1 What is managerial economics?
As a student, you might wonder what managerial economics really is. Well, there isn’t a single well-accepted definition. However, there are certain ideas that many people agree on.
In simple terms, managerial economics is about applying economic theories to make better decisions in business and management. It’s about using tools from economics to solve real-world problems that companies face every day. That means, any sort of method, information, and knowledge from economic research that can help managers in making good decisions.
If you’re curious about what most people mean by managerial economics, sources like Wikipedia can give you a good starting point. While I wouldn’t suggest citing Wikipedia in academic papers1 or using ChatGPT to generate text, it can provide helpful, widely accepted definitions and give you an overview of the topic.
1 Wikipedia is generally considered a secondary source.
1.1 What is managerial economics for Wikipedia?
1.2 What is managerial economics for ChatGPT?
Me: Define managerial economics
Me: What distinguishes managerial economics from Microeconomics and Macroeconomics?
1.3 What is economics?
All economic questions arise because we want more than we can get. Our inability to satisfy all our wants is called scarcity and because of scarcity, we must make choices that depend on the incentives we face. An incentive is a reward that encourages or a penalty that discourages an action.
Economics is a social science, and as in all social sciences, many of the terms used in it are poorly defined. The following quotes can demonstrate that:
John Maynard Keynes (1883-1946): “The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps it possessors to draw correct conclusions.” Keynes (1921)
Alfred Marshall (1842-1924): “Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing.” Marshall (2009, p. 1)
Gary S. Becker (1930-2014): “Economics is all about how people make choices. Sociology is about why there isn’t any choice to be made.” Becker (1960, p. 233)
Colander (2006, p. 4): “Economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.”
Parkin (2012, p. 2): “Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices.”
Gwartney et al. (2006, p. 5.): “[E]conomics is the study of human behavior, with a particular focus on human decision making.”
Backhouse & Medema (2009, p. 222): “[E]conomics is apparently the study of the economy, the study of the coordination process, the study of the effects of scarcity, the science of choice, and the study of human behavior.”
Greenlaw & Shapiro (2022, ch. 1): Economics seeks to solve the problem of scarcity, which is when human wants for goods and services exceed the available supply. A modern economy displays a division of labor, in which people earn income by specializing in what they produce and then use that income to purchase the products they need or want. The division of labor allows individuals and firms to specialize and to produce more for several reasons: a) It allows the agents to focus on areas of advantage due to natural factors and skill levels; b) It encourages the agents to learn and invent; c) It allows agents to take advantage of economies of scale. Division and specialization of labor only work when individuals can purchase what they do not produce in markets. Learning about economics helps you understand the major problems facing the world today, prepares you to be a good citizen, and helps you become a well-rounded thinker.
Backhouse & Medema (2009, p. 222): “Perhaps the definition of economics is best viewed as a tool for the first day of principles classes but otherwise of little concern to practicing economists.”
Jacob Viner (1892-1970): “Economics is what economists do.” Backhouse & Medema (2009, p. 222)
Parkin (2012, p. 2): “Microeconomics is the study of the choices that individuals and businesses make, the way these choices interact in markets, and the influence of governments. […] Macroeconomics is the study of the performance of the national economy and the global economy.”
Although many textbook definitions are quite similar in many ways, the lack of agreement on a clear-cut definition of economics does not really matter and does not necessarily pose a problem as
“[E]conomists are generally guided by pragmatic considerations of what works or by methodological views emanating from various sources, not by formal definitions.” Backhouse & Medema (2009, p. 231)
The important questions of economics: How do choices end up determining what, where, how, and for whom goods and services get produced? And: When do choices made in the pursuit of self-interest also promote the social interest?
Exercise 1.1 Brain
Source: https://pixabay.com/images/id-6671455
I am the author of the Managerial Economics course and I am currently looking for a cover image for my book. I have reached out to several art and marketing companies for suggestions. Now imagine you are a sales representative from one of these companies and you have designed the cover shown in the image Figure 1.1. You have three minutes to make a compelling sales pitch that convinces me to choose your design. What would you say in those three minutes?