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Economics Notes

Managerial economics deals with three key concepts: 1. Price systems arise due to scarcity of resources. Opportunity sets define what consumption bundles individuals can afford given prices and income, with trade-offs between goods determined by relative prices. 2. Production possibility curves show the maximum output combinations an economy or firm can produce with limited resources. Points inside the curve represent inefficient production, while unattainable points lie outside. 3. Absolute advantage occurs when a country can produce more of two or more goods than other countries using the same inputs, due to better technology or resources. This leads to gains from international trade.

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149 views

Economics Notes

Managerial economics deals with three key concepts: 1. Price systems arise due to scarcity of resources. Opportunity sets define what consumption bundles individuals can afford given prices and income, with trade-offs between goods determined by relative prices. 2. Production possibility curves show the maximum output combinations an economy or firm can produce with limited resources. Points inside the curve represent inefficient production, while unattainable points lie outside. 3. Absolute advantage occurs when a country can produce more of two or more goods than other countries using the same inputs, due to better technology or resources. This leads to gains from international trade.

Uploaded by

kulbirsg
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Managerial Economics

1. Price Systems:

Price systems are the result of scarcity. The basic proposition of economics, that scarcities are essentially universal, is often phrased, as there is no such thing as a free lunch. 2. Opportunity Sets: All possible consumption bundles that someone can afford given the prices of goods and the person's income level is the pportunity set. !t specifies the cost of one option in terms of another. The tradeoffs "ithin opportunity sets is given by the relative price, that is ho" many units one good must be given up for one unit of the other good. Trade-offs are necessary as resources are scarce.

1 3. Production Possibility: Production possibility describes the amount of goods a firm or society could produce given a fi$ed amount of land, labor, and other inputs.

Right igure !magine an economy that can produce only "ine and cotton. According to the Production Possibility %rontier &PP%', points A, ( and ) * all appearing on the curve * represent the most efficient use of resources by the economy. Point + represents an inefficient use of resources, "hile point , represents the goals that the economy cannot attain "ith its present levels of resources. 1. !dea 1- At any point in time only a certain .uantity of goods can be produced due to limited resources. 2. !dea 2: To produce more of one good, some production of the other good has to be given up. ". Opportunity cost !t is the value of "hat is foregone in order to have something else. This value is uni.ue for each individual. pportunity cost is important to the PP% because a country "ill decide ho" to best allocate its resources according to its opportunity cost. Therefore, the previous "ine/cotton e$ample sho"s that if the country chooses to produce more "ine than cotton, the opportunity cost is e.uivalent to the cost of giving up the re.uired cotton production. #. $bsolute $d%antage 0ometimes a country or an individual can produce more than another country, even though countries both have the same amount of inputs. %or e$ample, )ountry A may have a technological advantage that, "ith the same amount of inputs &arable land, steel, labor', enables the country to manufacture more of both cars and cotton than )ountry (. A country that can produce more of both goods is said to have an absolute advantage. (etter .uality resources can give a country an absolute advantage as can a higher level of education and overall technological advancement. !t is not possible, ho"ever, for a country to have a comparative advantage in everything that it produces, so it "ill al"ays be able to benefit from trade.

Managerial Economics
&. Sun' costs

0un2 costs are e$penditure that have already been made and cannot be recovered no matter "hat choice is made. A rational person "ould ignore these costs in decision ma2ing. (. )arginal *osts Marginal costs are the e$tra costs of doing something +. $ccording to the economic principle there are t,o possibilities to optimi-e the input.output relation: #. )a/imi-ation principle- Ma$imi3e output at given inputs 1. )inimi-ation principle- Minimi3e inputs at given output 0. Slope: The relationship bet"een t"o variables in a curve is given by slope. The slope is defined as the increase in y per unit increase in x. #. !f the graph has an up"ard &or positive' slope, the t"o variables are directly related4 they move up"ard or do"n"ard together 1. !f the graph has a do"n"ard &or negative' slope, the t"o variables are inversely related4 they move in opposite directions 11. 2udget *onstraint: The set of all bundles those are affordable "ith given income and prices. %ollo"ing e.uation describes the budget constraint

11. 3ecessary assumptions on preference ordering:

12. !ndifference *ur%e: !ndifference curve is the graphical representation of the set of bundles that the consumer prefers e.ually or different set of bundles among "hich the consumer is different. Mapping of tradeoffs bet"een one good and another by an individual at a specific moment in time. )haracteristics#. Al"ays )onve$, sho"ing tradeoff bet"een goods

7 1. )an be a mapping of indifference curves 5. !f give an option, one "ould prefer to stay further a"ay from origin. At this indifference curve one "ill have much more goods.

13. )arginal Rate of Substitution: M60 is ratio of marginal utilities, "hich is consuming one additional unit.

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