PPA 723: Managerial Economics

Lecture 1:Introduction

Managerial EconomicsLecture 1: Introduction

Outline

• Course Requirements

• What is Policy Economics?

• Production Possibility Frontier

Managerial EconomicsLecture 1: Introduction

Microeconomics provides a set of tools for understanding how people behave

as consumersas workersas business managersand in a variety of other roles.

These tools are helpful in designing and evaluating public policies

but they are never the whole story.

Managerial EconomicsLecture 1: Introduction

Microeconomics is a new way of thinking.

But it is logical and anyone who tries can figure it out.

The key is practice.

If you are having trouble, do as many problems as you can!

Learn to be patient: Go step by step.

Managerial EconomicsLecture 1: Introduction

Some people think economics is too technical:How can one shed light on policy

issues with tools that are beyond the reach of elected officials?!

But the main insights of economics are often simple and logical.

We will not go beyond graphs and simple algebra.

Managerial EconomicsLecture 1: Introduction

Ironically, some people think economics is too simple:How can one gain insight into

a complex policy issue with a simple graph?!

But a basic analytical principle is that one must start with the basics, then add complexity.

You must learn to decide how much complexity is needed for each decision.

Managerial EconomicsLecture 1: Introduction

According to some popular reports economics is rigid and political.“Markets are just fine on their

own and the government should not interfere.”

In my judgment, economics is a flexible tool that can be applied to virtually any institutional setting, not just perfectly competitive markets,

It can be useful to people with virtually any set of values.

Managerial EconomicsLecture 1: Introduction

This leads to the distinction between positive and normative analysis:

Positive analysis: Statements about human behavior that can be tested against the evidence.

Normative analysis: Statements about the best course of action that combine positive analysis and values.

Managerial EconomicsLecture 1: Introduction

People who agree on the positive analysis may still choose different policies because they have different values.

Unfortunately, many people work backwards:They select a policy on the basis of

their values and then make behavioral arguments to support their conclusion.

This approach may undermine their own objectives!

Be as objective as you can when you do positive analysis!

Managerial EconomicsLecture 1: Introduction

A Simple Economic Idea: The Production Possibility Frontier

Food

Guns

Possible

Not Possible

AB

C

Managerial EconomicsLecture 1: Introduction

This production possibility frontier sheds light on several useful economic concepts:

ScarcityChoiceOpportunity CostPositive versus Normative