Managerial Economics

1. Managerial
Economics

2. Economics …?
• Social science
• Dealing with scarcity
• Allocation of available resources to maximise
satisfaction
• Choice making
• Prioritization
• Affordability
• Risks and uncertainty
http://www.youtube.com/watch?v=2YULdjmg3o

3. Economics – An overview
Challenges
and opportunities
Improved present
and future outcomes
Economic knowledge
Description
Explanation
Prediction
Recommendation

4. Decision making in business
• Defining target
• Studying socio-politico-economic
environment (collection of information)
• Exploring courses of action
• Analysing alternatives
• Choosing best alternative
• Validation through experiment
• Execution

5. Economics - An Overview
(cont’d)
An Example -
To understand the economic way of
thinking in more detail, let us focus on an
observation on Healthcare and the US
economy.

6. Health-Care and the US Economy
• Observation: Health-care spending has increased
faster than the rest of the U.S. economy since 1990.
• To understand how we ended up with the
observation, we need:
• a measure of health-care spending
• a measure of the overall size of the U.S. Economy

7. Health-Care and the US Economy
• Measure of size of the Economy: Gross Domestic
Product (GDP) - a measure of the value of all
goods (cars, trucks, houses, TVs, etc.) and
services (education, IT, health-care, etc.)
produced in an economy during a specified
period of time.
• Health-care spending – includes payments for
hospital services, lab tests, nursing homes, visits
to doctors, medicines, eyeglasses, and more.

8. Health-Care and the US Economy
• One way to assess health-care spending compared to
the spending of all goods and services is to look at
health spending as a share of GDP, or:

9. Health-Care and the Economy
(cont’d)

10. Health-Care and the US Economy
• Column (3) in Table shows the share of health-
care spending to GDP has gradually increased
from 9.6 percent in 1990 to 11.9 percent in
2004.

11. Health-Care and the US Economy

12. The three questions ….
• What is to be produced ?
• Theory of DEMAND- studying consumers
• How is it to be produced ?
• Theory of PRODUCTION & COST - producers
• Who gets the output?
• Mechanisms for ‘fair’ distribution: Govt. regulation &
MARKET MECHANISM (pricing theory, profit
maximisation, risks and uncertainty)
SCOPE OF MANAGERIAL ECONOMICS

13. The Circular Flow Model
A model that illustrates the flow of
funds and goods and services through
the economy as people (households
and firms) buy and sell in markets.

14. The Circular Flow Model
The Two Major Players
Households – who buy goods and services and sell their labor
services to firms in the labor market. Households also supply
capital to firms in the capital market
Firms – sell goods and services in the goods market and buy
the labor services that households sell in the labor market.
Firms also demand (or borrow with interest) capital from
households in the capital market.

15. CIRCULAR FLOW DIAGRAM

16. The three markets:
1) the labor market
2) the capital market
3) the goods and services market
The Circular Flow DiagramThe Circular Flow Diagram
in Health Carein Health Care

17. Circular Flow Diagram in Health Care

18. Economic Models
Economic Model
• An explanation (or representation) of how
the economy or part of the economy
works.
• Abstractions or simplifications of the real
world.

19. Economic Models: an
Example
4 ways to illustrate economic relationship
between variables:
1. with words,
2. with a numerical value,
3. with a graph, and
4. with algebra or an equation.

20. Economic Models: an Example
Relationship between number of doctors employed at anRelationship between number of doctors employed at an
HMO and number of physical examinations givenHMO and number of physical examinations given

21. Microeconomic vs. Macroeconomic
Models
• Microeconomics: the branch of economics that
examines individual decision making at firms and
households and the way they interact in specific
industries and markets.
• Macroeconomics: the branch of economics that
examines the workings and problems of the
economy as a whole---focuses on variables such
as GDP growth and unemployment.

22. Impacts of Economics on Public
Policy
• Positive Economics: economic analysis that
explains what happens in the economy and why,
without making recommendations about
economic policy.
• Examples of the scope of positive economics:
• Explaining why governments increase or
decrease tax rates.

23. Impacts of Economics on Public
Policy (cont’d)
• Normative Economics: economic analysis that
makes recommendations about economic policy;
aims to develop and recommend policies about
what the government should do.
• Examples of the scope of normative economics:
• Recommend that the government increase tax
rates to prevent a budget deficit.

24. Positive or Normative
Economics?
• Are the statements below positive or normative
statements?
• Countries with high population growth rates usually have
low income per capita.
• Countries should have population control as part of its
growth strategy.
• The best policy to discourage population growth is to tax
families with more than 4 children.
• A $1000 tax per child levied on families with more than 4
children in the US could generate revenues of more than
$40 million dollars.
Answer: Positive, Normative, Normative, Positive.

25. Recap
• Economics – An overview
• Scope of Managerial Economics
• The Circular Flow Model (case of health
care
• Economic Models
• Microeconomics and Macroeconomics
• Positive or Normative Economics