Managerial Economics : Unit 1 Fundamentals

Scarcity of
Scarcity of Resources
Resources and
and it’s
it’s Consequences
Consequences
•
Resources are scarce and can ,
for the most part , only be used once .

wanting more than we can get with limited resources

For each
•
3 Questions : company there are three basic questions that need to be
resolved -

Which goods and services should be produced ?

-

-
How much of these goods and services should be produced ?

-
Who should relieve the produced goods and services ?

Answer : Given rational behaviour and scarcity , you can expect people to work

to get what they want Ctneir motivation) using the limited resources at their

disposal (their -
constraints)

Opportunity costs: Economic costs of using resources

/
Total Economic cost
PIZZERIA
The total
opportunity
cost of both kinds of

|
resources

Revenue cost
Explicit :

EUR100,000 EUR20,000 Supplies

Explicit Costs Of Market Implicit
Costs Of Owner -

Supplied Resources Supplied Resources

Implicit : EUR 30,000 Time
-

The monetary The return foregone by not

payments to
resource owners taking the owner's resources

•
labor services of skilled and
to market
•
money provided +☐ the q FOR 100>000 Mental value

÷:*
. ..
*i . i. owner.
Raw materials purchased
Economic EUR50,000
•
Time and labor services
LOSS
•

:
•
'

tal equipment rented Provided by the firm's owner

Or leased Land
• ,
buildings ,
or capital
equipment owned and used
by the firm
Managerial Economics Unit 2
: The invisible hand of the market
Fundamentals-
' An overview Demand curve

supply and Demand Supply curve

The invisible Interaction of

Hand of the supply and Demand
MarketEquilibrium
market The Assumptions of the Market
model

Elasticities - Elasticities of Demand

\ Elasticities of supply

Applications

P€) cur ve
The demand curve
A

40 -••

••

f-
30 -

Beg
25
•⑨
-

20 -
••@

••••
10 -

••••

' ••

փ%thousands ( per year)

Demand shifters
change in
quantity
demanded is caused
the by Change in

change in the Price

""d ""
0 Change in to
ntity Demanded shifts
either left or

0 right
 The invisible hand of the market
The
The supply
supply curve
curve

hanger in
supply
change
refers to shifts
quantity
supplied either left or
@
right

Law of keeping increase in

supply other factors constant an
price
:
,

results in an increase in
quantity supplied .

Market Equilibrium
•
Surplus : Firms
producing more than

µµµ •
Shortage :
they can

Consumers
sell

are
.

willing to buy
more than is offered .

• Market Equilibrium Quantity demanded

:

equals quantity supplied .

?⃝
 The invisible hand of the market
Elasticities

Price Elasticity Of Demand =

¥0 =
0.5 = -1.5
-

0.33

Y÷;→
What does it mean for price elasticity of demand to be
-
1:57
-

describes the size of the quantity

the
-

Elasticity change in

demanded of the its price

when
good changes .

→ Price elasticity of demand

for cups Of
coffee
means that 1% decrease in
price of the coffee
will lead to 1.5% the
increase in
quantity of the
coffee cups demanded .
Managerial Economics : Unit 3 Consumer Decisions
The concept of
utility
Consumer decisions - an overview
Utility Theory
Indifference Curves
Consumer Decisions

Budget Constraints
willingness to
Pay
Budget Line

Demand

Budget Optimum

Individual Demand

Applications curve

Utility

Utility of the amount of satisfaction person derives from something

•
is a measure ,
a .

•
Utility is an ordinal measure and can be ranked ,
but cannot be used to calculate

absolute differences .
 Consumer Decisions
curve
Indifference cur ve

⑦ ②
to t
Prefers over equa

Indifference curve is downward

sloping .

-
All combination of ✗ I 4 located on the indifference curve

provides the same level of satisfaction .

Budget constraints
Budget constraints and
and Budget
Budget line
line

-1¥
slopes

income
Managerial Economics :
Unit 4 Business decisions 1: Full competition

Production function
-
A production function is the link between levels of input usage
and attainable levels of output .

The production function formally describes the relation

between physical rates of output and physical rates
of input usage .

g.⑧ =/ (④④ *
Capital
/ ¥1?
of
""

capital
auantity
of
output
maximum

output
b.
quantity of
Used
in production
labor input

if a firm is Economically efficient

then it must also be
technically efficient

•
Long-run production function : Q=f( L ,K) Short Run-

: One factor Of production is

fixed
•
Short -
run
production function : Q =/ ( L ) Long
-
Run Both labour and capital
: are

J variable -

Fixed
capital
 Business decisions 1: Full competition

Costs: A minimization problem

• ① =
10,000 units

• Price of Labor CW) per unit is EUR40

• Price of capital Crt per unit is EUR60

• Total costs C =
WL + rk ( at point A)
=
( UO) (603 1-(60×100)
①
=
2400+6000

=
EUR8400
•
Total costs C =
w Ltrk ( at point B)
j

=
14031663+(60×90)
=
2640 + 5400
=
EUR 8,040

Average
Average and
and Marginal
Marginal cost
cost
When the
•
marginal is above the
average
marginal cost , then the
average increases .

Average total • When the marginal is below the

average
cost
,
then the
average decreases
¥
.

• ATC & the AVC comes closer together

Average
variable cost
as the output increases -

• The only difference in AFC & AVC is the

Average
fixed cost
AFC
to
.

And AFC is
• as
declining the more we

produce
So as AFC smaller ATC & AVC
gets
•
,

closer to eachother
get
?⃝
?⃝
Managerial Economics : Unit 5 Entrepreneurial decisions II: Incomplete Competition

Monopoly
Monopoly
•
Definition : A market situation in which
only one
company acts as a
supplier
ofgood
a -

•
Why do monopolies exist ? Barriers to
entry
-
Scarce resources lie critical resource )

-
Economies of scale C i.e natural monopoly)
-
Government intervention ( i.e state created )

Aggressive business tactics

-

Perfectly competitive
• The demand curve for the
-

market as a whole is downward

sloping
 Entrepreneurial decisions II: Incomplete Competition

Monopolistic competition

_o--__IfEIf_

% ] This is equivalent to
saying profits are
zero .

•
Definition : a market with
many firms that sell goods and services that are

similar ,
but
slightly different .

>
Profit
maximizing price
Price ( $) •
If the

tangent
average
to the
total cost curve is not

demand curve ,
then
exactly
profits .
I
-

will be + or
depending on the location of

""""••
-

monopolistic price MC
demand
9 the average total cost curve or the

④ " " e-

! ATC
,

•••••

I \ MR • A monopolistic competitive firm cannot

☒ Units adjust its price without causing a

change
The in the
quantity consumers demand
profit maximizing
.

Production quantity
?⃝
Managerial Economics : Unit 6 Business decisions III : game theory

Prisoner’s Dilemna

Definition It's which two rational choices

a
game of strategy in
people
: make

that lead to a less than ideal result for both .

First move First mover advantage Player: who moves first gets a
higher payoff
than those who follow .
Managerial Economics : Unit 7 Advanced microeconomics
Advanced microeconomics

Adverse selection

e-

• Risk neutral buyers are

willing to spend no

more than $11,000 .

Therefore , only lemons

offered for
- r-
will be sale but
. . .

buyers
will
figure this out and will not
buy Signaling
the car at all !