Cap 1 Economia

Managers, Profits, and Markets

Student of managerial economics: Will I ever use this?
Professor: Only if your career is successful.

Success in the business world, no matter how you slice it, means winning in the marketplace. From CEOs of large corporations to managers of small, privately held companies-and even nonprofit institutions such as hospitals and universities-managers of any ofthese kinds of organizations cannot expect to make successful business decisions without a clear understanding of how market forces create both opportunities and constraints for business enterprises. Business publications such as The Wall Street Journal, Business Week, The Economist, Harvard Business Review, Forbes, and Fortune regularly cover the many stories of brilliant and disastrous businessdecisions and strategies made by executive managers. Although luck often play s a role in the outcome of these stories, the manager's understanding- or lack of understanding- of fundamental economic relations usually accounts for the difference between success and failure in business decisions. While economic analysis is not the only tool used by successful managers, it is a powerful and essentialtool. Our primary goal in this text is to show you how business managers can use economic concepts and analysis to make decisions and design strategies that will achieve the firm's primary goal, which is usually the maximization of profit.

Publishers roll out dozens of new books and articles each year touting the latest strategy du jour from one of the year' S most "insightful" business gurus.The never-ending parade of new business "strategies," buzzwords, and anecdotes might lead you to believe that successful managers must constantly replace outdated analytical methods with the latest fad in business decision making. While it is certainly true that managers must constantly be aware of new developments in the marketplace, a clear understanding of the economic way of thinking aboutbusiness decision making is a valuable and timeless tool for analyzing business practices and strategies. Managerial economics addresses the larger economic and market forces that shape both day-to-day business practices, as well as strategies for sustaining the long-run profitability of firms. Instead of presenting cookbook formulas, the economic way of thinking develops a systematic, logicalapproach to understanding business decisions and strategies- both today's and tomorrow´s.

While this text focuses on making the most profitable business decisions, the principles and techniques set forth also offer valuable advice for managers of nonprofit organizations such as charitable foundations, universities, hospitals, and government agencies. The manager of a hospital´s indigent-carefacility, for example, may wish to minimize the cost of treating a community´s indigent patient while maintaining a satisfactory level of care. A university president, facing a strict budget set by the state board of regents, may want to enroll and teach as many students as possible subject to meeting the state-imposed budget constraint.
Although profit maximization is the primary objective addressed inthis text, the economic way of thinking about business decisions and strategies provides all managers with a powerful and indispensable set of tools and insights for furthering the goal s of their firms or organizations.

1.1 THE ECONOMIC WAY OF THINKING ABOUT BUSINESS PRACTICES AND STRATEGY

Since this text relies primarily on economic theory to explain how to make more profitable businessdecisions, we want to explain briefly how and why economic theory is valuable in learning how to run a business. Managerial economics applies the most useful concepts and theories from two closely related areas of economics- microeconomics and industrial organization-to create a systematic, logical way of analyzing business practices or tactics to get the most profit, as well as formulating...