Managerial Economics

• The goal of a firm is profit.

Management

• Accomplishing tasks and achieving goals optimally involves planning, organizing, staffing, directing, and controlling.
• Management includes deploying and manipulating human, financial, technological, and natural resources.

Economics

• Economics is a social science that studies production, distribution, and consumption of goods and services.
• It analyzes choices made by individuals, businesses, governments, and nations in allocating resources.
• The building blocks of economics are the studies of labor and trade
• Economics aims to determine which methods yield the best results.

Managerial Economics

• Managerial economics applies economic concepts, theories, and analytical tools to solve managerial problems.

Managerial Economist

• A managerial economist applies economic principles and tools to help businesses make informed decisions, optimize resource allocation, and achieve strategic goals.
• Focuses on microeconomic analysis and decision-making within an organization.

Functions of Managerial Economist

• Demand Forecasting
• Capital Budgeting
• Risk Analysis
• Pricing and Competitive Strategies
• Profit Planning
• Government Regulations
• Cost Analysis
• Strategic Planning

Managerial Economist Responsibilities

• To make a reasonable profit on capital employed
• To make successful forecasts through in-depth study of internal and external factors
• To inform management of all economic trends
• To establish and maintain contacts with individuals and data sources
• To earn full status in the business to help the management in decision-making

Specific Decisions

• Product Scheduling
• Demand Forecasting
• Market Research
• Economic analysis of the industry
• Investment of Appraisal
• Security Management Analysis
• Advice on foreign exchange management
• Advice on trade
• Pricing and related decisions
• Analyzing and forecasting environmental factors

Steps in Decision Making

• Define the Problem
• Determine the Objective
• Discover the Alternatives
• Forecast the Consequences
• Make a Choice

Macroeconomics

• Macroeconomics studies aggregate economic activity, including national income, employment, and the general price level.

Microeconomics

• Microeconomics studies the economic behavior of individual decision-making units like consumers, resource owners, and firms.

Production Possibilities Curve (PPC)

• The PPC model captures scarcity and opportunity costs of choices.
• The PPC is a graph showing different output combinations given current resources and technology.
• The PPF is based on the assumption that increasing production of one commodity decreases production of another.
• The PPF assumes constant technological infrastructure

Opportunity Cost (OC)

• Opportunity cost is the value of the next best alternative forgone.

Three Reasons that Cause Economic Problems

• Scarcity of Resources
• Unlimited Human Wants
• Alternative Uses

The Law of Diminishing Marginal Returns

• States that adding an additional factor of production results in smaller output increases.
• Adding excessive amounts of a production factor leads to decreased per-unit incremental returns.

Economic Costs

• Economic cost is the value to society of all resources used in production.

Explicit Costs

• Explicit costs is the value of resources purchased for production.

Implicit Costs

• Implicit costs is the value of self-owned resources in production.

Total Costs

• Total costs are explicit costs + implicit costs.

Economic Profit

• Economic profit is total revenue - costs (explicit + implicit).

Accounting Measures of Cost and Profit

• It provides guidelines for measuring revenue, cost, and profit.

Definitions

• Revenue is the total monetary value of goods/services sold.
• Cost is the collective expenses incurred to generate revenue.
• Variable Cost (VC) are expenses that change with sales volume.
• Fixed Cost (FC) are expenses that remain constant regardless of sales volume.
• Profit/Loss- The difference between revenue and cost.
• Accounting Cost (Total Cost) is the sum of variable & fixed costs.
• Accounting Profit - The difference between revenue and accounting costs.

Economic Measures of Cost and Profit

• Measured according to accounting principles are not necessarily relevant for decisions related to operating/acquiring a business.

Economic Cost

• The sum of variable cost, fixed cost, and the value of the next best alternative use of money involved in business.
• Economic Profit - The difference between revenue and economic costs.

Sunk Cost

• Sunk costs are costs already incurred and cannot be recovered.

Prospective Costs

• Prospective costs are future costs avoidable by actions taken.

Revenue, Cost, and Profit Functions

• These functions define the relationship between volume/quantity created/sold and its impact on revenue, cost, and profit.

Revenue Function

• The revenue is the total revenue of a company or business depends on the number of units sold.

Cost Function

• Represents the total cost of producing a number of units.

Average Cost Function

• Calculated by dividing total cost by quantity.

Profit Function

• It represents the difference between revenue and costs.

Break Even Point

• It is the level of sales where total revenue equals total costs.

Break Even Analysis

• A financial calculation analyzes the relationship between fixed and variable costs and the selling price.

Demand Curve

• It represents the relationship between the price charged and the maximum unit quantity that could be sold.

Marginal Analysis

• Evaluates small changes in a variable.
• It Measures responsiveness of revenue, cost, or profit.
• Helps businesses decide on production
• Determines optimal production level for efficiency or profit.

Marginal Revenue

• The increase in revenue from selling one additional unit of output.

Marginal Profit

• Measures the change in profit from a unit increase in quantity.

Marginal Cost

• Measures the change in cost from a unit increase in quantity.

The Shutdown Rule

• A firm should operate if selling price per unit is at least as large as the average variable cost per unit.

Value of the Firm

• It represents the economic profits into the future and expected amount for owners if the business is sold.

Consumer Theory

• It states consumers plan the purchase, timing, borrowing, and saving to maximize satisfaction from goods/services.
• It enables consumers to compare prices and plan transactions.
• Consumers look at current and expected prices for goods/services.

Substitution Effect

• If a product becomes more expensive, consumers switch to cheaper alternatives.
• Based on the argument that employing marginal reasoning like the marginal analysis. Marginal Utility of the Good
• The resulting increase in their utility if a consumer were to receive one or more units of some good or service.
• It is the consumer's response to a changing price to restore balance in the ratios of marginal utility to price.

Income Effect

• Refers to the change in the quantity of a good that a consumer demands as a result of a change in their real income, holding relative prices constant.

Consumer Experience

• Consumers may experience equivalent increase/decrease in wealth, requiring a different wealth level to afford new consumption patterns at previous prices.

Is the Theory of Consumer Realistic?

• Bounded rationality and satisficing are discussed in Simon (1997) which states that humans do behave rationally with a limited range of options
• Simon also states that human beings may “satisfice”, meaning that they work to meet a certain level of consumption satisfaction rather than the very best pattern of consumption.
• Differences between the theory and actual behaviour may not result in starkly different consumption is that we observe how others behave.