Lesson 1 Summary

• A manager is a person directing the use of limited resources to achieve a goal.
• Economics is the science of optimization, or making decisions about the allocation of limited resources.
• Managerial economics is the study of directing limited resources in an efficient way to accomplish business goals.
• Microeconomists focus on the economic decision-making process of households and firms and their links in markets.
• Macroeconomists focus on the aggregate forces and trends determining the overall economic structure.
• Market models (supply and demand) are introduced to analyze markets. In competitive market models, there are many buyers and sellers, and they are all price takers (they take market prices as given).
• The demand curve presents the link between the quantity demanded for a good and its price.
  • The law of demand indicates that the link between the quantity demanded for a product and its price is negative. If prices get higher, the quantity demanded falls. If prices get lower, the quantity demanded increases. The demand curve has a negative slope (downward sloping).
  • In addition to the price of the product, there are other determinants of demand, such as the level of the consumer's income, prices of related goods (substitutes and complements), tastes of consumers, expectations of consumers about the future, and number of consumers (population).
  • If any of these additional determinants change, the demand curve will shift.
• The supply curve presents the relationship between the quantity supplied and the price of the product.
  • The law of supply states that the link between the quantity supplied and the price is positive. If the price is higher, the quantity supplied will increase as well. If the price gets lower, the quantity supplied will fall too. The supply curve has a positive slope (upward sloping).
• In addition to prices, there are other determinants of supply—for example, input prices (cost of production), technology improvement or decline, expectations about the future, and the number of sellers (number of firms).
  • If any of these additional factors change, the supply curve will shift (toward the right if it is a positive shock and toward the left if it is a negative shock).
• The intersection of the demand and supply curves determines the market equilibrium price and quantity.
  • At the equilibrium price, quantity demanded will be equal to quantity supplied.
• The economic actions of buyers and sellers make markets move toward their equilibrium conditions.
  • If the market price (current price charged in a market) is above the equilibrium price of the market, then we observe a surplus. This leads to the market price falling.
  • If the current market price in a market is below the equilibrium price, we observe a shortage. This leads to a higher market price.