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CHAPTER 1 - INTRODUCTION TO ECONOMIC DECISION MAKING Opening quote, see page 1. Decision making is at the heart of most important business and govt. problems. Examples: High-tech company: Undertake a promising but expensive R & D program? Petrochemical Manufacturer: Cut price in response to increased competition? Telecommunication Co: What bid to make for govt. contract? Food company: Introduce a new food product after mixed test-marketing? Fed Govt.: Stricter rollover standards for SUVs? City Govt.: Allocate funds to construct harbor tunnel for increased traffic flow? Fed Govt.: Increase funding for cancer research? Important question: “What is the alternative?” All decisions are economic decisions involving what comparison? Managerial Economics (ME) is the analysis of major management decisions using the tools and concepts of economics: supply and demand and cost, resource allocation, efficiency, cost-benefit, trade-offs, competition, strategic behavior, industry organization, market structure, etc. Managerial Economics (ME) is the study of the economic framework and the economic tools used to make management decisions, in both the private and public sector. For example , think of the thousands of decisions that get made every month at GM, Genesee County, Hurley Hospital, UM-F, YWCA, etc. ME provides a formal, systematic decision-making framework that facilitates and enhances sound decision making within organizations. ME focuses on the prescriptive approach to managerial decision, meaning a very applied approach (instead of theoretical) to analyzing practical decisions actually faced by businesses and governments. Most of the analytical methods covered in ME were developed in response to important, actual real- world, recurring managerial decisions, such as optimal pricing (e.g., pricing in the airline industry taking into account consumer demand, profit maximization, elasticity, rivals’ reactions), forecasting (GM forecasting demand to determine optimal production, pricing, advertising, etc.), capital budgeting (PV comparison of current costs versus expected future benefits), cost-benefit analysis of regulation or legislation, etc. ME applies the principles of economics to help us understand how decisions are made in the public and private sectors. EXAMPLES OF MANAGERIAL DECISIONS 1. Multinational Production and Pricing. Consider U.S. automaker like GM with production facilities in 50 countries and sales in almost 200 countries! To maximize profits, what decisions does ECN 469: Managerial Economics Professor Mark J. Perry 1
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GM have to make in regard to pricing and production? See example in book, two markets for sales and production of vehicles for an automaker (p. 3). 2. Forecasting.
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This note was uploaded on 01/23/2012 for the course ECON 469 taught by Professor Staff during the Fall '11 term at University of Michigan.

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