MANECO MODULE Week 1-5 (1).pdf

CBA Week 1-5 2020-2021 COLLEGES OF BUSINESS ADMINISTRATION AND ENTREPRENEURSH...

CBA Week 1-5 2020-2021 COLLEGES OF BUSINESS ADMINISTRATION AND ENTREPRENEURSHIP MANAGERIAL ECONOMICS (MANECO) Week 1: (Introduction to the Course) Week 2: (Intro to Managerial Economics) Week 3: (Key Measures and Relationships Part 1) Week 4: (Key Measures and Relationships Part 2) Week 5: (Demands and Pricing) Prepared by: Prof. Ron Louie S. Lim Instructor  GLOBAL RECIPROCAL COLLEGES CHAPTER I WEEK 1 GRC’S VISION AND MISSION WITH VIRTUAL CLASSROOM POLICIES I. MISSION GRC is creating a culture for successful, socially responsible, morally upright skilled workers and highly competent professionals through values-based quality education. II. VISION A global community of excellent individuals with values. Core Values III. ONLINE NETIQUETTE General Guidelines: 1. Students will use official GRC account in signing up for official online platform. 2. Screen name and aliases are not accepted during the live sessions. 3. Student should use appropriate language and tone during online sessions. 4. Respect and consideration for other students should be observe all the time. 5. Sarcasm, humor, and/or posting of jokes are not allowed inside the platform 6. Issues of privacy and information sharing outside of class are strictly prohibited. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES On Live Classes 1. In all live classes, student must be log in at least ten (10) minutes before the designated time. Student will wait for the faculty to be accepted in the platform. 2. All students maybe in dress down attire during the live classes, however a proper dress code is strongly observed. 3. All participants will always have the microphone on and off when classes are conducted. Microphone will turn ON once permitted by the faculty and turn OFF once done. 4. Students must signify intention to speak using available icon’s or simply raise hands to ask the faculty permission to speak. In this manner, speaking simultaneously among participants will be avoided. 5. Sharing of screen by students must obtained approval from the faculty, screen that contains personal information is advise to close before sharing screen. 6. Students are encouraged to use the chat feature of the platform for conversations relevant to the topic. Off topic exchanges are strongly discouraged IV. CLASS RULES AND REGULATIONS – SEE MANUAL V. LEARNING OUTCOME A graduate of a business or management degree should be able to 1. Perform the basic principles and functions of management such as planning, organizing, staffing, directing and controlling. 2. Apply the basic concepts that underlie each of the functional areas of business and employ these concepts in various business situations. 3. Select the proper decision-making tools to critically, analytically and creatively solve business problems and drive to expected results. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES 4. Express oneself clearly and communicate effectively with stakeholders both in oral and written forms. 5. Apply information and communication technology skills as required by the business environment. 6. Work effectively with other stakeholders and manage conflict in the workplace. 7. Plan and implement business related activities. 8. Demonstrate corporate citizenship and social responsibility. 9. Exercise high personal, moral and ethical standards. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES CHAPTER II WEEK 2 INTRODUCTION TO MANAGERIAL ECONOMICS Intended Learning Outcome The learners will be able to;  Identify the definition of Managerial Economics and its relevance to decision making of managers.  Kinds of Business Formation  Basic Applications of Managerial Economics to different kind of entities or firms. What is Managerial Economics? Economics is defined as the study of choice in allocating scarce resources in relation to production, distribution and consumption of goods and services. Study of economics also includes different types of business, organization and any kinds of administrative unit. The frame ―study of choices in allocating scarce resources‖ entails what the managers of different organization does. Managerial Economics is a subfield of the wide-range study of economics that puts an emphasis on principles allocating scarce resource for a prudent managerial decision-making. Our study on Managerial Economics aims to provide different economic terminology, critical thinking and reasoning in improving managerial decisions. In our intent to understand more, we will re- introduce ourselves in two different approach in the study of economics; Macroeconomics and Microeconomics. Microeconomics approaches studies related to goods and services on an individual perspective of decision-making entities; households and business meanwhile Macroeconomics deals with those MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES on an aggregate level, ie; total consumption in comparison to production in a particular region. The Microeconomic Approach is vital in understanding the behavior of different atomic entities in an economy. On the other hand, grasping the relationships of many household and businesses would be too complicated to derive from description of a particular unit. The Macroeconomic approach provides measures and theories to critically understand the overall economic relationships households and business. In view of the fact that managerial economics aims to apply economic principles for the improvement of managerial decisions of a particular organization, most of our discussion in managerial economics focuses on microeconomic approach with vital considerations of economic environment that includes the overall state of economy and understanding critical economic forecast that is vital and useful in every particular managerial decisions. RELEVANCE OF MANAGERIAL ECONOMICS TO MANAGERS In a society, we often rely on others to produce and distribute goods and services necessity for living. Yet, the supply of these products and services comes not from individuals but definite organization created for the purpose of producing those products and services as well as distributing it. Any kinds of business or entities can be viewed as producers, whether goods or services, and the overarching responsibility of overseeing and making decisions for these economic institutions relies on its executives or managers. A skeptic may ask regarding the relevance of studying economics if they can already define their specific role in studying core subjects in every Business Courses but upon examining every literature, it reveal that economics provides foundational terminology and principles. Even if we can apply different techniques and MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES strategies from every point of view of marketing, operations, finance without critical appreciation of economic principle, we can only appreciate the ―whys’‖ and ―hows’‖ of these strategies if we understand the value of each underlying economic principles. According to an article written in lifeatunitedworld.wordpress.com, Managerial Economics helps the managers in their business decisions with regards to sales and profits. It also helps them craft a viable production and inventory policies for their organization because it aids them understand the risk and production in the context of their company. Managerial economics paves the way to have a better understanding on Demand Analysis as an integral part of decision making for investments. Managerial Economics assist the managers in understanding competition and competitor’s strategies including pricing. Managerial Economics describes the logic of this pricing practice with respect to the goal of profit maximization In an article on https://www.wisdomjobs.com, Managerial Economics helps the Manager to make the best decision given on the information they had applying every economic theory and methodology to management decision making. Cost analysis, pricing analysis, demand and supply analysis stem out of a critical appreciation of Managerial Economics by Business Decision Makers. Overall, the Managers or Decision Makers in Business or any organization who understand fully every economic principle relevant to his business and economic environment has an advantage in creating value for his industry. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES BUSINESS FORMATION AND MANAGERIAL ECONOMICS In a better outlook, in order for us to understand and appreciate the importance of Managerial Economics in any types for business forms, let us first know their definition and comparison.  Profit Organization – any business entity whose primary aim is to generate profit from the regular operation of business with a view to maximizing the wealth of owners is called Profit Organization. The income earned by these entities is either retained for future contingencies, in the form of reserves or distributed to the owner as dividend.  Non-Profit Organization – as the name suggest, Non-Profit Organization is a legal organization whose primary aim is to promote public welfare rather than making profit. According to Surbhi S in his article at keydifferences.com, the differences between profit and non-profit organisation can be drawn clearly on the following grounds:  A profit organization is defined as a legal organization, which is operated with the sole aim of earning profit from the business activities. On the flip side, a non-profit organization is one that is operated with the primary objective of benefiting the society as a whole.  A profit organization, as its name suggests, works for profit maximization of the concern. As against this, a non-profit organization works for providing service, for the well-being of the society.  A profit organization can be a sole proprietorship, partnership or a body corporate, i.e. company whereas a non-profit organization is an association MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES of person, which can be a club, trust, public hospitals, cooperative society, etc.  The management of a profit organization is overlooked by a sole proprietor in the case of sole proprietorship, partners in case of partnership and directors in case of company. On the contrary, there is the board of directors, trustees, committees or governing bodies who look after the management of a non-profit organization.  The major source of income, for a profit organization, is from the sale of goods and services. Conversely, the non-profit organization, derive a considerable part of their income from donation, subscription, membership fee, charity and so on.  When it comes to the commencement of the entity, a huge amount in the form of capital is brought in by the owners to run the business. Unlike, the non-profit organization, raise funds for commencement, in the form of contribution through donation, grant, legacies, subscription, etc.  The financial statement of a profit organization includes the income statement, balance sheet and cash flow statement. In contrast, the non- profit organization prepare receipt & payment a/c, income & expenditure a/c and balance sheet prepared at the end of accounting year to know their financial position.  Money earned over and above by the profit organization, i.e. profit, is transferred to the capital account. On the other hand, the excess of income over expenses results in the surplus which is transferred to the capital fund. Both types of Business Formation necessitate the usage of Managerial Economic Principles in every decision making promulgated by their economic decision makers. Both Profit Organizations and Non-Profit Organizations, Managerial Economics helps them in the following; MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES  It helps in assisting cost control and profit planning methods that helps in the increase of business profits.  It plays effective role in managing the forward planning and decision making in the internal operations of the business. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES CHAPTER SUMMARY Managerial Economics is such an important understudy in every professional and manager in the field of business of any industry. It forms a solid foundation when a critical business decision making is about to be promulgated. A better understanding of business economics such as demand and supply analysis, pricing and others will be crucial in maximizing potentials for a particular entity whether profit or non-profit organization. Allocating scarce resources properly is the prime focus of Managerial Economics especially if the broader spectrum of economics shows disparity and imbalance. Thus, any type of business formation needs the very principle in Managerial Economics, to maximize their very potential in the industry. Both Macroeconomics and Microeconomics understanding of business economics will serve any industry all the kinds of benefits they can earned in applying principles of both approaches. Thus, an executive of an entity must show utmost desire to learn the economic flow of his industry for his better decision making that will surely benefit his organization. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES GLOSSARY Economics - the study of choice in allocating scarce resources in relation to production, distribution and consumption of goods and services. Managerial Economics - is a subfield of the wide-range study of economics that puts an emphasis on principles allocating scarce resource for a prudent managerial decision-making. Macroeconomics - deals with those on an aggregate level, ie; total consumption in comparison to production in a particular region. Microeconomics - approaches studies related to goods and services on an individual perspective of decision-making entities; households and business. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES BOOK REFERENCES: 1. Thomas, C.R. et al. (2016). Managerial Economics: Foundations of Business Analysis and Strategy. 12th Edition. New York, USA. McGraw-Hill Education. 2. Baye, M.R. (2010). Managerial Economics and Business Strategy. 7th Edition. USA. McGraw-Hill/Irwin. INTERNET REFERENCES: 1.https://resources.saylor.org/wwwresources/archived/site/textbooks/Principles% 20of%20Managerial%20Economics.pdf 2.https://lifeatunitedworld.wordpress.com/2014/05/02/managerial-economics-how- is-it-important-for-business- managers/#:~:text=Managerial%20economics%20is%20very%20much,inventory% 20policies%20for%20the%20future. 3.https://www.wisdomjobs.com/e-university/managerial-economics-tutorial- 307/how-is-managerial-economics-useful-9984.html 4.https://keydifferences.com/difference-between-profit-and-non-profit- organisation.html MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES ASSESSMENT Chapter Quiz Name: _________________________ Date: _______________ Section: _______________________ Score: ______________ Instruction: Identify the Correct Answer ____________1. It is defined as the study of choice in allocating scarce resources in relation to production, distribution and consumption of goods and services. ____________2. It is a subfield of the wide-range study of economics that puts an emphasis on principles allocating scarce resource for a prudent managerial decision-making. ____________3. ________ approaches studies related to goods and services on an individual perspective of decision-making entities; households and business. ____________4. It deals with those on an aggregate level, ie; total consumption in comparison to production in a particular region. ____________5. Managerial Economics helps the managers in their business decisions with regards to ______________. ____________6. Managerial economics paves the way to have a better understanding on ___________ as an integral part of decision making for investments. ____________7. Any business entity whose primary aim is to generate profit from the regular operation of business with a view to maximizing the wealth of owners is called __________________. ____________8. ____________ is a legal organization whose primary aim is to promote public welfare rather than making profit. ____________9. Managerial Economics helps the Manager to make the ____________ given on the information they had applying every economic theory and methodology to management decision making. ____________10. Any kinds of business or entities can be viewed as ___________. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES ASSIGNMENT: Name: _________________________ Date: _______________ Section: _______________________ Score: ______________ Instruction: Define the following terminologies and be able to explain on your own words and give example. 1. Revenue 2. Total Cost 3. Fixed Cost 4. Variable Cost 5. Sunk Cost 6. Opportunity Cost MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES CHAPTER III WEEK 3 KEY MEASURES AND RELATIONSHIPS (Revenue, Cost and Profit Function in Business) Intended Learning Outcome The learners will be able to;  Differentiate Revenue, Cost and Profit.  Identify the function of Revenue, Cost and Profit in business decision- making.  Identify the function of Breakeven Analysis for Manager’s decision-making.  Facilitate the discussion of Price change and the function of Marginal Analysis in Business Economics.  Learn how to compute Revenue, Cost, Profit, Breakeven Point and Marginal point REVENUE, COST AND PROFIT Every business engages themselves either by selling commodities or providing services to their target customers or clients. The aggregate monetary value of items sold or services rendered is called Revenue. With every revenues earned, the business incurred a corresponding cost and expenses in producing and selling those items or rendering those services. There are at least two kinds of cost that businesses incurred;  Fixed Cost – cost that is largely invariant to the volume of sales (ex. Cost of Raw Materials)  Variable Cost – cost that is directly related to the volume of sales. (ex. Cost of Furniture and Fixtures)  Sunk Cost - refers to money that has already been spent and which cannot be recovered MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES  Opportunity Cost - is the profit lost when one alternative is selected over another. The concept is useful simply as a reminder to examine all reasonable alternatives before making a decision. Businesses are viable on a sustained basis only when the revenue generated by the business generally exceeds the cost incurred in operating the business. The difference between the revenue and cost (found by subtracting the cost from the revenue) is called the profit. When costs exceed revenue, there is a negative profit, or loss. ECONOMICS VERSUS ACCOUNTING MEASURES OF COST AND PROFIT Accounting disciplines provides technical guidelines in revenue, cost and profit recognition based on the Generally Accepted Accounting Principles (GAAP) and those information provided by accounting principles are relevant in some exchange in our country’s economy. For example, corporations must produce financial statements to help investors and creditors assess the health of the corporation. Individuals and businesses must produce tax returns to determine a fair measurement of income for taxation purposes. But Cost measured under GAAP’s guidelines are not necessarily relevant or essential measurements for business decision related to business operation or acquiring business. For example, GAAP states that businesses should depreciate fixed assets according to its useful life. However, from the lens of the business, the entire acquisition expense of particular fixed assets was recognized upon purchase even if borrowings were important to make the purchase possible. On the other hand, there are other businesses costs relevant to decision making that may not be considered as cost from the perspective of GAAP. For example, time invested by the business owner in running his business. Under GAAP, it is not recognized as expense or cost but it is definitely relevant to the owner in his MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES decision making in running his own business. With these two different perspectives, it is definitely useful to distinguish accounting cost from economic cost. Since profit is the residue of revenue minus cost, we can also distinguish economic profit from accounting profit. REVENUE, COST & PROFIT FUNCTIONS The relationships between the volume or quantity sold to cost and profit are called functions. In this chapter, we will focus on revenue function, cost function and profit function. These relationships are expressed in terms of tables, graphs or algebraic equations. Note that we are computing from an economic perspective and not accounting. REVENUE FUNCTION - is the product of the price per unit times the number of units sold. The formula for Revenue Function is; Revenue (R) = Selling Price (P) x Quantity Sold (Q) Ex. If an ice cream seller will sell P20 per unit of ice cream with 10000 units sold, how much is the total revenue of the ice cream seller? Using the formula, the total revenue of the ice cream seller is P200,000 COST FUNCTION – the cost function has two main components; the Fixed Cost and the Variable Cost. The formula for Cost Function is; Cost (C) = Fixed Cost (F) + Variable Cost (V) Variable Cost is the product of Cost/unit and Units sold. Ex, If the ice cream seller bought an ice cream cart P5000 and cost/unit of P8, how much is the Total Cost of the Ice Cream Seller? Using the formula, the total revenue of the ice cream seller is P85,000. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES PROFIT FUNCTION – it is the difference between Revenue and Cost. The formula for Profit Function is; Profit (π) = Revenue (R) – Cost (C) The symbol π is used to represent Profit as P is used as symbol for Price. Ex. The total Profit earned by the Ice cream seller is P115,000 using the formula given. AVERAGE COST FUNCTION - The average cost is another interesting measure to track. This is calculated by dividing the total cost by the quantity. The relationship between average cost and quantity is the average cost function. The formula for Average Cost is; AC = C/Q {P5000 + [10,000(8)]} / 10,000 = P8.50 MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES Sample Problem: Mang Juan, a barber invests P10,000 in a rented apartment per month and P25,000 for other equipments for his desired Barber Shop. His variable cost per service is P25. His charge for a particular service is P100 per head. Compute the Revenue, Cost, Profit and Average Cost based on the table given below. Month Units Revenue Fixed Cost Variable Cost Total Cost Average Cost 100 25 January 100 February 200 March 300 April 400 May 500 June 600 July 700 August 800 September 900 October 1,000 November 1,100 December 1,200 Total 7,800 Answer: Month Units Revenue Fixed Cost Variable Cost Total Cost Average Cost 100 25 January 100 10,000.00 35,000.00 2,500.00 37,500.00 375.00 February 200 20,000.00 35,000.00 5,000.00 40,000.00 200.00 March 300 30,000.00 35,000.00 7,500.00 42,500.00 141.67 April 400 40,000.00 35,000.00 10,000.00 45,000.00 112.50 May 500 50,000.00 35,000.00 12,500.00 47,500.00 95.00 June 600 60,000.00 35,000.00 15,000.00 50,000.00 83.33 July 700 70,000.00 35,000.00 17,500.00 52,500.00 75.00 August 800 80,000.00 35,000.00 20,000.00 55,000.00 68.75 September 900 90,000.00 35,000.00 22,500.00 57,500.00 63.89 October 1,000 100,000.00 35,000.00 25,000.00 60,000.00 60.00 November 1,100 110,000.00 35,000.00 27,500.00 62,500.00 56.82 December 1,200 120,000.00 35,000.00 30,000.00 65,000.00 54.17 Total 7,800 780,000.00 35,000.00 195,000.00 230,000.00 29.49 MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES Revenue - P 780,000 Cost - P 230,000 Profit - P 550,000 Average Cost for the Year – P230,000/7,800 = 29.49 CHAPTER SUMMARY Economic indicators such as Revenue, Cost and Profit and even Average Cost are important measurements needed to track so that Business Decision Makers will be able to provide wise decision for their respective companies or organization. Economic Cost and Profit is as vital as the Accounting Cost and Profit because they indicate two different perspectives for the company and both provide good indicators as to where the company’s financial health status are. These business economic measurements provides important factor to different important internal decision making. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES BOOK REFERENCES: 1. Thomas, C.R. et al. (2016). Managerial Economics: Foundations of Business Analysis and Strategy. 12th Edition. New York, USA. McGraw-Hill Education. 2. Baye, M.R. (2010). Managerial Economics and Business Strategy. 7th Edition. USA. McGraw-Hill/Irwin. INTERNET REFERENCES: 1.https://resources.saylor.org/wwwresources/archived/site/textbooks/Principles% 20of%20Managerial%20Economics.pdf MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES ASSESSMENT Chapter Quiz Name: _________________________ Date: _______________ Section: _______________________ Score: ______________ Instruction: Complete the table below. Mang Juan, a taho vendor invests P1,000 for taho cart and P2,000 for other equipments for his taho business for a total of P3,000 per month. His variable cost per service is P4. His selling price per cup of taho is P10. Compute the Revenue, Cost, Profit and Average Cost based on the table given below. Variable Average Month Units Revenue Fixed Cost Cost Total Cost Cost 10 4 January 500 February 550 March 600 April 650 May 700 June 750 July 800 August 850 September 900 October 950 November 1,000 December 1,100 Total 9,350 MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES ASSIGNMENT: Name: _________________________ Date: _______________ Section: _______________________ Score: ______________ INSTRUCTION: Define the following terminologies and be able to explain in your own words and give example. 1. Break-even Point 2. Break-even Analysis 3. Contribution Margin 4. Price Change 5. Marginal Analysis MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES CHAPTER IV WEEK 4 KEY MEASURES AND RELATIONSHIPS (Breakeven Analysis, Marginal Analysis & Impact of Price Change) Intended Learning Outcome The learners will be able to;  Differentiate Revenue, Cost and Profit.  Identify the function of Revenue, Cost and Profit in business decision- making.  Identify the function of Breakeven Analysis for Manager’s decision-making.  Facilitate the discussion of Price change and the function of Marginal Analysis in Business Economics.  Learn how to compute Revenue, Cost, Profit, Breakeven Point and Marginal point BREAKEVEN POINT AND BREAKEVEN ANALYSIS One of the big considerations in every business decision making, whether to acquire a business or pursue a particular investment is the determination of Breakeven Point and the ability of the investment or business to overreach the target breakeven point and make profit. Breakeven Point (BEP) in economics, business—and specifically cost accounting—is the point at which total cost and total revenue are equal, i.e. "even". There is no net loss or gain, and one has "broken even", though opportunity costs have been paid and capital has received the risk-adjusted, expected return. There are a number of ways to determine a precise value for the breakeven level algebraically. One is to solve for the value of Q that makes the economic profit function equal to zero: BEP = (SP-VC)Q – FC or Q = FC/(SP-VC) MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES Once the volume of quantity being sold crosses the breakeven threshold, each unit sold will result to additional profit. When the price and unit contribution margin are even close, most of the revenue generated results to additional profit once you get above the breakeven point. On the other hand, if the company falls below the breakeven point, the loss will grow exponentially as the volume level drops. Business entities which have a higher rate of Fixed Cost see a close correlation between revenue and profit meanwhile, business entities which have a higher rate of Variable Cost perceived to have relatively modest changes in profit relative to changes in revenue. If business level falls off, they can scale down their variable costs and profit will not decline so much. At the same time, large increases in volume levels beyond the breakeven level can achieve only modest profit gains because most of the additional revenue is offset by additional Variable Costs. Figure 1: IMPACT OF PRICE CHANGE To determine the impact of price and determine a best price, we need to measure the relationship between the selling price and the maximum unit quantity to be sold. This relationship is called a Demand Curve. Demand Curves generally follow the pattern called the Law of Demand. The Law of Demand states that as the price increases, demand decreases. As it states, there is a primary impact in the unit demand when there is a sudden change in price. We call it MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES Direct Relationship. The behavior of consumer tends to buy less when there is a high selling price and tends to buy more when there is a lesser selling price. Company’s executives must be prudent enough in decisions about price decrease or increase. To develop a demand curve, we assume that the relationship between price and quantity is linear, meaning, that any change in unit quantity will have a proportional change in the price. Graphically, you can infer this relationship by plotting the two price-quantity pairs on a graph and connecting them with a straight line. Algebraically, we can express Demand Curve as Qd = a – b(P) Q = quantity demand a = all factors affecting price other than price (e.g. income, fashion) b = slope of the demand curve P = Price of the good. Inverse demand equation The inverse demand equation can also be written as P = a -b(Q) a = intercept where price is 0 b = slope of demand curve Q = quantity demand In this module, we will do more analysis rather than computation to exercise our critical thinking in Economics. FIGURE 2 MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES MARGINAL ANALYSIS Business Decision Makers analyze relationships like revenue functions from the perspective of how the function changes in relation to a small change in the quantity. These marginal measurements not only provide a numerical value to the responsiveness of the function to changes but also indicate whether the entity would benefit from increasing or decreasing the volume of production. The Marginal Revenue measures the change in revenue in response to a unit increase in production. The marginal cost gauges the change in cost matching up in the increase of production. The marginal profit measures the change in profit resulting from a unit increase in the quantity. Marginal measures for economic functions are related to the operating volume and may change if assessed at a different operating volume level. There are multiple computational techniques for actually calculating these marginal measures. If the relationships have been expressed in the form of algebraic equations, one approach is to evaluate the function at the quantity level of interest, evaluate the function if the MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES quantity level is increased by one, and determine the change from the first value to the second. FIGURE 3 MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES CHAPTER SUMMARY Determining Breakeven Point, Price Change Impact and Marginal Analysis provides company decision maker a broader perspective in determining price, production and sales target. These determinants work individually but has an interrelationship that will help executives and managers work wisely in their sales and production forecast. BOOK REFERENCES: 1. Thomas, C.R. et al. (2016). Managerial Economics: Foundations of Business Analysis and Strategy. 12th Edition. New York, USA. McGraw-Hill Education. 2. Baye, M.R. (2010). Managerial Economics and Business Strategy. 7th Edition. USA. McGraw-Hill/Irwin. INTERNET REFERENCES: 1.https://resources.saylor.org/wwwresources/archived/site/textbooks/Principles% 20of%20Managerial%20Economics.pdf 2. https://www.readyratios.com/reference/analysis/break_even_point.html 3. https://courses.byui.edu/econ_150/econ_150_old_site/lesson_03.htm 4. https://www.economicshelp.org/blog/2391/economics/marginal-analysis-in- economics/ MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES ASSESSMENT Chapter Quiz Name: _________________________ Date: _______________ Section: _______________________ Score: ______________ Instruction: Identify what kind of table, make an analysis and explanation. 1. 2. 3. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES ASSIGNMENT: Name: _________________________ Date: _______________ Section: _______________________ Score: ______________ INSTRUCTION: Answer the following. 1. What is the Theory of Consumer? Is it realistic? 2. Determinants of Demand 3. Forecasting Demand 4. Consumer Demand MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES CHAPTER V WEEK 5 DEMANDS AND PRICING Intended Learning Outcome The learners will be able to;  Learn the Theory of Consumer and its valuable contribution to Manager’s decision making process.  Identify the determinants of Demand  Able to compute and make a graph for Price Elasticity and Demand Elasticity.  Facilitate the discussion on Consumer’s primary reason for Consumption decisions. THEORY OF CONSUMER The theory of the consumer posits that a consumer plans her purchases, the timing of those purchases, and borrowing and saving so as maximize the satisfaction she and her household unit will experience from consumption of goods and services. In this theory, consumers are able to compare any two patterns of consumption, borrowing, and saving and deem that either one is preferred to the second or they are indifferent between the two patterns. Based on the ability to do these comparisons, consumers look at the prices charged for various services now, and what they expect prices to be for goods and services in the future, and select the pattern of consumption, borrowing, and saving that generates the greatest satisfaction over their lifetime within the constraint of their wealth and expected future income. Although the consumers MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES may anticipate changes in prices over time, they may find that their guesses about future prices are incorrect. When this happens, the theory states that they will adjust their consumption, borrowing, and saving to restore the optimality under the newly revealed prices. In fact, the theory identifies two effects of price changes: the substitution effect and the income effect. The substitution effect is based on an argument employing marginal reasoning like the marginal analysis discussed in previous module "Key Measures and Relationships". Economists often use the term utility as a hypothetical quantitative value for satisfaction that a consumer receives from a pattern of consumption. If a consumer were to receive one more unit of some good or service, the resulting increase in their utility is called the marginal utility of the good. As a consequence of maximizing their overall satisfaction from consumption, or equivalently maximizing their utility, it will be the case that if you take the marginal utility of one good or service and divide it by its price, you should get the same ratio for any other good or service. If they were not roughly equal, the consumer would be able to swap consumption of one good or service for another, keep within their wealth constraint, and have higher utility. The substitution effect is the consumer’s response to a changing price to restore balance in the ratios of marginal utility to price. IS THE THEORY OF CONSUMER REALISTIC? Strictly speaking, it would be difficult to make a case that the theory of the consumer conforms to our own experience of consumption decisions or what we observe of other consumers. We don’t consciously weigh the relative marginal utilities of tens of thousands of possible goods and services we might consume. We don’t know all the current prices and don’t even know of the existence of MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES many goods and services. Even if we did, the computational complexity to solve for optimal consumption would overwhelm our faculties, and probably even the fastest computers available. Many times we and others don’t think of our consumption in terms of what gives us the greatest satisfaction but in terms of what it takes to get by. Consumers who are impoverished or suffer a major ailment are probably unable to do even a modest attempt at optimizing consumption. Others may simply consume as a matter of habit rather than conscious choice. Although our consumption decisions may not fully conform to the theory of the consumer, there have been some attempts to argue thatwe do approximate it. Herbert Simon proposed a theory of bounded rationality 2 that states that humans do behave rationally with a limited range of options. So if consumers focus on a modest set of important goods and services, they may be able to achieve something close to the theoretical optimum in terms of overall utility. Simon also observed that human beings may not optimize so much as they ―satisfy,‖ meaning that they work to meet a certain level of consumption satisfaction rather than the very best pattern of consumption. If the level of acceptability is reasonably close to the optimum level, again the results of consumption decisions may approximate what would occur if the consumers operated according to this theory. Another argument suggesting that differences between the theory and actual behavior may not result in starkly different consumption is that we observe how others behave. If someone else, either by active choice or by accidental discovery, is experiencing greater satisfaction under similar circumstances of wealth and income, their friends and neighbors will detect it and start to emulate their consumption patterns. So our consumption may evolve in the direction of the optimal pattern. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES Perhaps most importantly, the lack of face validity of the theory of the consumer does mean the theory is not useful in modeling consumer behavior. We do expect consumers to respond to price changes and we do expect consumers to respond to changes in their wealth, whether due to changes in their actual discretionary income or indirect impacts on wealth resulting from price changes. DETERMINANTS OF DEMAND Demand drives economic growth. Businesses want to increase demand so they can improve profits. Governments and central banks boost demand to end recessions. They slow it during the expansion phase of the business cycle to combat inflation. If you offer any paid services, then you are trying to raise demand for them. So what drives demand? In the real world, a potentially infinite number of factors impact each consumer's decision to buy something. In economics, however, the equation is simplified to highlight the five primary determinants of individual demand and a sixth for aggregate demand. The five determinants of demand are: 1. The price of the good or service. 2. The income of buyers. 3. The prices of related goods or services—either complementary and purchased along with a particular item, or substitutes and bought instead of a product. 4. The tastes or preferences of consumers will drive demand. 5. Consumer expectations. Most often, this refers to whether a consumer believes prices for the product will rise or fall in the future. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES 6. For aggregate demand, the number of buyers in the market is the sixth determinant. Demand Equation or Function This equation expresses the relationship between demand and its five determinants: qD = f (price, income, prices of related goods, tastes, expectations) As you can see, this isn't a straightforward equation like 2 + 2 = 4. It isn't that simple to create an equation that accurately predicts the exact quantity that consumers will demand. Instead, this equation highlights the relationship between demand and its key factors. The quantity demanded (qD) is a function of five factors— price, buyer income, the price of related goods, consumer tastes, and any consumer expectations of future supply and price. As these factors change, so too does the quantity demanded. How Each Determinant Affects Demand Each factor's impact on demand is unique. When the income of the buyer increases, for example, that could also increase demand. The buyer has more money and is more likely to spend it. But when other factors increase—like the price of related goods, for example—demand could decrease. Before breaking down the effect of each determinant, it's important to note that these factors don't change in a vacuum. All the factors are in flux all the time. To understand how one determinant affects demand, you must first hypothetically assume that all the other determinants don't change. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES Price The law of demand states that when prices rise, the quantity of demand falls. That also means that when prices drop, demand will grow. People base their purchasing decisions on price if all other things are equal. The exact quantity bought for each price level is described in the demand schedule. It's then plotted on a graph to show the demand curve. Income When income rises, so will the quantity demanded. When income falls, so will demand. But if your income doubles, you won't always buy twice as much of a particular good or service. There's only so many pints of ice cream you'd want to eat, no matter how wealthy you are, and this is an example of "marginal utility." Prices of related goods or services The price of complementary goods or services raises the cost of using the product you demand, so you'll want less. The opposite reaction occurs when the price of a substitute rises. When that happens, people will want more of the good or service and less of its substitute. Tastes When the public’s desires, emotions, or preferences change in favor of a product, so does the quantity demanded. Likewise, when tastes go against it that depresses the amount demanded. Brand advertising tries to increase the desire for consumer goods. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES Expectations When people expect that the value of something will rise, they demand more of it. Number of buyers in the market The number of consumers affects overall, or ―aggregate,‖ demand. As more buyers enter the market, demand rises. Price Elasticity of Demand Explained If the quantity demanded of a product exhibits a large change in response to changes in its price, it is termed "elastic," that is, quantity stretched far from its prior point. If the quantity purchased has a small change in response to its price, it is termed "inelastic"; or quantity didn't stretch much from its prior point. The more easily a shopper can substitute one product with a rising price for another, the more the price will fall – be "elastic." In other words, in a world where people equally like coffee and tea, if the price of coffee goes up, people will have no problem switching to tea, and so the demand for coffee will fall. This is because coffee and tea are considered good substitutes to each other. The more discretionary a purchase is, the more its quantity will fall in response to price rises, that is, the higher the elasticity. So, if you are considering buying a new washing machine but the current one still works (it's just old and outdated), and if the prices of new washing machines goes up, you're likely to forgo that immediate purchase and wait either until prices go down or until the current machine breaks down. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES On the other hand, the less discretionary a good is, the less its quantity demanded will fall. Inelastic examples include luxury items where shoppers "pay for the privilege" of buying a brand name, addictive products, and required add- on products. Addictive products may include tobacco and alcohol. Sin taxes on these types of products are possible to introduce because the lost tax revenue from fewer units sold is exceeded by the higher taxes on units still sold. Examples of add-on products are ink-jet printer cartridges or college textbooks. These items are usually more necessary (as opposed to discretionary) and lack good substitutes (only HP ink will work in HP printers). Time also matters. Demand response to price fluctuations is different for a one-day sale than for a price change over a season or year. Clarity in time sensitivity is vital to understanding the price elasticity of demand and for comparing it across different products. Examples of Price Elasticity of Demand Generally as rules of thumb, if the quantity of a good demanded or purchased changes more than the price change, the product is termed elastic. (The price changes by +5%, but the demand falls by -10%). If the change in quantity purchased is the same as the price change (say, 10%/10% = 1), the product is said to have unit (or unitary) price elasticity. Finally, if the quantity purchased changes less than the price (say, -5% demanded for a +10% change in price), then the product is termed inelastic. To calculate the elasticity of demand, let's take a very simple example: Suppose that the price of apples falls by 6% from P50 a bushel to P47 a bushel. In response, grocery shoppers increase their apple purchases by 20%. The elasticity of apples would thus be: 0.20/0.06 = 3.33 indicating that apples are quite elastic in terms of their demand. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES CHAPTER SUMMARY Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It is computed as the percentage change in quantity demanded (or supplied) divided by the percentage change in price. Elasticity can be described as elastic (or very responsive), unit elastic, or inelastic (not very responsive). Elastic demand or supply curves indicate that quantity demanded or supplied respond to price changes in a greater than proportional manner. An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied. A unitary elasticity means that a given percentage change in price leads to an equal percentage change in quantity demanded or supplied. BOOK REFERENCES: 1. Thomas, C.R. et al. (2016). Managerial Economics: Foundations of Business Analysis and Strategy. 12th Edition. New York, USA. McGraw-Hill Education. 2. Baye, M.R. (2010). Managerial Economics and Business Strategy. 7th Edition. USA. McGraw-Hill/Irwin. INTERNET REFERENCES: 1.https://resources.saylor.org/wwwresources/archived/site/textbooks/Principles% 20of%20Managerial%20Economics.pdf 2. https://www.investopedia.com/terms/p/priceelasticity.asp 3. https://hbr.org/2015/08/a-refresher-on-price-elasticity MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES ASSESSMENT Chapter Quiz Name: _________________________ Date: _______________ Section: _______________________ Score: ______________ Instruction: True or False ____________1. Theory of Consumer posits that a consumer plans her purchases, the timing of those purchases, and borrowing and saving so as maximize the satisfaction she and her household unit will experience from consumption of goods and services. ____________2. Demand drives economic growth. ____________3. qD = f (price, income, prices of related goods, tastes, expectations) is the equation for Demand. ____________4. The quantity demanded (qD) is a function of five factors— price, buyer income, the price of related goods, consumer tastes, and any consumer expectations of future supply and price. As these factors change, so too does the quantity demanded. ____________5. The law of demand states that when prices rise, the quantity of demand falls. ____________6. When income rises, so will the quantity demanded. When income falls, so will demand. ____________7. The price of complementary goods or services raises the cost of using the product you demand, so you'll want less. ____________8. When the public’s desires, emotions, or preferences change in favor of a product, so does the quantity demanded. ____________9. When people expect that the value of something will rise, they demand more of it. ____________10. The number of consumers affects overall, or ―aggregate,‖ demand. As more buyers enter the market, demand rises. MANAGERIAL ECONOMICS MANECO 2020-2021  GLOBAL RECIPROCAL COLLEGES ASSIGNMENT: Name: _________________________ Date: _______________ Section: _______________________ Score: ______________ INSTRUCTION: Answer the following.  Differentiate Cost Approach from Resource Approach in Production Planning  Define Marginal Revenue  What is the meaning Derived Demand?  What is Marginal Cost of Input and Economic Rent? MANAGERIAL ECONOMICS MANECO 2020-2021