– Over time
• Explanation: differences in
productivity
 How the Economy as a Whole Works
• Productivity
– Quantity of goods and services produced
from each unit of labor input
– Higher productivity
• Higher standard of living
– Growth rate of nation’s productivity
• Determines growth rate of its average income
 How the Economy as a Whole Works
Principle 9: Prices rise when the
government prints too much
money
• Inflation
– An increase in the overall
level of prices in the economy
• Causes for large / persistent
inflation
– Growth in quantity of money
• Value of money falls
 How the Economy as a Whole Works
Principle 10: Society faces a short-run
trade-off between inflation and
unemployment
• Short-run effects of monetary injections:
– Stimulates the overall level of spending
• Higher demand for goods and services
– Firms – raise prices; hire more workers;
produce more goods and services
– Lower unemployment
Prof. Doaa Salman 36
 How the Economy as a Whole Works
• Short-run trade-off
between
unemployment and
inflation
– Key role – analysis o f
business cycle
• Business cycle
– Fluctuations in
economic activity
• Employment
Table 1
Ten Principles of Economics

38
Assess your self

Scarcity is
A) our inability to satisfy all our wants.
B)a situation that exists during economic
recessions but not during economic booms.
C) eliminated by choices.
D) an economic problem only for poor people.

39
Assess your self

After you graduate, you have decided to accept a position working at the Bureau of Labor
Statistics for $45,000.00 a year. The two other offers you received were working for Wal-Mart
for $38,000 and working for Ernst and Young consulting for $42,000. Of these two offers, you
would have preferred the job at Ernst and Young. What is the opportunity cost of accepting
the position at the Bureau of Labor Statistics?
A) the $45,000 you are paid for working at the Bureau of Labor Statistics
B) the $42,000 you would have been paid working for Ernst and Young
C) the $38,000 you would have been paid working for Wal-Mart
D)the $42,000 you would have been paid working for Ernst and Young and the $38,000 you
would have been paid working for Wal-Mart

40
Assess your self

The opportunity cost of attending college includes the cost of

A) the tuition but not the job at which you would otherwise have
worked.
B) the highest valued alternative to attending college.
C) the highest valued alternative to attending college plus the cost of
tuition.
D) tuition, books, and the lost wages for the hours spent studying.

41
Assess your self

Human capital is
A) all capital owned by individuals, but not by corporations or
governments.
B) all capital owned by individuals or corporations, but not by
governments.
C) machinery that meets or exceeds federal safety standards for use by
humans.
D) the skill and knowledge of workers.

42