MANAGERIAL

ECONOMICS
BACHELOR OF SCIENCE IN ACCOUNTANCY AND
BACHELOR OF SCIENCE IN ACCOUNTING
INFORMATION SYSTEM

INSTRUCTOR: RUDY CERVANTES CUYA JR.

 TOPICS FOR PRELIM

I. FUNDAMENTALS OF MANAGERIAL ECONOMICS

A. INTRODUCTION
B. THE 6 STEPS OF DECISION MAKING
C. THE ECONOMICS OF EFFECTIVE MANAGEMENT
II. MARKET FORCES: DEMAND AND SUPPLY
A. DEMAND
B. SUPPLY
C. MARKET EQUILIBRIUM
D. PRICE RESTRICTIONS AND MARKET
EQUILIBRIUM
E. COMPARATIVE STATICS
III. QUANTITATIVE DEMAND ANALYSIS
A. THE ELASTICITY CONCEPTS
B. OWN PRICE ELASTICITY OF DEMAND
C. CROSS-PRICE ELASTICITY
D. INCOME ELASTICITY
E. OTHER ELASTICITIES
F. OBTAINING ELASTICITIES FROM DEMAND
FUNCTIONS
G. REGRESSION ANALYSIS
OBJECTIVES At the end of the lesson students are expected
to:

1. IDENTIFY AND APPLY THE SIX PRINCIPLES OF

EFFECTIVE MANAGERIAL DECISION MAKING;

2. APPLY BASIC CALCULUS IN DETERMINING THE

MARGINAL VALUE OF A FUNCTION;

3. EXPLAIN AND PRESENT THE SUPPLY AND DEMAND

FUNCTIONS, GRAPHICALLY AND MATHEMATICALLY;
AND

4. APPLY THE CONCEPT OF ELASTICITY IN MAKING

DECISIONS.
 INTRODUCTION
WHAT IS ECONOMICS?

ECONOMICS IS THE SCIENCE OF MAKING DECISIONS IN THE PRESENCE OF

SCARCE RESOURCES. SCARCITY IS THE CENTRAL PROBLEM OF ECONOMICS
THAT IS WHY ECONOMISTS ARE OBSESSED WITH EFFICIENT ALLOCATION OF
RESOURCES.

MANAGERIAL ECONOMICS

MANAGERIAL ECONOMICS, THEREFORE, IS THE STUDY OF HOW TO DIRECT SCARCE

RESOURCES IN THE WAY THAT MOST EFFICIENTLY ACHIEVES A MANAGERIAL GOAL.

THE MANAGER

A MANAGER IS A PERSON WHO DIRECTS RESOURCES TO ACHIEVE A STATED GOAL. THIS DEFINITION
INCLUDES ALL INDIVIDUALS WHO:
1. DIRECT THE EFFORTS OF OTHERS, INCLUDING THOSE WHO DELEGATE TASKS WITHIN AN
ORGANIZATION SUCH AS A FIRM, A FAMILY, OR A CLUB;
2. PURCHASE INPUTS TO BE USED IN THE PRODUCTION OF GOODS AND SERVICES SUCH AS THE OUTPUT
OF A FIRM, FOOD FOR THE NEEDY, OR SHELTER FOR THE HOMELESS
KEY TO MAKING SOUND
DECISIONS
Know the
information
Collect
Data
Process/Analyze the
Data
 THE ECONOMICS OF EFFECTIVE
MANAGEMENT
1. IDENTIFY THE GOALS AND 2. RECOGNIZE THE NATURE 3. UNDERSTAND
CONSTRAINTS; AND IMPORTANCE OF INCENTIVES;
PROFITS;
THE OVERALL GOAL OF MOST
FIRMS IS TO MAXIMIZE ACCORDING TO DANIEL PINK
PROFITS OR THE FIRM’S (2009), INCENTIVES ARE A
THE FIRST STEP IN MAKING
VALUE. CONTINGENT MOTIVATOR. TO
SOUND DECISIONS IS TO
SUCCEED AS A MANAGER,
HAVE WELL-DEFINED GOALS
YOU MUST HAVE A CLEAR
BECAUSE ACHIEVING
GRASP OF THE ROLE OF
DIFFERENT GOALS ENTAILS
INCENTIVES WITHIN AN
MAKING DIFFERENT
ORGANIZATION, SUCH AS A
DECISIONS. A GOAL IS SIMPLY
FIRM, AND HOW TO
AN AIM OR AN AMBITION
CONSTRUCT INCENTIVES TO
TOWARDS SOMETHING
INDUCE MAXIMAL EFFORT
FROM THOSE YOU MANAGE.
 THE ECONOMICS OF EFFECTIVE
MANAGEMENT

5. RECOGNIZE THE TIME

4. UNDERSTAND MARKETS
VALUE OF MONEY

IT IS IMPORTANT TO BEAR IN MIND THAT THERE TWO IT IS IMPORTANT TO RECOGNIZE THAT $1 TODAY
SIDES TO EVERY TRANSACTION IN A MARKET: FOR IS WORTH MORE THAN $1 RECEIVED IN THE
EVERY BUYER (CONSUMER) OF A GOOD THERE IS A
FUTURE
CORRESPONDING SELLER (PRODUCER). Present value (PV) - is the amount that would
have to be invested today at the prevailing
THREE SOURCESOF RIVALRY
interest rate to generate the given future
(1) CONSUMER-PRODUCER RIVALRY – IT OCCURS value.
BECAUSE OF THE COMPETING INTERESTS OF WHERE:
CONSUMERS AND PRODUCERS. FV = IS THE FUTURE VALUE
RECEIVED
(2) CONSUMER-CONSUMER RIVALRY – IT ARISES WHEN N = YEARS IN THE FUTURE,
THERE IS A LIMITED QUANTITY OF GOODS AVAILABLE THAT I = IS THE INTEREST
CONSUMERS WILL COMPETE WITH ONE ANOTHER FOR
RATE
THE RIGHT TO PURCHASE. FOR EXAMPLE, WHAT IS THE PRESENT
(3) PRODUCER-PRODUCER RIVALRY – THIS EXISTS VALUE OF YOUR PHP100 IN 10 YEARS IF THE
WHEN MANY SELLERS COMPETE WITH ONE ANOTHER INFLATION RATE IS AT 5%.
FOR
THE RIGHT TO SERVICE THE CUSTOMERS AVAILABLE
 PRESENT VALUE
OF A STREAM
NET PRESENT VALUE (NPV) OF A PROJECT IS SIMPLY
THE PRESENT VALUE (PV) OF THE INCOME
THE BASIC IDEA OF THE PRESENT VALUE OF A STREAM GENERATED BY THE PROJECT MINUS THE
FUTURE AMOUNT CAN BE EXTENDED TO A
CURRENT COST (C0) OF THE PROJECT.
IF YOU ARE PROMISED 𝐹𝑉1 ONE YEAR IN THE
SERIES OF FUTURE PAYMENTS. FOR EXAMPLE,

FUTURE, 𝐹𝑉2
TWO YEARS IN THE FUTURE, AND SO ON FOR
N YEARS, THE PRESENT VALUE OF THIS SUM
OF FUTURE PAYMENTS IS,

REMEMBER: THE GENERAL RULE IS TO APPROVE THE

PROJECT IF THE NPV IS POSITIVE (>0), AND
REJECT IT IF IT IS NEGATIVE (<0).
or
EXAMPLE:
A PROJECT IS EXPECTED TO GENERATE REVENUES
BEGINNING YEAR 2 UNTIL YEAR 5. EVERY YEAR THE
REVENUE AMOUNTS TO PHP100,000. THE INVESTMENT
COST IS PHP150,000 AND IS ALL SPENT AT
YEAR 0. CHECK THE NPV TO SEE IF THE PROJECT IS
PROFITABLE? ASSUME A DISCOUNT RATE OF 15%.
 6. USE MARGINAL
ANALYSIS
MARGINAL ANALYSIS IS ONE OF THE MOST IMPORTANT
MANAGERIAL TOOLS – A TOOL WE WILL USE
REPEATEDLY THROUGHOUT THIS COURSE.

MARGINAL BENEFIT REFERS TO THE ADDITIONAL

BENEFITS THAT ARISE BY USING AN ADDITIONAL UNIT
OF THE MANAGERIAL CONTROL VARIABLE. IT MAY BE
AN ADDITIONAL REVENUE A FIRM GENERATES IN EVERY
ADDITIONAL UNIT OF Q PRODUCED.
MARGINAL COST - ON THE OTHER HAND, IS THE MAXIMIZING NET BENEFIT: MARGINAL PRINCIPLENET BENEFITS IS
ADDITIONAL COST INCURRED BY USING AN MAXIMIZED WHEN MARGINAL BENEFITS EQUAL MARGINAL COSTS.
ADDITIONAL UNIT OF MANAGERIAL CONTROL THEREFORE, THE MANAGER SHOULD INCREASE THE MANAGERIAL
VARIABLE. IT MAY BE AN ADDITIONAL COST TO A FIRM CONTROL VARIABLE (Q) UP TO THE POINT WHERE MARGINAL NET
FOR EVERY ADDITIONAL UNIT OF Q PRODUCED. BENEFITS EQUAL TO ZERO.

MARGINAL NET BENEFIT (MNB) - IS THE CHANGE IN

NET BENEFITS THAT ARISE FROM A ONE-UNIT
CHANGE OF THE MANAGERIAL CONTROL VARIABLE.
 MARGINAL ANALYSIS AND
CALCULUS
the rules of differential calculus can
be applied directly to any functional
equation to derive marginal values.
The process of finding the tangent
slope commonly is referred to as that is, the rate of change or slope of the function at a particular value
of x. (The d in this notation is derived from the Greek letter delta (∆),
taking the derivative of (or which has come to mean “change in.”)
differentiating) the functional RULE 1. THE DERIVATIVE OF A CONSTANT IS
equation. ZERO.
To illustrate the basic calculus rules,
let y denote the dependent variable
and x the RULE 2: THE DERIVATIVE OF A CONSTANT TIMES A VARIABLE IS SIMPLY THE
CONSTANT.
independent variable. We write y =
f(x), where f(x) represents the
(unspecified) functional relationship
between the variables.
WHAT IS DEMAND?

DEMAND IS THE WILLINGNESS OF A CONSUMER TO BUY A COMMODITY AT A GIVEN PRICE. THUS, THE

𝑸𝒅 = 𝒇(𝑷)
DEMAND FUNCTION IS,
 THE DEMAND
CURVE

THE NEGATIVE SLOPE OF THE DEMAND CURVE IS DUE TO THE FOLLOWING:

• INCOME EFFECT
– an increase in the price of goods and services decreases the consumer’s
real income or purchasing power. Purchasing power is the volume of
goods and services the consumer can buy with his/her income.
• SUBSTITUTION EFFECT
– an increase in the price of goods and services will make the consumer shift their consumption to an
alternative good (substitute good), where
the price is cheaper
 QUANTITY DEMANDED IS 60 [𝑸𝒅 = 𝟖𝟎 − 𝟐(𝟏𝟎)
FOR EXAMPLE, IF PRICE IS EQUALS TO 10,
THE ALGEBRAIC FORM OF

= 𝟔𝟎]
DEMAND
THE INVERSE RELATIONSHIP (NEGATIVE
RELATIONSHIP) OF THE PRICE AND QUANTITY
DEMANDED MAKES
ITS ALGEBRAIC FORM (DEMAND EQUATION)
DENOTED WITH A MINUS SIGN IN THE PRICE.

JEANS IS 𝑸𝒅 = 𝟖𝟎 − 𝟐𝑷. WHEN YOU TRY

THE ALGEBRAIC FORM OF THE DEMAND FOR

SUBSTITUTING THE VALUE OF PRICE IN THE

EQUATION, YOU WILL GET THE QUANTITY OF
JEANS SOLD BY THE FIRM.
INVERSE DEMAND
FUNCTION
 CONSUMER SURPLUS

CONSUMER SURPLUS IS THE

DIFFERENCE BETWEEN WHAT
CONSUMERS ARE WILLING TO PAY
AND WHAT
THEY ACTUALLY PAY FOR A GOOD
OR A SERVICE.
FROM OUR EXAMPLE, THE
CONSUMER IS WILLING TO
BY 50 JEANS (Q = 50), IF THE
PRICE OF JEANS IS
$15 (P =15)
Consumer surplus can be computed using the same formula of an area of a triangle (only
if the demand curve is linear), which is
WHAT IS SUPPLY?
SUPPLY REFERS TO THE QUANTITY OF GOODS THAT A SELLER IS WILLING TO SALE AT A GIVEN PRICE. THUS, THE SUPPLY

𝑸𝒔 = 𝒇(𝑷)
FUNCTION IS

THIS SIGNIFIES THAT THE QUANTITY SUPPLY (QS) OF GOODS IS DEPENDENT ON THE PRICE.

THE SUPPLY
CURVE
The supply curve is upward sloping. This implies that there is a POSITIVE relationship between the price
and quantity supply. Positive relationship means that when the price increases, quantity supply increases,
and vice versa. The law of supply states: as the price of a good rises (falls) and other things remain
constant, the quantity supplied of the good rises (falls). This means
 Theory of individual behaior
 It is defined as the area of research within the
field of marketing that focuses on how
consumers acquire use and dispose of goods,
services time and ideas.
Consumer Behavior – is an individual who
purchases goods ad services from firm for the
purpose of consumption.
4 preferences of consumer behavior
 Completeness
 More is better
 Diminishing Marginal rate of substitution
 Transitivity
Market Rate Substitution
- is the rate at which one good may be traded for
another in the market.
Consumer Equilibrium
- is to choose the consumption bundle that maximizes
his or her utility, or satisfaction.
 The Production Function
 Production function – is an engineering relation
that defines the maximum amount of output
that can be produced with a given set of
inputs.
 Short run Decisions – is defined as the time
frame in which some factors of productions are
fixed.
 Long- run is defined as the horizon over which
manager can adjust all factors of production.
The role of the managers in the production
process
 To ensure that the firm operates on the production
function.
 To ensure that the firm uses the correct level of inputs.
Measures of Productivity
1. Total Product – is simply the maximum level of output
that can be produced with a given amount of inputs.
2. Average product – is an input defined as total product
divided by the quantity used of the input.
3. Marginal Product – an input is the change in total
output attributable to the list unit of an input.
 Returns to Scale
- Measures the percentage change in output resulting from a given
percentage change in inputs.
3 important cases
1. Constant returns to scale (CRS)
- it occurs if a given percentage change in all inputs results in an
equal percentage change in output.
2. Increasing returns to scale (IRS)
- It occurs if a given percentage increase in all inputs results in a
greater percentage change in output.
3. Decreasing Returns to Scale (DRS)
- It occurs if a given percentage increase in all inputs results in a
smaller percentage increase in output.
 Marginal Revenue Product – is the extra
revenue that results from an unit increase in
the input.
 Marginal cost of an input – is simply the
amount an additional unit of the input adds to
the firm’s total cost.
 Marginal Profit per unit – is the additional profit
from adding one more worker.