What Managerial Economics can tell us about AI and Software Development

Managerial economics provides a framework for understanding how AI and software developers interact through isoquant and isocost curves—tools that model how firms trade off capital (LLMs) and labor (developers) to maintain output levels. The Marginal Rate of Technical Substitution reveals that neither input can be eliminated entirely; diminishing returns mean you need both AI and human developers working together, similar to how a single person with multiple shovels won't dig more holes than necessary. This framework helps answer critical questions about whether AI will replace developers, complement them, or how cost changes in LLMs will reshape software development economics.

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