LESSON 1: Introduction to Managerial Every investment decision made means there

Economics are alternatives forgone. The cost of forgone.

Economics - The study of how societies use
scarce resources to produce valuable goods
and services and distribute them among
different individuals for consumption.
Alternatives is what we call the opportunity cost.
• Opportunity Cost is the foregone benefit that
would have been derived by an option not
chosen.

Microeconomics - The study of individual • Opportunity cost of a decision is the sacrifice

behavior of households, firms, and market. of alternatives required by that decision.

Managerial Economics • Opportunity cost represents the benefits or

revenue foregone by pursuing one course of
• Managerial economics refers to the
action rather than another.
application of economic theory and the tools of
analysis of decision science to examine how an To solve this problem, we would have to use the
organization can achieve its objectives most net present value (NPV).
effectively (Salvatore)
Below is the formula for the NPV
• Managerial economics is the study of the
allocation of scarce resources available to a
firm or other unit of management among the
activities of that unit (Haynes, et. al.)

Having knowledge in managerial economics

can help managers make decisions on pricing, CF = Cash Flow
production process, and decisions on the R = Interest rate
volume of output. t = Time

The person who manage a whole organization

or a single unit has power to decide on how
resources, such as labor, tasks, raw materials,
etc., may be used for investments.

Economic concepts geared towards efficient

use of resources are required competencies for
managers to achieve goals of the organization.

How does economics actually fit in the

managerial decision-making?

Since economics teaches us to efficiently

manage resources to overcome constraints.

Decision-making starts from identifying goals,

and in the lens of an economist, identifying
goals also entails identifying the constraints and
the incentives, an organization may gain given
its limitations.
Opportunity Cost in Managerial Economics
Since the NPV is negative, it only means that the
firm would earn more if it just used Php
500,000.00 to engage in another investment
instead of buying a new machine.
LESSON 2: Demand and Supply Analysis decrease in the quantity demand of electricity.
People tend to lessen their electricity
Perceived as rudimentary economic concepts,
consumption and when the price of electricity
the realm of demand and supply analysis
decreases, they tend to use electricity more
represent how the interest of consumers and
often resulting to an increase in the quantity
producers interact in the market, in a fashion
demand of electricity.
that emphasize the importance of price to keep
both market players in check. SUBSTITUTE EFFECT

What is Demand? This theory explains the negative relationship of

The relationship between price and the quantity
consumers are willing and able to buy, all things
held constant. The law of demand defines the
relationship between quantity demand and
price.
Law of Demand
• States that, assuming all things are equal, the
quantity demanded has an inverse relationship
with price.
• As price increases, quantity demanded
decreases and vice versa.
The law of demand reflects how consumers
behave to changes in price. This concept is
evident in our everyday lives. Whenever we
purchase commodities to satisfy our needs or
wants, we tend to choose products with lower
prices.
Theories that explain the negative relationship
between quantity demand and price:
quantity demanded and price for goods with
substitutes. Whenever the price of a good
increases, there are some consumers who
would shift their consumption to substitute
goods, but if the price of a good decreases
even consumers of substitutes might shift their
consumption towards the good that dropped its
price.
Consumers of substitute goods such as pork,
beef and poultry display the behavior stated by
this theory. When the price of pork increases, its
consumers might shift their consumption
towards, beef or poultry resulting to a decrease
in the quantity demand of pork. However, if the
price of pork decreases, consumer of beef and
poultry might shift their consumption to pork
resulting to an increase in the quantity demand
of pork.
The table below showing the corresponding
quantity demand per price level is called
demand schedule.

INCOME EFFECT

States that people curb their consumption

whenever the price of a good increases
because their current income will not allow
them to spend more money from their saving or
money allotted for buying other goods.

People have the opposite reaction when price

of a good drops. The purchasing power of their
current income increases so they can buy more To illustrate the relationship between the price
without having to spend more than what they and quantity demand shown by the demand
are already spending for buying the good. schedule, we will also show below the graphical
relationship between price and quantity
This theory is evident whenever prices of goods
demand, known as the demand curve.
with no substitute changes. For example, when
price of electricity increases, resulting to a

The demand curve is downward sloping due to
the negative relationship between price and
quantity demand. As shown by the graph, the
quantity demand gets higher as price level
drops.
When price drops from Php 4.00 to Php. 2.00,
the quantity demand changed from 20 to 40.
Most of the time, demand curve is depicted in a
linear fashion, which is why the demand
function, an equation showing the price and
quantity demand relationship, is also expressed
in negative linear equation.
Demand functions are necessary tools
especially for decision making. It can provide
an estimate amount of quantity demanded at
a given price level.
Below is an example of a demand function:
Although the law of demand pertains to the
relationship of price and quantity demanded, it
does not mean that quantity demand will only
change in response to price changes.
When quantity demand changes in response to
changes in price, we call this change in quantity
demand. However, there are other factors that
may cause demand to change. When demand
changes due to factors other than price, we
call this a change or shift in demand.
What are the factors that may cause Shift in
Demand?
Consumer Income
Changes in consumer income will definitely
change the capacity of consumers to buy more
or less.
The way how changes in consumer income
affects the demand of a particular good
depends on the kind of good. In relation to
income, we have to kinds of goods, to wit
Inferior and Normal goods.
• Normal Goods
Typical goods bought by consumers that have a
positive relationship with income. If income of
consumers increases, demand of normal good
will also increase and vice versa. A good
example of this good are IPhones. When people
have high income, a lot of people can afford to
buy IPhones so the demand of IPhones will
definitely increase. If people have low income
people will opt to buy other phone which cost
less.
• Inferior Goods
Goods bought by consumers when they are low
on income. These goods have negative
relationship with income. If income of
consumers increases, demand of normal good
will also decrease and vice versa. Imitation
products are the best example for these types
of goods. People only buy imitation products
because they have low purchasing power, but
if their income gets higher, less people will buy
these imitation products.
Price of Related Goods Another factor that affects demand is the
population. If population rises, there would be
There are two kinds of related goods that may
more potential consumers. The relationship of
affect the demand of a product.
population and demand is positive.
• Complementary Goods
Other factors
These are goods that are usually consumed
Aside from the factors discussed above, there
together. If the price of the product increases,
are also other factors that affect demand of
its demand will decrease along with the
products, such as consumer expectations,
demand of the complementary goods.
political events, weather, and other special
Therefore, the price of the complementary
cases.
goods has a negative relation with a product. A
good example of this is the price of coffee What happens to demand curve when there is a
creamers affecting the consumption of coffee. shift in demand?
If price of creamers increases the demand for
When factors that causes shift in demand enters
creamers will decrease along with the
the scene, demand will definitely change but
consumption of coffee because some people
price will remain the same.
might not like to drink coffee without creamers.

• Substitute Goods

As the name itself entails, substitute goods are

consumed in exchange of another good. If the
price of a substitute good increases, its demand
will decrease because its consumers will shift
their consumption to other products. The
demand of a product has a positive relationship
with price of its substitute goods. A good
example for this is the relationship of the price of
coffee to the demand of tea. Since coffee is a
substitute product of tea, whenever the price of
coffee increases the demand for coffee will
decrease and its consumer might shift their
consumption to tea, thus increasing the
demand for tea?

Taste or Preference

Taste or preference of consumers dictates the

amount of demand a product has. While
preference of people in a particular area may
be hard to predict, it can be easily be
influenced through various advertising activities.
The amount of advertising efforts exerted by a
firm defines the volume of consumers it might
attract. The advertising cost for products usually
What is Supply?
has a positive relationship with the demand.
The relationship between prices and the
Population
quantity firms/producers are willing and able to
sell, all things held constant.
Law of Quantity Supply
• States that, assuming all things are equal, the
quantity demanded has a positive relationship
with price
• As price increases, quantity supplied also
increases and vice versa.
Quantity supply reflects the behavior of firms or
producers of goods and services used to satisfy
needs and wants. Firms themselves engage into
producing goods and services in order to gain
something. Most firms strive to earn profit as an
incentive to making goods and services
available for consumers, which is why when a
good or service can be sold at a high price,
more producers would like to invest into
producing such good or service and offer it to
consumers.
The supply schedule and supply curve below
illustrate the positive relationship between price
and quantity supply.
The supply curve is an upward sloping curve
indicating that whenever the price increases
the quantity supply would increase as well and
vice versa.
Supply Function
Supply function is an equation defining the
relationship between price and quantity supply.
Same with the demand function, supply
function can be used to estimate the quantity
supply given a certain price level. The main
difference between demand and supply
function is that the supply function is positive
because of its direct relationship of supply with
price.
Same as demand, there are factors that may
cause shifts in supply.
Prices of Inputs
A change in the prices of inputs can determine
the willingness of producers to produce more.
Price of inputs is inversely related to supply
because prices of inputs affects production
cost. If price of inputs increases, producers will
produce less because of higher cost of
production and vice versa.
Production Technology
An improvement in production technology
results in to a much more efficient production,
which means more products may be produced
using less amount of inputs. Production
technology has a positive relationship with
supply.
Number of Firms
As the number of firms producing the same
good increase, the more products will be
available in the market. So obviously, the
number of firms is directly related with supply.
Substitutes in Production
Government Regulation
Government regulations such as incentives and
taxes can affect supply. Incentives can help
ease the cost of production which is why it has
a positive relationship with supply. Taxes,
however, have negative relationship in supply
because as increase in tax imposed, can
increase the price of inputs, thus increasing the
cost of production.
Shifts in Supply Curve
An increase in supply will shift the supply curve
to the right as shown in the graph below:
A decrease in supply will shift the supply curve
to the left as shown in the graph below:
Equilibrium
• The state of balance between demand and
supply.
Market Equilibrium – the meeting of supply and
demand in a market.
Equilibrium market price – the price agreed by
the seller to offer its good or service for sale and
for the buyer to pay for it.
Markets
Market is a mechanism. It caters to the
interaction between the consumers and
producers. Through markets, the products
wherein producers are supposed to allocate
their resources into are determined by its
interaction with consumers through markets,
leading to efficient use of scarce resources.
Aside from efficiency on the allocation of
resources, the forces of supply and demand
may also be controlled by markets, through
price.
Changes in Market Price
Demand and Supply shifters might affect the
current market price. Since market price is the
equilibrium between demand and supply, then
if any of the demand or supply changes, then it
would create an imbalance between the
market forces and a new market equilibrium
shall emerge.
LESSON 3: Quantitative Demand Analysis
Elasticity is a measure for the responsiveness of
one variable to another. In the case of price
elasticity of demand, it measures how much
demand has changed in response to changes
in price.
What is Elasticity?
Elasticity, in Physics, it refers to the expansion or
contraction of physical matter. While in
Economics, it refers to the degree of
responsiveness of one variable to another.
Demand Elasticity – refers to the buyer’s
reaction or response to changes in the prices of
goods and services.
Factors that Affects Elasticity:
Availability of Substitutes
Demand of products with substitutes are usually
elastic, which means that its consumers are
responsive to price changes. If the price of a
product increased even by the slightest, since
substitutes are available, consumers have more
product to shift their consumption to. However,
if a product has little to none substitute, then
consumers will be forced to be more tolerant to
changes on price because they have no other Consumers of this demand are slightly
product to consume that can provide them responsive to price changes just like consumer
with the same satisfaction. This is the case with of products with no substitutes and necessity
electricity, there are almost no alternative to products.
electricity. When price of electricity increases,
Perfectly Inelastic Demand
consumers tend to retain its level of
consumption. There are cases when the demand is perfectly
inelastic. The demand is unresponsive to any
Necessity
changes in price.
Demand of products that are deemed
Unitary Demand
necessary, tend to be more inelastic. Its
consumers are not much responsive to price A unit elastic or unitary demand is when the
changes. The best example for this is rice. Since percentage change in price is equal to the
rice is a staple food in this country, consumers percentage change in demand.
are less likely to react to changes in the price of
rice. Point Elasticity – is a method used to determine
the elasticity of a given price level based on the
Time Horizon demand curve.
The longer the time period between prices
changes, the more time the customers have to
adjust its consumption and look for substitutes. It
simply means that the longer the gap between
changes in price, the more elastic the demand
would be.

The range values derived from the price

elasticity of demand may range from Elastic,
Inelastic and Unit Elastic o Unitary.
Elastic Demand
When the absolute value of price elasticity of
demand is greater than one, then the demand
is elastic.
It simply means that the consumers of a product
are responsive to price changes.
A typical demand curve is a linear equation
with an intercept and slope. The slope of a
demand function can be used to solve for
elasticity of a particular price level.
Cross-Price Elasticity - measures the
responsiveness of consumers to changes in the
price of related goods.

Perfectly Elastic Demand Income Elasticity – measures the responsiveness

A slight change in price leads to zero demand.
There is usually a perfectly elastic demand in a
situation wherein there are numerous sellers of a
homogenous good.
Inelastic Demand
of consumers to changes in income.
Advertising Elasticity – measures the
responsiveness of the quantity demand of a
specific good to the changes in the advertising
efforts of the firm of the cost of advertising

When the absolute value of price elasticity of

demand is less than one, then the demand is
inelastic.
LESSON 4: Consumer Behavior
Consumer is the one who demands goods and
services.
Consumers are considered the King of
Producers because, without us consumers, there
will be no need for production. That is why
producers work hard to search what goods or
services will keep the consumers' satisfaction.
To satisfy ourselves, we consume Consumer
Goods. These are the goods that yield
satisfaction directly to any consumer. These
goods are primarily sold for consumption and
not to be used for further processing of another
good.
Maslow’s Hierarchy of Need
1. Physiological needs – these are the basic
needs for sustaining human life.
2. Safety needs – these are the needs to
achieve safety feeling. It can be in the form of
house, money, or security.
3. Social needs – this is the need for
belongingness, love, care, and acceptance.
4. Esteem needs – this is the need for
recognition. Furthermore, sometimes we satisfy it
by having control or power with the things we
are good at.
5. Self-actualization needs – this is the need for
growth or improvement. It answers the questions
of what we are capable of becoming.
3. Consumer Choices – is the combination of
consumer preference and budget
constraints. It answers the question of what
combination of goods or services will
consumers buy to achieve their satisfaction
while at the same time maximizing their
limited budget?
Economics of Satisfaction
1. Utility Theory – this refers to the satisfaction or
pleasure that an individual/consumer gets from
consuming a good/service. It can also be
defined as consumers' willingness to pay for
goods or services, whatever its price, to achieve
satisfaction.
a. Marginal Utility – is defined as the additional
satisfaction that an individual derives from
consuming an extra unit of goods/services.
b. Total Utility – total satisfaction that a
consumer derives from the consumption of
goods/services.
c. Law of Diminishing Marginal Utility – as the
consumer gets more satisfaction in the long run,
he experiences a decline in satisfaction. As
more and more units of products/goods are
consumed, every additional unit gives
satisfaction with a diminishing rate.
2. Indifference Curve – showing no bias/neutral.
To explain it more, different combinations of
goods and services give the same level of
satisfaction to the consumer.

Three steps involved in studying Consumer

Behavior

1. Consumer Preferences – describe how and

why people prefer one good to another.
Sometimes people prefer a good or service
because of its quality and brand. However,
most of the time, people prefer goods and
services based on their price.
2. Budget Constraints – this means that
people have limited income. As
consumers, we want what is best for us,
and we want it all, but one thing that limits
us from consuming it all is our budget.
3. Budget Line – or consumption-possibility line,
which indicates the various combinations of two
products, which can be purchased by the
consumer with his income, given the prices of
the products. A consumer has a fixed budget,
and she/he has to spend his/her money wisely
to be able to maximize his/her satisfaction.
He/she has several combinations of two
products to choose from. However, the choice
relies on his/her budget.
Example:
Demand for Siopao
1. Note that marginal utility means additional
utility and total utility is the sum of all the utility
gain in consuming.
2. At unit 1, the buyer's willingness to consume
the siopao is at the original price level of 15,
with a marginal utility of 40 and a total utility of
40.
3. At unit 2, the buyer's willingness to consume
the siopao is at the price of 12.75.The marginal
utility is at 50, which makes the total utility goes
to 90. (40 + 50 = 90)
4. At unit 3, the buyer's willingness to consume
the siopao is at the price of 10.50.
The marginal utility is at 80, which makes the
total utility goes to 170. (90 + 80 = 170)
5. At unit 4, the buyer's willingness to consume
the siopao is at the price of 8.25. The marginal
utility is at 90, which makes the total utility goes
up to 260. (170 + 90).
6. At unit 5, the buyer's willingness to consume
the siopao is at the price of 6.
Marginal utility goes down at 80. This is the law
of diminishing marginal utility. Whereas you
consume more siopao, your satisfaction
declines because you get full of it. The total
utility is at 340. (260 + 80). This means that the
total utility of 260 incurred in unit 4 is considered
the maximum point of satisfaction consumers
get in consuming siopao. Why? Because at unit
4 is the last piece of siopao that gives the
consumer the highest marginal utility at 90.
LESSON 5: Production Analysis
Short-Run Production Analysis
 Production involved with at least a single
fixed input is short-run production.
 Law of Diminishing Marginal Returns-
adding an additional factor of
production results in smaller increases in
output.
STAGES OF PRODUCTION
Average Product

 AP is the quantity of output produced

for each single amount variable input
used for production.

Long-Run Production Analysis

Marginal Product
 During long-run production, all inputs are
 MP is the additional output produced
variable inputs. The analysis of long-run
per additional variable input added to
production involves two concepts-
production.
isoquant & isocost.

Isoquant

 Isoquant is a curve of
variouscombination of inputs that yields
the same level of output.

Marginal Rate of Technical Substitution (MRTS) -

a decrease in one inputs should be matched
with an increase of another input

 Below is an example of a production

cost express in cubic function:

Q= 4LM+0.3L²M+0.4LM²-0.06L³M-0.01L

Isocost
  Isocost is a line showing the combination
of inputs that have the same cost.
 Compared to the isoquant, isocosts are
expressed in linear equation to define
the relationship of the cost of
production.
LONG-RUN PRODUCTION ANALYSIS
LESSON 6: Economic Growth
 Macroeconomics is the study of the
economy as a whole. It is the branch of
economics that concerns itself with
market systems that operate on a large
scale
 Economic Growth is the period of steady
growth in output, along with an
improvement in living standards. It is one
of the major macroeconomic goals. It is
to achieve a high and growing national
output level to meet the population's
demands.
 GDP (Gross Domestic Product) is the
market value of all final goods and
services produce within a nation in a
given time.
 Nominal GDP, where the measure of
output is based on current prices.
 Real GDP, where the measure of output
is based on changes in inflation
 GDP = C + I + G+ (X-M); where C stands
for Consumption, I is for Investment, G is
for Government Expenditure, X is for
Exports, and M is for Imports.
GDP CALCULATIONS
 Expenditure Approach – GDP is based
on households, businesses, and the
government in a given period.
 Income Approach – GDP is based on
the earnings of the households,
businesses, and the government in a
given period.
 Flow of product approach – GDP is the
sum of the amount of final goods and
services produced and multiplied by
their respective prices in a given period.
 Gross Value Added (GVA) Approach –
GDP is the sum of the output (GVA) of
the economy’s major industries fora
given period.
RULES ON MEASURING GDP
 Only final goods are included in the
calculation of GDP
 Final goods are the goods that are
ready to consume (not to sell)
 The secondary sale of a good is not
included
>>Cars, gadgets, clothes, etc. that can be
bought and sold in second hand are not
included in the computation of GDP yearly due
that they are already included the first time they
were produced and bought
 Only final goods for the period
considered are included in the
calculation
>>If we are looking for 2019 GDP, we should
only include the goods and services produced
domestically in 2019, not including the year 2018
or 2017.
LIMITATIONS OF GDP
 GDP does not include non-market
activities
>> Example, household chores, even when we
get tired by doing all the household chores, it
does not contribute anything to GDP
 GDP does not include the informal sector
>>Those businesses that are not legally
registered are not included in the computation
of GDP
 GDP does not include externalities
>>the harmful effects of businesses, weather
conditions, etc. are not included in the
measurement of GDP
OTHER MEASURES OF ECONOMIC GROWTH
 GNP (Gross National Product) – the
market value of all final goods and
services produced by nationals of a
country for a given period.
GNP = GDP + NFIA
>>GDP is the gross domestic product, while NFIA
is the net factor income abroad.
 NI (National Income) – total income
received by the most basic factors of
production of a country. NI = w + r + i +
Profits
>>W stands for wages, R is for rent, and I is for
interest.
 DI (Disposable Income) – income
received by an individual net of taxes.
Take- home pay.
>>This is the available money to be spent or
saved as one wishes.
DI = Personal Income + Transfer Payments –
Taxes
>>Transfer payments are the payment for SSS,
Philhealth, Pag-Ibig, etc.
LESSON 7: Unemployment
Second to the goal of macroeconomics is to
achieve high employment with low
unemployment rate. When this happens, it
means continued production of goods and
services to meet the population’s needs.
According to Marshall (1890), individuals wish to
be as occupied as they could and live a life as
good as possible.
 Employed refers to those who perform
any work that is paid (including those
who are absent from work and on
leave).
Employment Rate = Employed/Labor Force
 Unemployed refers to those who are not
performing any paid work but wish to do
so.
Unemployment Rate = Unemployment/Labor
Force
 Labor Force refers to those working with
the age of 15-60 years old and are either
working or looking for work
Labor Force= Employed + Unemployed
 Not in the labor force refers to those who
are capable of working with the age of
15- 60 but opt not to look for work.
TYPES OF UNEMPLOYMENT
  Frictional Unemployment – WHY UNEMPLOYMENT EXISTS?
unemployment due to the movement of
 Inflexible wages- due to labor market
people between jobs.
administration. This falls under the
>>For example, I resign from my work without company that does not give the right
having a back-up plan or without having a new salary and benefits to employees.
company to work at; I am now under the
Voluntary- personal reasons why other people
Frictional Unemployment. But if I resign in my
chose to be unemployed.
work today, and I will work in a different
company tomorrow, I will not be tagged as
unemployed.

 Structural Unemployment – mismatch

between the qualifications of a
jobseeker/s and the job opening.

>>For example, you are an IT graduate but work

as a management trainee in fast food. That is
considered a mismatch. It is not wrong to have
a different job field that does not match your
college degree. However, most of the reasons
why many resign is because of the mismatch of
skills.

 Cyclical Unemployment –
unemployment due to overall low
demand for labor (economic
recession/depression).

>>This unemployment is due to the movement

of the business cycle. In the business cycle,
there is a level of peak, growth, recession, and
depression. Usually, the cyclical unemployment
happens under the recession and depression
period. Those employees who are affected by
this are not considered an asset to their
company.

CONCEPTS OF EMPLOYMENT

 Underemployment - It is a situation
where the employed individual wishes to
work more either because of surplus
time or need to earn more income.

 Voluntary Unemployment who are

considered discouraged workers. A
person who wishes to have a job but is
not satisfied with the current job
offerings, thus unemployed.