Managerial Economics

CHAPTER 1: INTRO TO MANAGERIAL EONOMICS - firm is thought to have profit maximization as its primary
goal
Definition of Economics - firm’s owner-manager is assumed to be working to
-Study of the production, distribution, and consumption of maximize the firm’s short-run profits
goods and services. - the primary goal of the firm is long-term expected value
-Management of scarce resources with unlimited wants maximization.
and needs.

The Circular Flow Diagram- represents the organization of an Value of the Firm- is the present value of the firm’s expected
economy in a simple economic model. future net cash flows.

Overview of Managerial Economics

- To provide economic terminology and reasoning for the
improvement of managerial decisions.
- Apply economics for the improvement of managerial
decisions in an organization.

Evaluating Choices Alternatives

- Recognize how economic forces affect organizations and
describe the economic consequences of managerial
behavior.
- Economic concepts and quantitative methods to develop
vital tools for managerial decision-making.

Theory of the Firm

- Firms are useful for producing and distributing goods and
services.

Expected Value Maximization

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8. Effective Market Research
- Analyzing domestic and foreign markets is crucial as it
helps determine niche market segments and allows for
global expansion

9. Measure Efficiency
- Prepare necessary reports with the statistics and keep
the management updated

10. Economic Intelligence

- External factors like government policies, employment
Limitations of Theory of the Firm opportunities, stages of the product cycle, exchange rates,
In practice, do managers try to: emerging economies, market trends, etc.
- to optimize (seek the best result) or merely satisfy (seek
satisfactory rather than optimal results)? Microeconomics vs Macroeconomics
- seek the sharpest needle in a haystack (optimize), or do
they stop after finding one sharp enough for sewing Microeconomics
(satisfice)? - study of decisions made by people and businesses
regarding the allocation of resources and the prices at
In practice, these questions can be solved: which they trade goods and services.
- Are generous salaries and stock options necessary to - focuses on supply and demand and other forces
attract and retain managers who can keep the firm that determine price levels in the economy.
ahead of the competition?
- When a risky venture is turned down, is this inefficient
risk avoidance? Microeconomics involves several key principles:

Purpose of Managerial Economics -Demand, Supply and Equilibrium

-Production Theory
1.Efficient Business Process -Costs of Production
- A comprehensive analysis of all internal factors helps -Labor Economics
you make better decisions in improving the internal
business process Macroeconomics
- studies the behavior of a country and how its
2. Framing Policies policies impact the economy as a whole.
- Formulate policies after continuous testing and based - analyzes entire industries and economies rather
on your past experiences than individuals or specific companies.

3. Long Term Planning

- Analyze the internal and external factors; influencing Importance of Managerial Economics to Managers
the business environment using diverse economic theories
and tools - A careful examination of the literature for any of these
subjects will reveal that economics provides key
4. Sourcing Raw Materials terminology and a theoretical foundation.
- With the scarcity of raw materials, make suitable - Learning different techniques in marketing, production,
decisions involving suppliers, competitors, and customers. operation management and finance shall also
understand its beneath relationships with Economics
5. Demand Analysis - Both organizations and consumers have scarce resources
- Helps you decide on the type of product/service and leading to effective managerial decision-making.
involves studying consumer behavior, purchase trends, - Creation of customer value in the realm of competitive
factors influencing purchase patterns, etc market.

6. Profit Analysis
- Earning reasonable profits is crucial for every business.

7. Efficient Management of Funds

- Budgeting and controlling the flow of funds are essential
for every business.
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CHAPTER 2: RELATIONSHIPS AND
KEY MEASURES

Economic Optimization Process

• Process of arriving at the best solution to a
problem;
• Optimization Decision: A choice alternative that
produces a result most consistent with managerial
objectives

LESSON 1: REVENUE, COST AND RELATIONS AND PROFIT

FUNCTIONS

Revenue Relations and Functions

• Effective production and pricing decisions
depend on an Consider the relationship between
output, Q, and total revenue, TR
• understanding of revenue relations.
• Price and Total Revenue
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Profit Maximization
At the profit-maximizing activity level, MR= MC,
and the added amount of revenue brought in by
the last unit produced (MR) is just sufficient to
offset the added cost (MC), and profit would fall
with an expansion in production; Profit
Maximization
• At the profit-maximizing activity level, MR= MC,
and the added amount of revenue brought in by
the last unit produced (MR) is just sufficient to
offset the added cost (MC), and profit would fall
with an expansion in production;
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LESSON 2: ACCOUNTING VS MEASURES OF COSTS
ECONOMIC AND PROFITS

Once the operating volume crosses the breakeven

threshold, each additional unit contribution margin
results in additional profit.
• However, if you fall below the breakeven level,
the loss will grow equally dramatically as the
volume level drops. Businesses
• Software providers, which tend to have mostly
fixed costs at high risk and high reward Breakeven
Analysis
• Businesses that have predominantly variable
costs, such as retail grocery outlets with modest
changes in profit relative to changes in revenue
• If the business level falls off, they can scale down
their variable costs and profit will not decline

LESSON 4: The Impact of Price Changes

• To examine the impact of price and determine
the best price, we need to estimate the
relationship between the price charged and the
maximum unit quantity that could be sold.
LESSON 3: BREAKEVEN ANALYSIS • This relationship is called a demand curve.
• As the sales volume increases, revenue and cost • Generally follow a pattern called the law of
increase and profit becomes progressively less demand The Impact of Price Changes
negative, turns positive, and then becomes • Assume that since the operator of the business
increasingly positive. last year sold 36,000 units at a price of $1.50 that
• From the graph, we can see the breakeven point we could sell up to 36,000 units at the same price
is slightly less than 35,000 units this coming summer.
• If the students can sell above that level, which • Next, suppose the students had asked the prior
the prior operator did, it will be worthwhile to operator how many ice cream bars he believes he
proceed with the venture.
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would have sold at a price of $2.00 and the prior
operator responds that he probably would have
sold 10,000 fewer ice cream bars.
• He estimates his sales would have been 26,000
at a price of $2.00 per ice cream bar.

The shutdown rule states that a firm should

continue operations as long as the price (average
revenue) is able to cover average variable costs.
• The firm can continue operating, as it will be
producing where marginal revenue (price, average
revenue) is equal to marginal cost, a condition that
ensures profit maximization or loss minimization
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CHAPTER 3: DEMAND AND PRICING