Basic Economic Relations

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Managers have to make tough choices that involve benefits and costs.

Until recently, however, it was simply impractical to compare the relative pluses and minuses of a large number of managerial decisions under a wide variety of operating conditions. For many large and small organizations, economic optimization remained an elusive goal. It is easy to understand why early users of personal computers were delighted when they learned how easy it was to enter and manipulate operating information within spreadsheets. Spreadsheets were a pivotal innovation because they put the tools for insightful demand, cost, and profit analysis at the fingertips of managers and other decision makers. Today's low-cost but powerful PCs and user-friendly software make it possible to efficiently analyze company-specific data and broader industry and macroeconomic information from the Internet. It has never been easier nor more vital for managers to consider the implications of various managerial decisions under an assortment of operating scenarios.

Effective managers in the twenty-first century must be able to collect, organize, and process a vast assortment of relevant operating information. However, efficient information processing requires more than electronic computing capability; it requires a fundamental understanding of basic economic relations. Within such a framework, powerful PCs and a wealth of operating and market information become an awesome aid to effective managerial decision making.1

This chapter introduces a number of fundamental principles of economic analysis. These ideas form the basis for describing all demand, cost, and profit relations. Once the basics of economic relations are understood, the tools and techniques of optimization can be applied to find the best course of action.

1 See Kevin Voigt and William Fraser, "Are You a Bad Boss?" The Wall Street Journal Online, March 15, 2002 (

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