Managerial Economics Basic

Defining Moments of Economics

• Defining Moments of Economics is the set of related events or ideas over time that has changes fundamentally in the manner we conduct our everyday lives or in the way we think about economy.

• Five phases in the moments of economics:– Industrial revolution– Capitalism– Rise and fall of socialism– Great Depression – Information Revolution

Externalities

• An externality is an effect on a third party that is caused by the consumption or production of a good or service.

• It is the situation in which a person’s activities such as, production and consumption of goods and services effect the well-being of uninvolved people.

Types of Externalities

• Positive Externalities:– A positive externality is a positive spillover that

results from the consumption or production of a good or service.

– For example, although public education may only directly affect students and schools, an educated population may provide positive effects on society as a whole.

Types of Externalities

• Negative Externalities:– A negative externality is a negative spillover effect

on third parties. – For example, secondhand smoke may negatively

impact the health of people, even if they do not directly engage in smoking.

Market Failure

• Market failure occurs due to inefficiency in the allocation of goods and services.

• Reasons for market failure includes following:– Asymmetric Information– Monopoly power– Lack of public goods– Externalities

Public Goods

• Public goods are the goods which are produced and are made available to the member of the society.

• They are the goods , which are non-rival and non-exclusive in nature and provide benefit to the people at 0 marginal cost (MC).

Characteristics of Public Goods

• Non-rival– Goods that are non rival can be made available to everyone

without affecting any individual’s opportunity for consuming them.

– Eg: Highway, lighthouse, etc.• Nonexclusive– People cannot be excluded from consuming it.– It is difficult or impossible to charge people for using

nonexclusive good; the goods can be enjoyed without direct payment.

– E.g. national defense,

The circular flow of economic activity

References

• https://www.boundless.com/economics/textbooks/boundless-economics-textbook/market-failure-externalities-7/introducing-market-failure-57/causes-of-market-failure-219-12310/