Managers and entrepreneurs make decisions all the time. Managerial economics is a science that helps to explain how resources such as labor, technology, land, and money can be allocated more efficiently. Understanding managerial economics helps individuals to make better decisions systematically.
- Managerial economics is a science that helps to explain how resources such as labor, technology, land, and money can be allocated efficiently. As such, managerial economics focuses on decisions individuals make. Let me quickly compare an economic approach to a decision with alternative perspectives. If you go to Starbucks to get your daily caffeine intake, you may want to sign in on the Starbucks customer program. If you pay with your Starbucks gold card you get some points, and for 125 points you get a free drink.
That's an economic decision, because you save an important resource, your money, to get your coffee. Another economic decision would be to skip Starbucks and brew your coffee at home. You'll get zero Starbucks points, but the coffee's may be 10 times cheaper. However, if you go to Starbucks because it makes you feel happy, then this not an economic decision, but a psychological one. In contrast, if you're Italian, and absolutely truly and forever hate Starbucks because they stole all the fancy Italian's expressions, such as macchiato and cappuccino, then you might boycott Starbucks.
This is not an economic or psychological decision, but a cultural one. In this course, and in life, I do not argue that economics is the only, or best way to explain or guide decisions, especially when it comes to your private life. You should not just go for the highest paying job and the richest spouse. Nevertheless, I think many entrepreneurs and executives make bad business decisions because they don't understand the fundamentals of managerial economics. That's why, in this course, you'll learn about different aspects of managerial economics.
What are customers buying? That's demand theory. What should we produce? That's production theory. Which costs do we need to worry about? That's cost theory. And what should we charge for it? That's pricing theory. If you are intimidated by me using the word theory four times in a row, don't worry. This is how textbook authors call their book chapters to impress their peers and their students. And while we do cover the fundamental theories in this course, I want to make sure that we always relate them to real world applications.
I define economics as a science, but many examples I use are pretty common sense. So, you might wonder whether economics is indeed a science. While some academics might disagree with my definition, economists use scientific methods to explain human behavior in a very formal way, and despite the fact that their economics models seem to be overly simplistic, they're often shockingly accurate in predicting human behavior. You may have see the movie A Beautiful Mind telling the story of Princeton Professor John Forbes Nash.
In 1950, he published his PHD dissertation on game theory where he described the Nash Equilibrium. For this seminal work, he won the Nobel Memorial Prize in Economic Sciences, 1994, 44 years later. And Nash economic theories are sill used in every day decisions in economics, computing, evolutionary biology, artificial intelligence, accounting, computer science, politics, and military theory. To conclude, let me summarize that economics is a science to allocate resources efficiently.
In this course about managerial economics, I try to help you to learn to make better decisions by applying economic theories.
- 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