Wednesday, January 11, 2006

Introduction to Economics and Managerial Decision Making


Managerial economics is about the criteria for rational decision making by managers of business enterprises. The criteria elaborated here for business enterprises can also be applied to non-commercial decision settings, including government agencies, eleemosynary institutions, the home, and one's personal life. Before we proceed to an examination of these decision criteria, we shall review the essential economic nature of decision making in order to establish the fundamental principles upon which decision criteria may be based.

As noted in a first Principles of Economics course, the world is characterized by scarcity rather than abundance. Human beings need certain things for survival, and they want to possess or consume a much larger variety of amenities. If all of these things were abundantly available, each person could simply gather as much as he or she wished, and still leave enough for everyone else to do likewise. Managerial decision making would require little more than determining the time sequence of acquisition.

In regard to most of the things that humans consume, scarcity is the rule and abundance is the exception. A scarcity of something means that the total of human wants for it exceeds the quantity of it available for human consumption. As a result, one person simply cannot take all that he or she might want without consequences for other persons. Something may be said to be scarce when its price exceeds zero (P greater than 0). The price may be expressed and paid in non-pecuniary terms as well as in money. There are a few things that have essentially zero prices, e.g., common air and the water available from a water fountain.


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