Department of Management (DoM)
Managerial Economics and Strategy (MES) Group

Economics for Management
Preparatory Reading

Economics for Management
DoM, MES Group

1. INTRODUCTION
1.2 What is Economics – Classic Definition
• Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. (Lionel Robbins 1932,“An Essay on the Nature and Significance of Economic Science”)

Economics for Management
DoM, MES Group

1. INTRODUCTION
1.2 What is Economics – Classic Definition
• Microeconomics is concerned with the behaviour of individual consumers and individual firms, acting and interacting in markets and in industry groups.
E.g. A company trying to maximize its profit
• Macroeconomics, in contrast, is concerned with the workings of national and international economies.
E.g. BoE fighting against inflation

Economics for Management
DoM, MES Group

1. INTRODUCTION
1.2 What is Economics
Economics is concerned with modelling the behaviour of individuals and organizations – firms, nonprofit organizations, and so on – in market and nonmarket settings.
Its models almost always assume that behaviour is purposeful – directed at some clear goal – and it usually studies how diverse behaviours that have conflicting objectives are brought into equilibrium by market and nonmarket institutions.

Economics for Management
DoM, MES Group

1. INTRODUCTION
1.2 What is Economics
This study is both descriptive (describing what happens) and evaluative (measuring what happens against some notion of an ideal outcome). After describing and evaluating particular institutions, economists often move on to policy prescription, considering how some objective might better be achieved if the institutions are modified.

Economics for Management
DoM, MES Group

1. INTRODUCTION
1.3 A Question
• In commodity foodstuffs markets, a suddenly failed harvest or large negotiated export agreement can send prices skyrocketing.
- Why?

Economics for Management
DoM, MES Group

1. INTRODUCTION
1.3 Demand, Supply, and Equilibrium
• Demand function is a function that records, for each possible price of the good, the total amount buyers of the good would choose to purchase.
• It is usually denoted as D(p) but can also be denoted as
QD.
• The higher the price, the less buyers want to buy
• Exception: Giffen good
3
• Numerical example: P( x) = 6 − x 5000

Economics for Management
DoM, MES Group

1. INTRODUCTION
1.3 Demand, Supply, and Equilibrium price demand quantity Figure 1.1 Demand

Economics for Management
DoM, MES Group

1. INTRODUCTION
1.3 Demand, Supply, and Equilibrium
• Supply function records, for each possible price of the good, the total amount that sellers of the good would choose to sell.
• It is usually denoted as S(p), but, again, can also be denoted as Qs.
• The higher the price, the more sellers want to sell
• Numerical example: P( x) = 1 + x

2500

Economics for Management
DoM, MES Group

1. INTRODUCTION
1.3 Demand, Supply, and Equilibrium price supply

quantity
Figure 1.2 Supply

Economics for Management
DoM, MES Group

1. INTRODUCTION
1.3 Demand, Supply, and Equilibrium
• If the price is such that S(p)>D(p), more would be offered for sale than would be bought. So sellers would like to lower the price.
• If the price is such that S(p) MC(q):
The firm can increase profit by increasing output level
• When output level is such that MR(q) < MC(q):
The firm can increase profit by decreasing output level
• So its profit is maximized when
MR(q) = MC(q)

Economics for Management
DoM, MES Group

2. CONCEPTS OF MARGINAL
2.5 Solving the Problem
• Back to the example, the MR of the firm is then

(

)

∂R ∂ 6x − 3x2 5000
3x
=
MR =
= 6−
∂q
∂x
2500
•

Its MC is

(

)

∂C ∂ 1000+ x + x2 5000 x MC =
=
= 1+
∂q
∂x
2500

Economics