While managerial economics appears to be very rational, economist quite often suffer from different fallacies. The short run fallacy leads to decisions that are not optimal on the long term. linear thinking fallacies don't take into account side effects and feedback loops. Maximizing fallacies undermine that a satisfying solution might work just well, and the correlation versus causality fallacy assumes causal relationships where they don't exist.
- If you buy a medicine,…it typically comes with a long list of warnings…about side effects.…The same is true for managerial economics.…While this medicine can cure you from a state of ignorance…and provide a certain immunization to poor decisions,…economists quite often suffer from different fallacies.…In this video, I will highlight a few of them…to ensure you use your medicine wisely and effectively.…The first fallacy is focusing on the short run…while neglecting the long run.…
For example, if you increase the price of your product,…the profit will go up short-term…because your customers cannot switch suppliers easily.…However, they will likely search for new suppliers…and give you less business…because of the dependency you just exploited.…Long-term your profitability may suffer…from this price increase.…The second fallacy is related to linear thinking…rather than systems thinking.…A good example is the French government,…who wanted to protect French population…from too many Hollywood blockbusters.…
They used two measures.…
- What are customers buying? (demand theory)
- What should we produce? (production theory)
- Which costs do I need to worry about now? (cost theory)
- What market am I in? (competition theory)
- What should we charge for it? (pricing theory)
To understand what managerial economics looks like in practice, Stefan explains how Google's auction-based advertising system employs the principles of game theory and how understanding this can help decision makers to outmaneuver their competitors.
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- Using economics to solve business problems
- Understanding price elasticity
- Demand curve shifts
- Economics of scale vs. scope
- Break-even and what-if analysis
- Profit maximization
- Economics in action