Managerial Economics – ECO 9705 – Spring 2003
Tuesdays and Thursdays, 6:00 – 7:15pm
Prof. June Ellenoff O’Neill
Chapter 1 - Preliminaries
Understand real versus nominal prices
Microeconomics – behavior of individual economic units, including consumers, workers, investors, owners of
land, business firms.
Explains why and how they make decisions, how they interact to form markets and
industries, how price is determined, how they evolve and operate and how government policies and global
economic situation affects them.
Macroeconomics – aggregate economic quantities, such as the level and growth rate of national output, interest
rates, unemployment and inflation.
"You can't always get what you want" – for most people there are limits to what you can have or do. For
economists, this is an obsession. Much of microeconomics is about limits. Also it's about how to make the most
out of these limits – the allocation of scarce resources. In planned economies, allocation decisions are made by
Describes the trade-offs and how they are best made – or making optimal trade-offs.
Consumers, Workers, Firms,
Prices - In a planned economy, prices set by the government. In a market economy, prices are set by the
interaction of consumers, workers and firms.
Theories and Models – explanation and prediction of observed phenomena.
Positive analysis – describes relationships of cause and effect. Deal with explanation and prediction.
Normative analysis – examines questions of what ought to be, what is best. Not only concerned with alternative
policy options but also with the design of particular policy choices.
Market is a collection of buyers and sellers that through their interaction, determine the price of products.
Buyers and sellers.
A market includes more than an industry.
Industry is a collection of firms that sell the same closely related products – is the supply side of a market.
Perfectly competitive market – many buyers and sellers, no single buyers or seller has a significant impact on
price. Agricultural markets are close to it. Copper, coal, tin.
Noncompetitive – individual firms can jointly affect the price – world oil market, OPEC cartel.
Market definition – what buyers and sellers are part of the market
Real versus Nominal Prices
To make comparisons meaningful (past, present, future), we need to measure prices relative to the overall price
level. We must correct for inflation when comparing prices across time. This means measuring prices in real
rather than nominal terms
Nominal price –
absolute price of a good, inadjusted for inflation
– price of a good relative to an aggregate measure of prices, price adjusted for inflation.
Consumer price index