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Notes for the final exam of “Managerial Economics”
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MANAGERIAL ECONOMICS (TOPIC 1)Introduction to economics
Economics (Definition) → How do we take decisions?
There is the economic performance of a country, but also there is the economy of each
person → “Human decisions related to limited resources”.
Humans have BIAS (prejuicios) when they take these decisions. Rationality is limited.
Concepts related to economics: money, time, inflation…
Behavioural economics → Combines elements of economics and psychology to
understand how and why people behave the way they do in the real world.
Depending on psychological factors the decisions towards economy could change in a
good or a bad way. Ex: Judges when deciding a parole. If they are rested and in a good
mood, there is a higher chance that they will conceive it. However, if they are tired
instead, their rejection has more chance than their approval.
Gary Becker → Applied economics to situations that they usually weren’t applied it →
Black people rights in the fifties.
When seeing a graphic, it is important that all the information is there. For example: if
there is a comparison of wages, the people that is compared must work in the same job
and category.
Manager discrimination → has two sides:
The negative one: decreases productivity due to the loss of talented people because
they are discriminated and by that, not hired.
The “positive” one (at least, in an analytic and purely economically beneficial way): there
is an increase of costumers (if they are the ones that discriminate) who do not belong
to the majority and have higher incomes. This derives in higher sells and by that, higher
incomes.
Profit paradox → Some companies are making the same or less than 20 years ago.
However, there are others who are making more than 20 years ago and have a
concentrate high level of money.
So, nowadays world is a one where markets are becoming oligopolistic (few firms have
the control of the market).
REAL WAGES AND PRODUCTIVITY → Till 1980 was the first stage where wages and
productivity increase in a direct proportional way (Labour income = Capital income).
However, after 1980 wages where stable while productivity was constantly growing
creating more profits. Each worker, even though it was paid the same, produced more
than before. Labour income is stable while capital income decreases. This is suggesting
that there was a bigger investment in innovation.
Also, the more education you get, the more wage you will have.
,Quasi-monopoly → MONOPOLY (One company has the entire control of the market.
There is no competition). One supplier holds most of the marketplace, but there are
competitors.
Examples of economic analysis: NOTABILITY.
Economics is the social science that studies the choices that individuals, businesses,
governments, and entire societies make when they cope with scarcity and the
incentives that influence and reconcile those choices.
It seeks to build a framework or roadmap of rational choice. The aim is to use this
roadmap to explain and evaluate the social interactions.
“Economics is a social science about the decisions-making progress related to scarce
resources”.
Social science → As it is a science, it means it follows the scientific method:
• Develop of a hypothesis (an idea or explanation for something that is based on
known facts but has not yet been proved. Can be a theorical model).
• Testing the hypothesis (check by experimenting –even though with is science is
limited–. However, nowadays there are ways to recollect data to have
conclusions. As these experiments would cause bad consequences to society and
its economy. For example: you cannot recreate the Second World War or the
New Deal in order to prove the hypothesis that unemployment decreased during
that time. There are just two hypothesis and History cannot be repeated to check
them) → Empirical data (data that was seen or proven).
As it is social, it means it studies human interactions.
Other economists’ definitions (Lionel Robbins and Alfred Marshall): NOTABILITY.
Economics is a social science, that implies:
• The use of the scientific method (observation, building models, checking these
models…).
• There is a tendency to develop models that can be expressed mathematically.
• The statistics and Econometrics are used to check the validity of the hypothesis.
• We consider that economic agents, are RATIONAL. They take decisions trying to
optimize. Some examples could be consumers maximizing their welfare, firms
maximizing their profits…
Resource → Anything that can be used to produce something else.
Scarce → In short supply. A “resource” is scarce when there is not enough of the
resource available to satisfy all the various ways a society wants to use it.
, Asymmetric information → When there is more information in one side than the other.
In the market, these two sides are:
• Buyers (DEMAND side)
• Sellers (SUPPLY side)
Usually, sellers have more information than buyers about the product’s quality. Sellers
will usually pay more if the quality is better. So, the seller must sell himself to convince
the buyer, who cannot measure the quality –they do not have that information–, to buy
the product → How does this affect the market? Buyers are assuming a risk when they
buy a product, thus, they want to pay less.
1st model: George Akerloff’s (2001 Nobel Economics Award) theory – “The Lemons
Market” → Wanted to answer the following question: What happens in a market with
asymmetric information? To answer it, he uses the following example: Sellers and
buyers of good and bad cars.
From the seller’s perspective:
• Sellers of good cars. They can make assurances because they know their product
is a good quality one → They offer a guarantee (There is a risk → A buyer can
make profit of it by being less careful with the object → Reason why guarantee
is limited).
• Sellers of bad cars → They sell it because they need the money, want a better-
quality car… Cannot make assurances, even if in Spain is mandatory.
From de consumer’s perspective:
• Those willing to pay for a good car (Good cars are around €12.000 and represent
a 60% of the total of cars).
• Those willing to pay for a bad car (Bad cars are around €3.000 and represent a
40% of the total of cars). Problem → If people see it is too cheap, they will think
it is of bad quality and they will not buy it.
ASSUMPTION → Buyers cannot differentiate between good and bad quality.
So, with this prince you can calculate what is called: EXPECTED VALUE –price which is a
generalization of the weighted average–. In this case:
60% · €12.000 + 40% · €3.000 = €7.200 + €1.200 = €8.400.
• From the seller of good cars’ perspective, this is an unfair price. Because it is too
low. They would only accept if they were desperate.
• From the seller of bad cars’ perspective, they are happy because they are being
paid more than they deserve. They are receiving more money than the value of
their product.
Because of this → The supply of bad cars (Increases). While the supply of good cars
(Decreases). This situation over time cause → Market Failure.
Because of the (Decreasing) prices → (Decreasing) of good quality (Infinite cycle).
Since good quality sellers have no reasons to sell their goods under their real price. Also,
because it is difficult to sell good products and prove its quality.
→ If costumers do not know how to measure quality, the quality of the market
decreases.
In order to prove the quality, people would have to hire other people who know how to
measure it. However, this costs money and by that, increases the product’s price which
people are no willing to pay.
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