MANAGERIAL ECONOMICS

REVIEWER

ECONOMY comes from a Greek word OIKONOMOS which means “one who manages a household.”
ECONOMICS study of how society manages its scarce resources. [Labor, capital, land or entrepreneurship]
MICROECONOMICS individual parts of the economy.
How households and firms make decisions and how they interact in specific markets

MACROECONOMICS looks at the economy as a whole.

Economy-wide phenomena, including inflation, unemployment, and economic growth

POSITIVE STATEMENTS attempt to describe the world as it is. POSITIVE ECONOMICS studies economic
behavior without making judgments. [Descriptive analysis]

NORMATIVE STATEMENTS how the world should be. NORMATIVE ECONOMICS, policy economics,
analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of
action. [Prescriptive analysis]

FUNDAMENTAL ECONOMIC PROBLEM

• What: Whether produce one good more and other less.
• How: how goods are produced; choice of technologies; division of labor who will do what.
• For whom: for whom are goods produced? Distribution of products among household; what pattern it takes;
where the income goes.

MARKET ECONOMY is one in which individuals private firms market the major decisions about production
and consumption.
In extreme case the economy is seen practicing LAISSEZ-FAIRE which means non-interference from the
government side in economic decision making.

In a COMMAND ECONOMY the government takes all decision about the economy.
MIXED ECONOMY consists of the elements of command and market. Most prevalent one.
LIONEL ROBBINS Economics is the science which studies human behavior as a relationship between ends
and scarce means which have alternative uses.

MANAGERIAL ECONOMICS is by nature goal oriented and prescriptive which may be viewed as
economics applied in decision making at the level of firm.

“Managerial economics is the price theory in service of business executive.” -D.J. WATSON
“Managerial economics can be viewed as an application of that part of microeconomics that focuses on such
topics as risk, demand, production, cost, pricing, and market structure.” -PETERSEN AND LEWIS

“Managerial economics is concerned with the ways in which managers should make decisions in order to
maximize the effectiveness or performance of the organizations they manage.” - EDWIN MANSFIELD

DOUGLAS - “Managerial economics is . The application of economic principles and methodologies to the
decisionmaking process within the firm or organization.”

PAPPAS & HIRSCHEY - “Managerial economics applies economic theory and methods to business and
administrative decision-making.”

SALVATORE - “Managerial economics refers to the application of economic theory and the tools of
analysis of decision science to examine how an organisation can achieve its objectives most effectively.”

HOWARD DAVIES AND PUN-LEE LAM - “It is the application of economic analysis to business
problems; it has its origin in theoretical microeconomics.

EFFICIENCY. An efficient economy is one that produces what people want at the least possible cost.
EQUITY, or fairness of economic outcomes.
GROWTH, or an increase in the total output of an economy.
STABILITY, or the condition in which output is steady or growing, with low inflation and full employment of
resources.

THE PRODUCTION POSSIBILITIES FRONTIER is a graph that shows the combinations of output that the
economy can possibly produce given the available factors of production and the available production
technology.
An UPWARD-SLOPING LINE describes a positive relationship between X and Y
A DOWNWARD-SLOPING LINE describes a negative relationship between X and Y

DEMAND: Quantities of a good or service that people are ready (willing and able) to buy at various prices
within some given time period, other factors besides price held constant.

MARKET DEMAND is the sum of all the individual demands.

The inverse relationship between price and the quantity demanded of a good or service is called the LAW OF
DEMAND.
Changes in price result in changes in the quantity demanded.
This is shown as movement along the demand curve.

SUPPLY Quantities of a good or service that people are ready to sell at various prices within some given time
period, other factors besides price held constant.
Equilibrium price: The price that equates the quantity demanded with the quantity supplied.
Equilibrium quantity: The amount that people are willing to buy and sellers are willing to offer at the
equilibrium price level.

SHORTAGE: A market situation in which the quantity demanded exceeds the quantity supplied.
SURPLUS: A market situation in which the quantity supplied exceeds the quantity demanded.
SHORT RUN • sellers already in the market respond to a change in equilibrium price by adjusting variable
inputs.

RATIONING FUNCTION OF PRICE is the increase or decrease in price to clear the market of any shortage
or surplus.
An increase in demand causes equilibrium price and quantity to rise.
An increase in supply causes equilibrium price to fall and equilibrium quantity to rise.

LONG RUN New sellers may enter a market • Existing sellers may exit from a market
QUALITATIVE FORECASTING is based on judgments of individuals or groups.
QUANTITATIVE FORECASTING utilizes significant amounts of prior data as a basis for prediction.
NAÏVE methods project past data without explaining future trends.
CAUSAL (or explanatory) forecasting attempts to explain the functional relationships between the dependent
variable and the independent variables.

JURY OF EXECUTIVE OPINION: A forecast generated by experts (e.g, corporate executives) in meetings.
The major drawback is that persons with strong personalities may exercise disproportionate influence.

DELPHI METHOD: A form of expert opinion forecasting that uses a series of written questions and answers
to obtain a consensus forecast.

OPINION POLLS: A forecasting method in which sample populations are surveyed to determine
consumption trends.

ECONOMIC INDICATORS: A barometric method of forecasting in which economic data are formed into
indexes to reflect the state of the economy.

GENERAL RULE OF THUMB If, after a period of increases, the leading indicator index sustains three
consecutive declines, a recession (or a slowing) will follow.

DRAWBACKS • Leading indicators occasionally forecast recessions that do not occur. • A change in the
index does not indicate the precise size of the decline or increase. • The data are subject to revision in the
ensuing months.

TREND PROJECTIONS: A form of naïve forecasting that projects trends from past data.
COMPOUND GROWTH RATE: Forecasting by projecting the average growth rate of the past into the
future.

TIME SERIES FORECASTING: A naïve method of forecasting from past data by using least squares
statistical methods.

FIRM is an organization that transforms resources (inputs) into products (outputs).

ENTREPRENEUR is a person who organizes, manages, and assumes the risks of a firm, taking a new idea or a
new product and turning it into a successful business.
HOUSEHOLDS are the consuming units in an economy.
OUTPUT, OR PRODUCT, MARKETS goods and services are exchanged.
INPUT MARKETS resources—labor, capital, and land—used to produce products, are exchanged.
LABOR MARKET, in which households supply work for wages to firms that demand labor.
CAPITAL MARKET, in which households supply their savings, for interest or for claims to future profits, to
firms that demand funds to buy capital goods.
LAND MARKET, in which households supply land or other real property in exchange for rent.
QUANTITY DEMANDED is the amount (number of units) of a product that a household would buy in a
given time period if it could buy all it wanted at the current market price.
DEMAND SCHEDULE is a table showing how much of a given product a household would be willing to buy
at different prices.
DEMAND CURVES Graph illustrating how much of a given product a household would be willing to buy at
different prices.
LAW OF DEMAND states that there is a negative, or inverse, relationship between price and the quantity of
a good demanded and its price.

INCOME is the sum of all households wages, salaries, profits, interest payments, rents, and other forms of
earnings in a given period of time. It is a flow measure.
WEALTH, OR NET WORTH, is the total value of what a household owns minus what it owes. It is a stock
measure.
NORMAL GOODS demand goes up when income is higher and for which demand goes down when income
is lower.
INFERIOR GOODS demand falls when income rises
SUBSTITUTES are goods that can serve as replacements for one another; when the price of one increases,
demand for the other goes up. Perfect substitutes are identical products.
COMPLEMENTS are goods that “go together”; a decrease in the price of one results in an increase in
demand for the other, and vice versa.
SUPPLY SCHEDULE is a table showing how much of a product firms will supply at different prices.
QUANTITY SUPPLIED represents the number of units of a product that a firm would be willing and able to
offer for sale at a particular price during a given time period.
LAW OF SUPPLY states that there is a positive relationship between price and quantity of a good supplied.
EQUILIBRIUM is the condition that exists when quantity supplied and quantity demanded are equal.
EXCESS DEMAND, or shortage, is the condition that exists when quantity demanded exceeds quantity
supplied at the current price.
EXCESS SUPPLY, or surplus, is the condition that exists when quantity supplied exceeds quantity demanded
at the current price.
PRODUCTION is an activity that transform inputs into outputs (or) conversion of resources into
commodities.Production is the organized activity of transforming resources into finish product
PRODUCTION FUNCTION specifies the maximum output that can be produced for a given amount of
input.
COST OF PRODUCTION refers to the total cost incurred by a business to produce a specific quantity of a
product or offer a service.
FIXED COSTS are expenses that do not change with the amount of output produced.
VARIABLE COSTS are costs that change with the changes in the level of production. That is, they rise as the
production volume increases and decrease as the production volume decreases.
TOTAL COST encompasses both variable and fixed costs.
AVERAGE COST refers to the total cost of production divided by the number of units produced. It can also
be obtained by summing the average variable costs and the average fixed costs.
MARGINAL COST is the cost of producing one additional unit of output. It shows the increase in total cost
coming from the production of one more product unit.
COST It refers to the monetary expenditure which a firm has to incur in order to purchase or hire the factors
of production.
CONTROLLABLE COST – It refers to costs w/c can be influenced or controlled by the actions of the
organization members.
UNCONTROLLABLE COST – It refers to costs w/c cannot be controlled by the actions of the organizations
members
COST FUNCTION is a function of input prices and output quantity whose value is the cost of making that
output given those input prices, often applied through the use of the cost curve by companies to minimize
cost and maximize production efficiency.