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Managerial Economics Is a Tool for Improving Management Decision Making

Managerial economics uses economic concepts and quantitative methods to solve managerial problems.

Economic Concepts

• Marginal Analysis

• Theory of Consumer Demand

• Industrial Organization and Firm Behavior

• Public Choice Theory

Management Decision Problems

• Product Selection, Output, and Pricing

• Internet Strategy

• Organization Design

• Product Development and Promotion Strategy

• Worker Hiring and Training

• Investment and Financing

Managerial Economics Use of Economic Concepts and Quantitative Methods to Solve Management Decision Problems

Optimal Solutions to Management Decision Problems

Quantitative Methods

• Numerical Analysis

• Statistical Estimation

• Forecasting Procedures

• Game Theory Concepts

• Optimization Techniques

• Information Systems

MANAGERIAL APPLICATION 1.1

Managerial Ethics

In The Wall Street Journal, it is not hard to find evidence of unscrupulous business behavior. However, unethical conduct is neither consistent with value maximization nor with the enlightened self-interest of management and other employees. If honesty did not pervade corporate America, the ability to conduct business would collapse. Eventually, the truth always comes out, and when it does the unscrupulous lose out. For better or worse, we are known by the standards we adopt.

To become successful in business, everyone must adopt a set of principles. Ethical rules to keep in mind when conducting business include the following:

• Above all else, keep your word. Say what you mean, and mean what you say.

• Do the right thing. A handshake with an honorable person is worth more than a ton of legal documents from a corrupt individual.

• Accept responsibility for your mistakes, and fix them. Be quick to share credit for success.

• Leave something on the table. Profit with your customer, not off your customer.

• Stick by your principles. Principles are not for sale at any price.

Does the "high road" lead to corporate success? Consider the experience of one of America's most famous winners— Omaha billionaire Warren E. Buffett, chairman of Berkshire Hathaway, Inc. Buffett and Charlie Munger, the number-two man at Berkshire, are famous for doing multimillion-dollar deals on the basis of a simple handshake. At Berkshire, management relies upon the character of the people that they are dealing with rather than expensive accounting audits, detailed legal opinions, or liability insurance coverage. Buffett says that after some early mistakes, he learned to go into business only with people whom he likes, trusts, and admires. Although a company will not necessarily prosper because its managers display admirable qualities, Buffett says he has never made a good deal with a bad person.

Doing the right thing not only makes sense from an ethical perspective, but it makes business $ense, too!

See: Emelie Rutherford, "Lawmakers Involved with Enron Probe Had Personal Stake in the Company," The Wall Street Journal Online, March 4, 2002 (http://online.wsj.com).

Managerial economics has applications in both profit and not-for-profit sectors. For example, an administrator of a nonprofit hospital strives to provide the best medical care possible given limited medical staff, equipment, and related resources. Using the tools and concepts of managerial economics, the administrator can determine the optimal allocation of these limited resources. In short, managerial economics helps managers arrive at a set of operating rules that aid in the efficient use of scarce human and capital resources. By following these rules, businesses, nonprofit organizations, and government agencies are able to meet objectives efficiently.

Making the Best Decision

To establish appropriate decision rules, managers must understand the economic environment in which they operate. For example, a grocery retailer may offer consumers a highly price-sensitive product, such as milk, at an extremely low markup over cost—say, 1 percent to 2 percent—while offering less price-sensitive products, such as nonprescription drugs, at markups of as high as 40 percent over cost. Managerial economics describes the logic of this pricing practice with respect to the goal of profit maximization. Similarly, managerial economics reveals that auto import quotas reduce the availability of substitutes for domestically produced cars, raise auto prices, and create the possibility of monopoly profits for domestic manufacturers. It does not explain whether imposing quotas is good public policy; that is a decision involving broader political considerations. Managerial economics only describes the predictable economic consequences of such actions.

Managerial economics offers a comprehensive application of economic theory and methodology to management decision making. It is as relevant to the management of government agencies, cooperatives, schools, hospitals, museums, and similar not-for-profit institutions as it is to the management of profit-oriented businesses. Although this text focuses primarily on business applications, it also includes examples and problems from the government and nonprofit sectors to illustrate the broad relevance of managerial economics.

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