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Managerial economics A
Berlinschi, De Ridder, Rogge
INTRODUCTION (04/10/2022)
Economics is divided into two subfields:
o Microeconomists study decision making by households and firms in the marketplace.
o Macroeconomists study the forces and trends that affect the economy as a whole
Managerial economics
In order to take optimal decisions, a manager should be aware of macroeconomic trends
• Example: if the economy is in recession, the demand for a particular product is likely
to be low, so it may not be a good time to hire new employees or buy new machinery
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS
Some important principles of economics
1. People face trade-offs: to increase equity, society may need to give up on some
efficiency, and vice-versa
2. The cost of something is what you give up to get it: because people face trade-offs
and make choices, they must compare the costs (opportunity cost = explicit cost +
implicit cost) and benefits of each action. Sometimes the cost of an action is not as
obvious as it might appear
3. Rational people think at the margin: Consumers will maximize their utility (see
chapter 5), producers will maximize their profit (see chapter 13) and rational behavior
will lead to the best possible market outcome. If MC < MR it’s beneficial
4. People respond to incentives: People make decisions by comparing costs and
benefits → behavior may change when costs and/or benefits change
5. Trade can make everyone better off: By trading with others, we can buy a greater
variety of goods and services at lower costs
6. Markets are usually a good way to organize economic activity: A market economy is
an economy that allocates resources through the decentralized decisions of many
firms and households as they interact in markets for goods and services. Households
decide what to buy and who to work for firms decide who to hire and what to
produce (invisible hand)
7. Governments can sometimes improve market outcomes: to promote efficiency and
equity when failure occurs because of e.g., an externality or market power.
-> These principles will be developed in the rest of this course
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,Cato Sluyts
CHAPTER 2 THINKING LIKE AN ECONOMIST
Positive versus normative
• Positive statements are statements that attempt to describe the world as it is:
o Called descriptive analysis
• Can be tested and confirmed or refuted
• Normative statements are statements about how the world should be:
o Called prescriptive analysis
o Include opinion
o Not possible to test and confirm or reject opinions
When economists make normative statements, they are acting more as policy advisors than
scientists
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,Cato Sluyts
CHAPTER 3 THE MARKET FORCES AND SUPPLY AND DEMAND (11/10/2022)
Markets
• Can be highly organized: buyers and sellers meet at a specific time and place
• Can be less organized: buyers ands ellers do not all meet at a specific time and place
o Competitive market: a market in which there are many buyers and many
sellers so that each has a negligible impact on the market price
§ Perfectly competitive markets have 2 important characteristics:
1) Goods being offered for sale are identical for all sellers
2) Buyers or sellers are so numerous that no single buyer or
seller can influence the market price (they are “price takers”)
• Classification of markets depending on degree of competition:
o Perfectly competitive → monopolistically competitive → oligopolistic →
monopolistic
• Market = group of buyers and sellers of a particular good or service
Supply and demand
• Two words that economists use most often
• Forces that make market economies work
• Determine the quantity of each good produced and the price at which it is sold
• If you want to know how an event or policy will affect the economy, you must first
think about how it will affect supply and demand
• Supply and demand refer to behavior of people as they interact with one another in
markets
Demand
People have unlimited needs/wishes for goods and services. Demand reflects a decision
about which needs/wishes to satisfy -> Law of demand: other things being equal (ceterus
paribus), the quantity demanded of a good falls when the price of the good rises
Individual demand is the amount of a good that an individual is willing and able to purchase
within a given time period
• Factors affecting individual demand:
a) Price of the good (negative correlation)
b) Income (normal goods: positive/inferior goods: negative)
c) Price of related goods (substitutes: negative/complements: positive)
d) Tastes
e) Expectations
f) Advertising
• Demand schedule: table that shows the relationship between the price of a good and
the quantity demanded, when all other variables affecting demand are held constant
• Demand curve: graph of the relationship between the price of a good and the
quantity demanded, when all other variables affecting demand are held constant
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, Cato Sluyts
Market demand is the amount of a good that all buyers are willing and able to purchase
within a given time period, it is the sum of all the individual demands for a particular good
or service
• Factors which determine market demand:
a) Actors which determine individual demand
b) Number of buyers
• The market demand is found by adding horizontally the individual demand curves
Demand changes
• When the price changes, the quantity demanded changes, this is a movement along
the demand curve (a)
• When a non-price determinant changes, the demand schedule/curve change, this is a
shift of the demand curve (b, c, d, e, f)
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