Welcome to ECON 308Welcome to ECON 308

Managerial EconomicsManagerial Economics

Index Cards: FrontIndex Cards: Front

• ECON 308 F09/TR 12:30) ECON 308 F09/TR 12:30)

• Name: (underline what you go by)Name: (underline what you go by)

• Email: (the one you read)Email: (the one you read)

• Phone:Phone:

• Major:Major:

• Source of News:Source of News:

• Favorite Book: Fiction or NonFavorite Book: Fiction or Non

Index Card: BackIndex Card: Back

• Most recent Job: Describe activitiesMost recent Job: Describe activities

• Expectations 6 years from nowExpectations 6 years from now

• Message to ME (ADDS = Your Story)Message to ME (ADDS = Your Story)

ECONOMICSECONOMICS

Economics Is a Economics Is a ScienceScience That That Analyzes How Analyzes How IndividualsIndividuals Behave, in a World of Behave, in a World of Scarcity.Scarcity.

Construction of TheoryConstruction of Theory

• AbstractionsAbstractions

• DefinitionsDefinitions

Definitions:Definitions: Words to describe realityWords to describe reality

Children learn words in pairs

( in ) ( out )

( up ) ( down )

( left ) ( right )

( Hot ) ( Cold )

Alternative perspective: The world exists in a continuum

Definitions break up the continuum Definitions break up the continuum into partsinto parts

• RedRed Yellow Yellow BlueBlue

• OrangeOrange GreenGreen• Red Orange Yellow Green Blue Indigo VioletRed Orange Yellow Green Blue Indigo Violet

Economic AnalysisEconomic Analysis

• Looks at small degrees of ChangeLooks at small degrees of Change

• Marginal: Additional: One more…Marginal: Additional: One more…

• Marginal Value: Additional Value of having Marginal Value: Additional Value of having one moreone more

• Marginal Revenue: Additional revenue Marginal Revenue: Additional revenue from one more.from one more.

• Marginal Cost: Additional cost of one moreMarginal Cost: Additional cost of one more

Construction of TheoryConstruction of Theory

• AbstractionsAbstractions

• DefinitionsDefinitions

• AssumptionsAssumptions

• ImplicationsImplications

• Adoption of TheoryAdoption of Theory

A Good Is A Good Is AnythingAnything, That an , That an Individual Individual WantsWants to to Have More OfHave More Of, , at Zero Priceat Zero Price..

• Anything : Material or Non-materialAnything : Material or Non-material

• An individual wantsAn individual wants

• Have More ofHave More of

• At Zero PriceAt Zero Price

Resource: Anything that can be Resource: Anything that can be used to produce Goods.used to produce Goods.

• Land = all its attributesLand = all its attributes

• Labor = PeopleLabor = People

• Capital = Buildings & EquipmentCapital = Buildings & Equipment

AssumptionsAssumptions

• Humankind has unlimited wantsHumankind has unlimited wants

• Our resources are limitedOur resources are limited

• ScarcityScarcity : Individually, and as a Society, : Individually, and as a Society, we do not have enough resources to we do not have enough resources to produce all the things we want.produce all the things we want.

Implications of ScarcityImplications of Scarcity

• ChoiceChoice: people must choose which goods : people must choose which goods to acquire.to acquire.

• Economic CostEconomic Cost: The Cost of any action, is : The Cost of any action, is the personal value of the next highest the personal value of the next highest valued alternative given-up.valued alternative given-up.

• CompetitionCompetition: We are in a state of : We are in a state of competition for the use of resourcescompetition for the use of resources

Forms of Competition in SocietyForms of Competition in Society

• ViolenceViolence, or Threat of Violence, or Threat of Violence

• Social/Political Social/Political : competition on the basis : competition on the basis of some limited behavior or characteristicof some limited behavior or characteristic

• Economic/MarketEconomic/Market: competition based on : competition based on offering the highest value in offering the highest value in exchangeexchange..

Primary Social Goal = FairnessPrimary Social Goal = Fairness

• Violence: not fair.Violence: not fair.

• Social political: not fair.Social political: not fair.

• Economic: not fair,Economic: not fair,

• Life is NOT FAIR !!Life is NOT FAIR !!

But, the market offers the broadest and most But, the market offers the broadest and most fair systemfair system

What Economics Is AboutWhat Economics Is About

• MicroeconomicsMicroeconomics: decisions of individuals : decisions of individuals and firms: what to buy and what to and firms: what to buy and what to produce.produce.

• MacroeconomicsMacroeconomics: the whole economic : the whole economic system and the role of government.system and the role of government.

Mechanisms of ChoiceMechanisms of Choice

• PoliticalPolitical: our representatives make choices: our representatives make choices

• Economic/marketEconomic/market: individuals and firms : individuals and firms make choices based on relative prices make choices based on relative prices about what to produceabout what to produce

Product Markets

  FIRMSHOUSEHOLD

 ResourceMarkets

$'s $'s Revenue

$'s Income $'s

Goods &Services

Goods &Services

Resources Inputs

 

Circular Flow Diagram of the Exchange Economy

Circular Flow Diagram of the Circular Flow Diagram of the Exchange Economy Exchange Economy

• HouseholdsHouseholds: Decisions: What to sell? : Decisions: What to sell? What to buy? What to buy? Assume Maximize UtilityAssume Maximize Utility

• FirmsFirms: Decisions: What inputs to use? : Decisions: What inputs to use? What to produce? What to produce? Assume Maximize Assume Maximize ProfitsProfits..

• MarketsMarkets: Factor Markets, Product Markets: Factor Markets, Product Markets

Role of MoneyRole of Money: The medium of exchange: The medium of exchange

Scarcity Scarcity Society Choices Society Choices

• What to produceWhat to produce? Goal find the mixture ? Goal find the mixture of outputs that maximizes society’s value.of outputs that maximizes society’s value.

• How to produceHow to produce? Goal: find the optimal ? Goal: find the optimal mix of inputs to maximize technical output.mix of inputs to maximize technical output.

• For whom to produceFor whom to produce? Who will get to ? Who will get to consume the goods produced.consume the goods produced.