Managerial Economics and Strategy - Chapter 1: Introduction

A set of vocabulary flashcards covering the fundamental concepts of managerial economics, decision-making, economic modeling, and market analysis.

Economics

The study of decision-making in the presence of scarcity.

Managerial Economics

The application of economic analysis to managerial decision making.

Managers

Individuals who make economic decisions by allocating the scarce resources at their disposal.

Profit

The bottom line calculated by the formula: $\text{Profit} = \text{Revenue} - \text{Costs}$.

Trade-Offs

The evaluation of alternatives in an environment of scarcity, which often involves considering the effect of a small change through marginal reasoning.

Marginal Reasoning

The process of considering the effect of a small change in a decision-making context.

Rational Maximizers

The assumption in economic analysis that others do the best they can with their limited resources.

Behavioral Economics

A field that explains why individuals cannot successfully maximize for psychological reasons, cognitive limits, and psychological biases.

Market

An exchange mechanism that allows buyers to trade with sellers, with firms and consumers as primary participants.

Strategy

A battle plan that specifies the actions or moves a manager will make to maximize firm profit when interacting with a small number of rival firms.

Game Theory

A tool used to understand and develop strategies when interacting with rival firms.

Model

A description of the relationship between two or more variables, often used by managers to conduct what-if analysis.

Simplifying Assumptions

The practice in economic modeling of including only essential issues and leaving aside complications to provide valid predictions of the real world.

Income Threshold Model

A specific model used to explain car purchasing behavior in China by assuming only income has a significant effect on the purchase decision.

Empirical Evidence

Real facts used by economists to test theories and check if a theory's predictions are correct.

Positive Statement

A statement concerning what is or what will happen, which describes reality and provides a testable hypothesis about cause-and-effect relationships.

Normative Statement

A statement concerning what somebody believes should happen, which prescribes a course of action based on value judgments that cannot be tested.

Two-Sided Markets Theory

An evolving theory used to understand online markets and disruptive innovations, such as the internet, that allow two groups of users to interact.