Management Economics

Chapter 1 and 2

Economics is the study of the choices consumers, businesses and government make to attain goals, given the scarce resources

Economics are used to answer:

• Price of goods and services determine
• Affection of pollution to the economy and government policy to deal with the effects
• International trade and government policy
• The control of government on goods and services and the effects

Scarcity: the situation in which unlimited wants exceed the limited resources available to fulfill those wants

Resources: Inputs used to produce goods and services, including natural resources like land, water, and capital and entrepreneur ability. They are factors of production

Economic models: Simplified versions of reality used to analyse real world economic situations

Markets: is a group of buyers and sellers of a good and service and the institution or arrangement by which they come together to trade.

Three key economic ideas:

People are rational: the assumption that consumers and firms use information to achieve their goals. They weigh the benefits and costs of each action.

People respond to economic incentives: people act from a variety of motives, beliefs, envy and compassion.

Optimal decisions are made at the margin: marginal: an extra or additional benefit or cost of a decision. The marginal benefit: additional enjoyment received and the marginal cost is the lower grade from the test. Should apple produce 300 more iphones? The marginal benefit is the additional revenue received and the marginal cost is the additional cost like wages, materials. The point is to continue the production up until the point where MB=MC

Trade off: the idea that because of scarcity, producing more of one good or service means producing less of another good or service. It forces society to make choices

What good and services to produce? To choose between alternative option, opportunity cost concept is used. It is the highest valued alternative that must be given up to engage in the chosen activity.  

How will it be produced? More workers? More machines?

who will received good and service produce? Depend largely on how income is distributed

Centrally planned economies (government decides how economic resources will be allocated) vs market economies (households and firms interacting in markets allocate economic resources)

Cpe: government decide good and service to produce, follow government orders, not satisfy the wants of consumers. Standard of living is low

Me: privately owned firm to produce good and service and decide how to produce them. Markets determine who received goods and service produced. Consumer sovereignty: consumers decide what goods and service will be produced. Lowest cost, highest quality.