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Chapter 2

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York University
PSYC 2120
Ward Struthers

Preface y Microeconomic theory of a firm is at the heart of managerial economics y Key reasons for managers to study analysis importance of understanding shifts in market demand and supply Chapter 1 Introduction Introduction Economics and Managerial Decision Making Managerial Economics is important and useful course y Foundation for studying other courses y Theoretical framework for tying courses together crossfunctional view of studies Economics study of behaviour of human beings in producing distributing and consuming material goods and services in a world of scare of resourcesdiscipline of organizing and allocating a firms scarce resources to achieve its desired objectives ManagementManagerial Economics use of economic analysis to make business decisions involving the best use of an organizations scare resources y Use of economic analysis in formulation of business policies y big gap between logic of economic theorists and problems of policy in practical management needs to be bridgedEconomists can build theoretical models and apply to any business model problems 1 Break it down to essential components 2 Describe relationships between components 3 Facilitating systematic search for an optimal solution y Method of reasoning involved in derivation of economic theoremManagerial Economics as a course is applied micro that includes selected quantitative techniques common in other disciplines y Linear programming management science y Regression analysis statistics econometrics and management science y Capital budgeting finance y Cost analysis managerial accounting and cost accountingMany disciplinesbusiness studies draw from core microeconomic concepts for theoretical support y Marketing Demand Price ElasticityCapital Budgeting BreakEven Analysis Opportunity Cost Economic Value Added y Financey Management Science Linear Programming Regression Analysis Forecasting y Strategy Types of Competition StructureConductPerformance Analysis y Managerial Accounting Relevant Cost BreakEven Analysis Incremental Cost Analysis Opportunity Cost microeconomic theory of behaviour and consumers and firms in competitive markets Heart of Managerial Economicsy Theory provides managers with basic framework for making key business decisions about allocation of firms scarce resources y In making decisions managers must answer the questions below in abridged forms 1 What are the economic conditions in a particular market a Market Structure b Supply and Demand Conditions c Technology d Government Regulations e International Dimensions f Future Conditions g Macroeconomic Factors 2 Should our firm be in this business 3 If so what price and output levels achieve our goals 4 How can we maintain a competitive advantage over our competitors a Costleader b Product Differentiation c Market Niche
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