MODULE 1

What is Managerial Economics? NATURE OF MANAGERIAL ECONOMICS

Management- is a set of principle relating to the  Arts and Science
function of planning, organizing, directing and  Micro Economics
controlling and the utilization of resources efficiently
and effectively to achieve organizational goals.  Uses Macro Economics

Manager- is a person who directs resources to achive  Multi-disciplinary

a stated goal.
 Prescriptive/Normatice Discipline
Economics- science of making decisions in the
presence of scarce resources  Management Oriented

Resources- anything used to produce a good or  Pragmatic

service. *land, labour, capital, and enterprise
Managerial economics- a stream of management SCOPE IF MANAGERIAL ECONOMICS
studies which emphasized solving business problems
and decision-making by applying the thoeries and
principles of microeconomics and macroeconomics. It
is a specialized stream dealing with the organization's
internal issues by using various economic theories.
Dr. Michael Baye- managerial economics is the study
of how to direct scarce resources in the way that most
efficiently achieves a managerial goal.
Dr. Dominick Salvatore- managerial economics is S- Specific
describe as the application of economic theory and M- Measurable
the tools of analysis of decision science to examine A- Achievable
how an organization can achieve its aims or objectives R- Relevant
most efficiently. T- Time Oriented
Managerial economics is defined as the utilization of
managerial skills in the business by applying economic
theories and concepts to maintain efficiency in costibg
and production and its effectiveness on every decision
making by the firms to fully maximize their profits.
Mathematical Economics- to managerial economics is
essential as it is used to formalize the economic
models prostulated by economic theory to firmly
identify the proper solution to a managerial problem.
Econometrics- used in managerial economics as a
statistical tool to estimate real-world data and analyse
the models postulated by economic theory
MODULE 2
Revenue- The total monetary value of the goods or Accounting Profit- total amount of money taken in
services sold. from sales (total revenue) minus the cost of producing
Total Revenue= Quantity of unit sold x Unit Price goods or services.
Cost- The collective expenses incurred to generate -These are what shown up on the firm's income
revenue over a period of time, expressed in terms of statement and are typically reported to the manager
monetary value. by the firm's accounting department.
o Variable Cost- cost elements that are related Economic Profit- are the difference between the total
to the volume of sales; as sales goes up, the revenue and the total opportunity cost of producing
expenses go up the firm's goods or services
o Fixed Cost- cost are largely invariant to the Opportunity Cost- foregone benefit for not choosing
colume of sales, at least within a certain range an alternative (next best alternative)
of sales volumes. -using a resource includes both the explicit (or
accounting) cost of the resource and the implicit cost
o Total Cost= Fixed Cost + (Quantity of unit sold of giving up the best alternative use of resource
x varialble unit cost) TOTAL OPPORTUNITY COST= EXPLICIT = IMPLICIT
Profit- difference that arises when a firm's total Explicit cost- a payment made to others during the
revenue is greater than its total cost course of running a business that represents the
outflows of casg in clear and obvious terms.
Loss- when costs exceed revenue, there is a negative Implicit cost- represent the opportunity cost that
profit occur from allocating resources for a specific purpose
PROFIT/LOSS= Total Revenue - Total Cost that can't be assigned a monetary value.
Sunk cost- a cost that has already been incurred and
that cannot be recovered. It is treated ad bygone and
are not taken into consideration when deciding
among alternatives.
MODULE 3
Michael Eugene Porter- American academic from 3 SOURCES OF RIVALRY
Harvard University 1. Consumer- Producer Rivalry - This rivalry occurs
- One of the world's most influential thinkers on because of the competing interests of consumers and
management and competitiveness. producers. Consumers attempt to negotiate or locate
-Known for his theory economics, business strategy, low prices while producers attempt to negiote high
and social causes. prices.
-Contributions: Porter Hypothesis; Porter's four
corners model; Porter's five forces. 2. Consumer- Consumer Rivalry - This rivalry reduces
What is all about Porter's Five Forces Frameworks? negotiating power of consumers in the marketplace.
When limited quantities of goods are available,
-Method for analysing competition of a business. consumers will compete with one another for the right
to purchase the available goods.
PORTER'S FIVE FORCES 3. Producer- Producer Rivalry - Unlike the other forms
of rivalry, this disciplining device funtions only when
Compeitive Rivalry/ Industry Rivalry- The intensity of multiple sellers of a product compete in the
competitive rivalry is the biggest determinant of the marketplace. Producers compete with one another for
competitiveness of the industry. the right to service the customers available.
- Awareness of competitiors marketing
strategies and pricing. Marginal Analysis- stated that optimal managerial
- Be reactivate to any changes made by decisions involve comparing the marginal (or
competitors. incremental) benefits of a decision with the marginal
(or incremental) costs.
Threat of New Entrants or Barriers to Entry- where
there's a high barriers to entry, exit is more difficult.
Bargaining Power of Suppliers- When there are few
substitutes, suppliers of raw materials, components,
labor and services to be firm can be a source of pwer
over the firm.
Bargaining Power of Customers- Buyer's power is
high if buyers have many alternatives. It is low if they
have few choices.
Threats of Substitutes- refers to the likelihood of your
customers finding a different way of doing way of
doing what you do.
Marginal Benefit- refers to the additional benefit that
arise by using an additional unit of variable.
Marginal Cost- the additional cost incurred by using
an additional unit of managerial control variable.
Marginal Principle: - to maximize net benefits the
manager should incrrease the managerial control
variable up to he point where marginal benefits equal
marginal costs. MB=MC; MNB= 0
MODULE 4 enough to another product.
Demand- the behavior of potential buyers in the 3. Future Expectations- market sentiment suggests
market. It is defined as the entire relationship of price that the price of a commodity is expected to rise in the
and quantity. future, it may lead to an increase in the current
Law of Demand- illustrated the relationship between demand and vice-versa.
quantity of a good that consumers are willing to buy 4. Taste and Preference- play a pivotal role in sgaping
and the price of the good that shows opposite or the demand for a product or commodity.
inverse relationship between price and quantity 5. Environmental Factors- the political, economic,
demanded. social, cultural and technological environment
Individual Demand Curve- represents the quantity of a prevailing in the country/region may have a direct
good that a consumer will buy at a given price, bearing on demand.
holding all else constant. 6. Population- has a direct bearing on the demand for
Market Demand- the sum of all the individual demand a commodity. More the number of people, higher the
curves in the market likely demand.
Change in Demand- refers to an increase or decrease
that is brought about by a change in other factors,
except price.
-entails a shift in demand curve
Chande in Quantity Demand- refers to the variation in
consumers demand of a commodity due to change in
its price, other factors remaining constant.
- upward and downward movement along the
same demand curve.
DEMAND SHIFTERS
1. Changes in total Income- if the incomes of the
consumers increase, it is expected that the demand
will increase, even if the price remains the same.
Inferior goods- an economic term that
describes a good whose demand drops when people's
income rise.
Normal good- a good that experienced an
increa in its demand due to a rise in consumer's
income.
2. Prices or related products- there exist products in
the market that may be substitutes or complements to
the product in question.
Complementary good- an item used in
conjuction with another good or service.
Substitute good- a product or service that
consumers see as essentially the same or similar-
MODULE 6
Economic Surplus- refers to two related quantities;
consumaer surplus and producer surplus. It is
calculated by combining the surplus benefit that is
experienced by both consumer and producers in
economic transaction.
Consumer surplus- difference between the highest
price a consumer is willing to pay and the actual price
they do pay for the good.
- a way to determine the total benefit that
consumers receive from their goods and services.
FORMULA: CS= 1/2 bh
Consumer- an individual who purchases products and
services.
Consumer surplus is located at the below of demand
curve but above the equilibrum price.
MODULE 7
Demand function- a mathematical equation which
ecpresses the demand of a product or services as a
function of its orice and other dactors such as the
prices of the substitutes and complementary goods,
income, etc.
- creates a relationship between the demand
(in quantities) of product and factors that affect the
demand.
General equation representing the demand curve;
Qxd = f(Px, Py, I, H)
Qxd = Quantity demanded for product X
Px = Price of Good X
Py = Price of related Good Y
I = Income
H = Other Variables Affecting Demand
TIPS ON THE DEMAND FUNCTION
1. (-) Negative sigms of the coefficient of Px implies
the inverse relationship of price and quantity
demanded.
2. Positive sign of the coefficient of Py or price of the
related good means that if the price of good Y
increases, quantity demanded for good X increases.
Negative means they are complementary goods.
Positive means they are substitute.
3. Positive sign of the coefficient of I or income means
that if the income of the consumer increases, quantity
demanded for good x increases.
Negative sign means inferior good.
Positive sign means normal good.
MODULE 8 curve. As additional firms enter an industry, more and
Supply- refers to the relationship between the price of more output are availble at each given price.
a particular good and the quantity of the good that Substitutes in Production- many firms have
firms are willing to sell at hat price, all other things technologies that are readily adaptable to several
remaining the same. different products.
Law of Supply- quantity supplied of a commodity is - When the price of cars rises, these firms can
directly related to the price of the commodity. When a convert some of their truck assembly lines to car
price of a commodity increases, its quantity supplied assembly ines to increase the quantity of cars supplied.
increases and when the price falls, quantity supplied Government- an increase in sales tax and other forms
also falls. of taxes is an added cost to production and will
Individual Supply- refers to a supply of a commodity decrease supply.
by an individual firm in the market - Government regulations, which can increase
or lower the costs of production, also affect the suppy
Market Supply- refers to a supply of a commodity by of outputs of firms.
all firms in the market. Producer expeectations/ Expectation of future prices-
Supply- refers to the entire supply schedule showing Producer expectations about future prices also affect
various quantities of a commodity offered for sale the position of the supply curve.
corresponding to different possible prices of that Supply function- describes how much of the good will
commodity, at a given time. be produced at alternative prices of the good,
Quantity supplies- specific quantity offered for sale alternative prices of inputs, and alternative values of
against a specific price. other variables that affect supply
Change in Supply- refers to an increase or decrease in General equation representing the demand curve;
supply that is brought about by a change in other Qxs = f (Px, Pr, W, H)
factors, except price.
- a change in supply entails a shift in the Where:
supply curve. Qxs = Quantity supplied for product x
Change in Quantity Supplied- refers ti the variation in Px= Price of Good X
producers' supply of a commodity due to change in its Pr= Price of technologically related goods
price, other factors remaining constant. W= Price of inputs such as wage on labor
-there is upward and downward movement H= Other variables affecting demand
along the same supply curve.

DETERMINANTS OF SUPPLY
1. Technology- anything that changes the amount of
outputs that a firm can produce with a given amount
of inputs can be considered a change in technology.
2. Input prices- the supply curve reveals how much
producers are willing to produce at alternative prices.
- as production cost change, the willingness of
producers to produce output at agiven price changes.
3. Number of Firms- affects the position of the supply