Managerial Economics/Introduction

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An economy consists of a set of people or individuals and their environment. Each individual in an economy has an economic problem.

An economic problem arises because each individual has unique desires (defined as experiences he or she would like to have) and a limited set of assets (consisting of human capital, possessions, and time). This limitation prevents the individual from ever satisfying all his desires and dictates his behavior.

Human Capital includes physical attributes, mental capabilities, skill, personality, associates (people she knows or know her), creativity, influence, and a philosophy of life.

Possessions are the physical objects the individual posses or, more properly, has a claim on.

Time is limited to 24 hours each day for the remainder of an individual's life.


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The economic problem we face forces us to economize, that is, to decide which desires to satisfy and which ones to leave unsatisfied. This behavior is both economically rational and the rationale behind economics.

It is important to note that the process of economizing occurs entirely in the context of uncertainty because the consequences of our actions happen in the future (of which we know nothing), and our decisions are made while being unaware of all things which exist in the present.

Economics then is the study of the consequences of economizing in the context of uncertainty. Economics is relevant as an internal model against which we can compare our present situation and make better decisions about our behavior. It does not give a set of tools to use, but rather an understanding of the world in which we live.