Economic decision making is based on five elements. First, we need to define what decisions we want to take. Second, we have to outline the choices. Third, a measurable objective must be defined. Fourth, we focus on only a small set of variables and finally, we have to define the relationship between those variables.
- Managerial economics is a way to make better decisions.…Those decisions don't have to be…about the monetary policy of the United States.…They can be very personal decisions,…like whether you should buy or rent an apartment.…When you face such a decision in your life,…your are confronted with many different questions,…options, constraints, and variables.…You can address this question…from a psychological point of view.…For example, which living situation…would make you more happy?…Traditional economists would not ask that question.…
They would ask a simple question:…is it cheaper to rent or to buy?…Of course, you can counter-argue…that the cheapest option might not be the one…that makes you happy, and I'm sure you deserve to be happy,…but whatever decisions you're going to make,…it it still important to know…whether it's cheaper to rent or to buy.…Entrepreneurs face economic decisions all the time.…I remember when my father started his own tortilla business.…He was the only producer of flour tortillas in Switzerland.…
- 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.
- 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