CHAPTER 1

Introduction to Economics and Managerial Economics

o Economics is a social science that studies the behavior patterns of human beings.
o The basic function of economics is to study how individuals, households, organizations, and nations utilize
their limited resources to achieve maximum profit
The Two Major Division of Economics:
The study of economics is divided into two parts:  microeconomics and macroeconomics.

1. Microeconomics is a branch of economics that examines the market behavior of individual consumers and
organizations. It focuses on the demand and supply, pricing, and output of individual organizations.
2. Macroeconomics analyzes the economy as a whole. It deals with issues related to national income,
employment pattern, inflation, recession, and economic growth. With the advent of globalization, there is a
rapid increase in complexities in business decision making.

How can we make the best economic choices?

1. How does scarcity force people to make economic choices?

 Scarcity forces all of us to make choices by making us decide which options are most important to us.
 The principle of scarcity states that there are limited goods and services for unlimited wants. Thus, people need to
make choices in order to satisfy the wants that are most important to them.
Economics begins with the idea that people cannot have everything they need and want.

 The fact that limited amounts of goods and services are available to meet unlimited wants is called scarcity.
 Scarcity forces people to make choices but it is not the same as a shortage.
 Shortages are temporary while scarcity always exists.
 People satisfy their needs and wants with goods and services.

 People’s needs and wants are unlimited, yet goods and services are limited.
 Every society is then faced with three key questions; What will be produced, how will it be produced and Who will
receive what is produced?
2. The Role of Entrepreneurs

 Entrepreneurs play a key role in turning scarce resources into goods and services
•Entrepreneurs are willing to take risks in order to make a profit. They:

–Develop original ideas

–Start businesses
–Create new industries
–Fuel economic growth

 An entrepreneur’s first task is to assemble the factors of   production: land, labor, and capital

3. Why are goods and services scarce.

 All goods and services are scarce because the resources used to produce them are scarce
 There are only so many natural resources available to produce particular goods
 The amount of labor available to produce goods and services can be limited.
 Each resource may also have alternative uses. Individuals, businesses, and governments have to choose which
alternative they want most.
 Physical capital is also limited for many industries.

4. Why every decision involves trade-offs.

 Trade-off- the alternatives that we give up when we choose one course of action over another
 All individuals, businesses, and large groups of people make decisions that involve trade-offs.
 Trade-offs involve things that can be easily measured such as money, property, and time or things that cannot be
easily measured, like enjoyment or job satisfaction.
 Businesses make trade-offs when they decide how to use their factors of production.
 A farmer who uses his or her land to plant broccoli, for example, cannot use that same land to plant squash.
 Governments also make trade-offs when they decide to spend their money on military needs instead of domestic
ones, and vice versa.

5. Concept of opportunity cost. How does opportunity cost affect decision making?

 Every time we choose to do something, like sleep in late, we are giving up the opportunity to do something less, like
study an extra hour for a big test.
 When we make decisions about how to spend our scarce resources, like money or time, we are giving up the chance
to spend that money or time on something else.
 In most trade-offs, one of the rejected alternatives is more desirable than the rest.
 The most desirable alternative somebody gives up as a result of a decision is the opportunity cost.

6. Why does every choice involve an opportunity cost

 We always face an opportunity cost. When we select one alternative, we must sacrifice another.
 Using a decision-making grid can help you decide if you are willing to accept the opportunity cost of a choice you are
about to make.

7. Thinking on the margin- When you decide how much more or less to do. 

1. Deciding by thinking on the margin involves comparing the opportunity costs and benefits.
2. This decision-making process is called a cost/benefit analysis
3. To make good decisions on the margin, you must weigh marginal costs against marginal benefits.

 The marginal cost is the extra cost of adding one unit such as sleeping an extra hour or building one extra house
 The marginal benefit is the extra benefit of adding the same unit.

•Once the marginal costs outweigh the marginal benefit, no more units can be added.

•Like opportunity cost, thinking at the margin applies not just to individuals, but to businesses and governments as well.

1. Employers think at the margin when they decide how many workers to hire.
2. Legislators think at the margin when they decide how much to increase government spending on a particular project.
 Concept of Managerial Economics
 Generally, applies the concepts, theories, and tools in the process of arriving at a sound decision-making for the
business.
 Managerial economics applies many familiar concepts from economics—demand and cost, monopoly and
competition, the allocation of resources, and economic trade-offs—to aid managers in making better decisions.
 Among the popular meaning of Managerial Economics had been defined by several economists and as follows:

Author Definition
Edwin Mansfield Managerial economics is concerned with the application of
economic concepts and economics to the problems of
formulating rational decision making
Spencer and Siegelman Managerial economics is the integration of economic theory
with business practice for the purpose of facilitating decision
making and forward planning by management
Prof. Evan J. Douglas Managerial economics is concerned with the application of
economic principles and methodologies to the decision-
making process within the firm or organization. It seeks to
establish rules and principles to facilitate the attainment of
the desired economic goals of management
Haynes, Mote, and Paul Managerial Economics refers to those aspects of economics
and its tools of analysis most relevant to the firm’s business
decisions-making process. By definition, therefore, its scope
does not extend to macroeconomic theory and the
economics of public policy an understanding of which is also
essential for the manager
 CHAPTER 2
Optimal Decisions Using Marginal Analysis

1.The Simple Model Classifications

 A firm produces a single good or service for a single market with the objective of maximizing profit.
 Its task is to determine the quantity of the good to produce and sell and to set a sales price.
 The firm can predict the revenue and cost consequences of its price and output decisions with certainty.

2.Difference between Accounting and Economic Profit

The Difference Between Accounting Profit and Economic Profit

Economic Profit not only includes explicit costs and implicit costs (opportunity costs) or costs that can be trade off or willing
to foregone.

3. Differentiating Implicit and Explicit Cost

Implicit costs are those that the company are willing to foregone in exchange for a benefit in the future. This are costs that
measures the sustainability, growth, and advancement of the company. They are also called intangible costs or costs that the
company is/are willing to bear or gamble for the improvement, development of the company and satisfaction of the customer.
4. Concept of Marginal Analysis

What is Marginal Analysis

 It is an examination of the additional benefits of an activity compared to the additional costs incurred by the same
activity. 

 Companies use marginal analysis as a decision-making tool to help them maximize their potential profits

Sample Table for Marginal Analysis

In this example, the additional (margin) cost of adding 1 quantity (dozen) of pizza with a total cost of $275 can be obtained by
getting the difference between the previous cost and the current cost that yileds a marginal cost of $75.
5. Concept of Marginal Profit

What is Marginal Profit.

 Marginal profit is the change in profit resulting from a small increase in any managerial decision variable.

 Marginal profit = [Change in Profit] / [Change in Output]

 Can be computed as:

            = ∆π / ∆Q = [ π1 - π0 ] / [Q1 - Q0]

Sample Table Data for Marginal Profit

The Marginal Revenue can be obtained by:

1. Getting the Total Revenue (TR) = Price x Quantity

2. Getting the Marginal Revenue (MR)= TR2-TR1

3. In this case the TR1 in producing Qty 1 = 1 x 10 = 10

                            TR 2in Producing Qty 2 = 2 x 9.50 = 19

    The MR can be obtained by getting the difference between 19-10 = 9 (additional/marginal)

6. The Concept of Marginal Cost

Marginal cost formula is nothing but the mathematical representation to capture the incremental cost impact due to a
production of additional units of a good or service. It is computed by dividing the change in total cost due to the production of
additional goods by the change in the number of goods produced. Although the total cost is comprised of fixed cost and
variable costs, the variation in total cost due to a change in the quantity of production is primarily because of variable cost
which includes labor and material cost. On the other hand, there might be few occasions when there is increase witnessed
in fixed costs which include administration, overhead and selling expenses. Mathematically,

The marginal cost formula can be useful in financial modeling to arrive at the optimum level of production required to ensure a
positive impact on the generation of cash flow.

Let us consider a simple example where the total cost of production of a company stood at $5,000 for the production of 1,000
units. Now, let us assume when the quantity of production is increased from 1,000 units to 1,500 units, the total cost of
production increased from $5,000 to $6,000.

Therefore,

 Marginal cost = ($6,000 – $5,000) / (1,500 – 1,000)

 Marginal cost = $1,000 / 500
 Marginal cost = $2 which means the marginal cost of increasing the output by one unit is $2
7. Demand Schedule and Its Types

Demand schedule refers to a tabular representation of the relationship between price and quantity demanded.

 It demonstrates the quantity of a product demanded by an individual or a group of individuals at specified price and
time.

Types of Demand Schedule

 Individual Demand Schedule: 

   Characteristics:

 Refers to a tabular representation of quantity of products demanded by an individual at different prices and time.

 Demonstrates the effect of changing price on the buying behavior of customers rather than change in the demand for
a product

 Expresses the disparity in demand with the difference in the product’s price

 Represents that at higher prices the quantity demanded reduces and vice versa

Market Demand Schedule:

Characteristics:

 It demonstrates the demand of a product in the market at different prices.

 The market demand schedule can be derived by aggregating the individual demand schedules.

8.