CHAPTER 1: The Fundamentals - A tool for helping managers to see the big picture and

a schematic to organize industry conditions.

of Managerial Economics Entry
Manager - Heightens competition and reduces the margin of
- direct resources to achieve goal existing firms in a wide variety of industry settings
- execute the word “manage” Entry costs - already lose because of risk
- able to use resources Sunk costs - incurred but cannot be recovered, justify
- integrate the cost of entry
Economics Network effects - establish a network
- making decisions - scarce resources Switching costs - flexibility
- social science Speed of adjustments
- efficient use of available resources Economies of scale
- maximum satisfaction of human wants Reputation - credibility
- proper allocation of goods and services Government restraints - policy
Resources Power of Input Suppliers
- anything used to produce a good or service, or - enter a contract (terms and conditions)
achieve a goal - fluctuation of suppliers
Decisions - long term relationships
- important because scarcity implies trade-offs - should have back-up
Trade-offs Supplier concentration
- making one choice, and give up another Price/productivity of alternative inputs
Efficiency Relationship-specific investments
- maximize resources Supplier switching costs
PFP (Production Possibility Frontier) Government restraints
- beyond efficiency Power of Buyers
- different combinations of outputs of two goods that - know how consumer behaves
can be produced using available resources and - demand - high
technology - location
Managerial Economics Buyer concentration
- direct scarce resources in the way that most Price/value of substitute products or services
efficiently achieves a managerial goal Relationship-specific investments
Economics of Effective Management Customer switching costs
Identify Goals and Constraints Government restraints
- well defined goals - good decision Industry Rivalry
- goals - provide direction Concentration
- constraints - difficult in achieving goal, making Price, quantity, quality, or service competition
solution and use available resources Degree of differentiation
Recognize the Nature and Importance of Profits Switching costs
Accounting Profit Timing of decisions
- total amount of money taken in from sales (total Information
revenue) minus the dollar cost of producing goods or Government restraints
services Substitutes and Complements
- explicit cost - tangible, counted, wages, utilities, raw Price/value of surrogate products or services
materials Price/value of complementary products or services
- profit = total revenue - cost Network effects
- higher profit Government restraints
- total revenue = profit x quantity Understand Incentives
Economic Profit - what drives you to act
- the difference between total revenue and cost - changes in profits provide an incentive to how
opportunity cost resource holders use their resources.
- lower profit - within a firm, incentives impact how resources are
- opportunity cost = explicit cost + implicit cost used and how hard workers work, one role of a
- explicit - accounting cost of the resources manager is to construct incentives to induce maximal
- implicit cost - giving up the best alternative use of effort from employees
resources Understand Markets
- implicit cost - quantified what if, not tangible - bargaining transactions
The Role of Profits - Consumer - producer rivalry - interest, price
- profits are a signal to resource holders where - Consumer - consumer rivalry - first come first serve
resources are most highly valued by society - Producer - producer rivalry - cats and throw
- Adam Smith’s Invisible Hand - guide that determines Recognize the Time Value of Money
price of the market - time to receive the benefits
- Interest - seller (profit), buyer (low price) - important to know the present value from future
- Equilibrium - equality between seller and buyer value
Five Forces and Industry Profitability
 - same amount you invest is worth more that you’ll
earn
- worth the wait
- measure opportunity cost of waiting (time value of
money)
- payment delayed - misopportunity
- managers can use present value analysis to properly
account for the timing of receipts and expenditures
Present Value Analysis
Present Value
- amount received in the future = amount you invest
today
- present value reflects the difference between the
future value and the opportunity cost of waiting
- stream of future values
- Marginal Benefits: MB (Q)
The change in total benefits arising from a
change in the managerial control variable,
Q.
- Marginal Cost: MC (Q)
The change in the total cost arising from a
change in the managerial control variable, Q.
- Marginal net benefits: MNB (Q)
MNB (Q) = MB(Q) - MC(Q)
- Marginal Principle
To maximize net benefits, the manager
should increase the managerial control
variable up to the point where marginal
benefits equal marginal costs. This level of
the managerial control variable corresponds
to the level at which marginal net benefits
are zero; nothing more can be gained by
further changes in that variable.
Marginal Analysis In Action

Net Present Value

- If the result is positive, the project is profitable but if
it is negative, a manager should reject a project.
- Income stream generated by a project minus the
current cost of the project Determining the Optimal Level of Control Variable
(nasa libro)
Present Value of Indefinitely Lived Assets Incremental Decision
- generate cash flows Incremental Revenues
- the additional revenues that stem from yes
or no decision
- perpetual stream when the same cash flow is Incremental Costs
generated - The additional cost that stem from a yes or
no decision
Thumbs up decision
Present Value and Profit Maximization - MB > MC, MB = MC
- maximizing profits means maximizing the value of Thumbs down decision
the firm, which is the present value of current and - MB < MC
future profits
Present Value and Estimating Values of Firms I
- Current profits with no dividends paid out and CHAPTER 2: Market Forces: Demand
expected, constant profit growth rate of g (assuming
and Supply
g < 1) is
Supply and Demand Analysis
- forecasting tool to predict trends in competitive
- markets and the driving forces behind the market.
Present Value and Estimating Values of Firms II Demand
- dividends are immediately paid out of current profits - measures of buyer (willing to pay)
Market Demand Curve
- Illustrates the relationship between the total quantity
and price per unit of a good all consumers are willing
Short-term and long-term profits
and able to purchase, holding other variables constant
- If the growth rate in profits is less than the interest
Demand Schedule
rate and both are constant, maximizing current (short-
- table (price and quantity)
term) profits is the same as maximizing long-term
- Inversely proportional
profits.
Law of Demand
Use Marginal Analysis
- The quantity of a good consumers are willing and
- optimal managerial decisions involve comparing the
able to purchase increases (decreases) as the price
marginal (or incremental) benefits of a decision with
falls (rises).
the marginal cost.
- Price and quantity demanded are inversely related.
- Maximize Net Benefits
Ceteris Paribus Assumption Theory
N (Q) = total benefits B (Q) - total cost C
- all variables are constant
(Q)
- you and me against the world (price and quantity

Shifts
Shift in Demand each price, holding input prices, technology, and
- drop CPAS other variables affecting supply constant
- Other factors affecting - upward sloping
- Entire demand curve shifts Supply Schedule
Shift in Quantity Demanded - price quantity supply table
- using CPAS Law of Supply
- law of demand (negative relationship) - As the price of a good rises (falls), the quantity
- only price supplied of the good rises (falls), holding other
- movement - downward sloping factors affecting supply constant
Changes in Demand Curve - directly proportional
- changes in behavior of consumers - Produce more - high price
Shift to the Left - decrease in demand Changes in Quantity Supplied
Shift to the Right - increase in demand - Only price
Demand Shifters - CPAS
Income - Law of Supply
Normal Goods (expensive) - directly proportional, if Changes in Supply
the income increases (decreases) then the demand - Other factors
for normal goods is also increases (decreases) - right - increase
Inferior Goods (cheaper) - inversely proportional, if - left - decrease
the income decreases then the demand for inferior Supply Shifters
goods increases (vice versa) Input Prices - inversely proportional, price increases and
Price of Related Goods quantity supplied decreases
Substitute Goods - directly proportional, if the price Technology or Government Regulation - directly proportional
of product Y increases, then the demand for product Number of firms - directly proportional
X increases. (vice versa) Substitution in Production - inversely proportional
Complement Goods - inversely proportional, if the Taxes - shift to the left
price of burger increases, then the demand for coke Excise Tax - directly proportional
decreases (vice versa) Ad Valorem Tax - directly proportional
Advertising and Consumer Tastes The Supply Function
- Informative and Persuasive - directly proportional - The supply function for good X is a mathematical
Population representation describing how many units will be
- Direct proportional produced at alternative prices for X, alternative input
Consumer Expectation prices W, and alternative values of other variables
- directly proportional, if the price increases tomorrow that affect the supply for good X.
then the demand today increases as well. Nasa ppt sunod
(stockpiling) Producer Surplus
Demand Function - : the amount producers receive in excess of the
- good X is a mathematical representation describing amount necessary to induce them to produce the
how many units will be purchased at different prices good.
for X, the price of a related good Y, income and other Nasa ppt aketnana
factors that affect the demand for good X. Market Equilibrium
The Linear Demand Function Competitive Market Equilibrium
- constant change or continuous change - Determined by the intersection of the market demand
- nasaa ppt!! and market supply curves.
Consumer Surplus - A price and quantity such that there is no shortage or
- Law of Diminishing Marginal Utility - consuming surplus in the market.
more, utility will diminish - Forces that drive market demand and market supply
- Marketing strategies – like value pricing and price are balanced, and there is no pressure on prices or
discrimination – rely on understanding consumer quantities to change.
value for products. - The equilibrium price is the price that equates
- Total consumer value is the sum of the maximum quantity demanded with quantity supplied
amount a consumer is willing to pay at different Price Restriction and Market Equilibrium
quantities. - In a competitive market equilibrium, price and
- Total expenditure is the per-unit market price times quantity freely adjust to the forces of demand and
the number of units consumed. supply.
- Consumer surplus is the extra value that consumers - Sometime government restricts how much prices are
derive from a good but do not pay extra for. permitted to rise or fall.
nasa ppt - Price ceiling
Supply - Price floor
- Behavior of seller nasa ppt
Market Supply Curve Comparative static analysis
- A curve indicating the total quantity of a good that all - The study of the movement from one equilibrium to
producers in a competitive market would produce at another.
 - Competitive markets, operating free of price 1. ELASTIC DEMAND > 1
restraints, will be analyzed when: - A change in price results to a greater change in
- Demand changes – Supply changes – Demand and quantity demanded.
supply simultaneously change - Change in price is relatively small.
Changes in Demand - curve looks almost flatter or horizontal
- Increase in demand only - goods - sensitive to price, with substitutes
- Increase equilibrium price - provide comforts and pleasures
- Increase equilibrium quantity EXAMPLE:
- Decrease in demand only - luxury ; not necessary
- Decrease equilibrium price 2. INELASTIC DEMAND < 1
- Decrease equilibrium quantity - A change in price results to a lesser change in
Changes in Supply quantity demanded.
- Increase in supply only - There is a relatively large change in price of the
- Decrease equilibrium price commodity.
- Increase equilibrium quantity - much more upright curve
- Decrease in supply only - curve - almost standing
- Increase equilibrium price - Insensitive to price
- Decrease equilibrium quantity - modest change
Price Ceiling - Necessity to the customer, essential to buyers
- Maximum legal price EXAMPLE:
Full Economic Price - Rice; water; shelter
- Dollar amount paid to a firm under a price ceiling 3. UNITARY DEMAND = 1
plus the non pecuniary price - A change in price results to an equal change in
Price Floor quantity demanded.
- Minimum legal price - semi-luxury or semi-essential goods
EXAMPLE:
CHAPTER 3: Quantitative Demand - clothing or shoes are either essential or luxury goods
4. PERFECTLY ELASTIC DEMAND
Analysis - Without change in price, there is an infinite change in
ELASTICITY quantity demanded.
- Responsiveness to change in price and their - Curve - straight line (lying down)
determinants. EXAMPLE:
- Both supply and demand react to changes in price - agricultural products, milk for kids, eggs, mineral
and other factors. As a result, we can observe shifts water
and movements in the curves . The degree to which 5. PERFECTLY INELASTIC DEMAND
either demand or supply reacts to these changes is - A change in price creates no change in quantity
referred to as elasticity demanded.
ELASTICITY OF DEMAND - Curve is standing
- refers to the reaction or response of the buyers to - matter of life and death
changes in price and other determinants. EXAMPLE:
- forecasting tool - Medicine
Demand elasticity may be classified as follows: (PED) Price Elasticity of Demand
a. Price Elasticity of Demand
b. Income Elasticity of Demand
c. Cross Price Elasticity of Demand
A. (PED) Price Elasticity of Demand
- measurement of how demand for a good responds to
a change in price. Total Revenue
- Used to determine the responsiveness of demand to - the total sale of the products by the producer or seller.
changes in the price of commodity. FORMULA: TR = P x Q
TR – total revenue
P – Price
Q – Quantity
* Note that in comparing 2 TRs, whoever yields a higher TR
* We will only deal with absolute values here, so
holding all other things constant, the price charged is the best
when doing the equation always drop the negative
price of the good whether it is the old price or the new price
sign (-)
- Buyers tend to reduce their purchases as price
Importance of Total Revenue in Pricing Decisions.
increases and tend to increase their purchases as
● Demand is ELASTIC = total revenue and price are
price falls. (NEGATIVELY RELATED)
INVERSELY PROPORTIONAL
TYPES OF PRICE ELASTICITY OF DEMAND
● Demand is Inelastic = total revenue and price are
(types of reaction of buyers to price changes)
DIRECTLY PROPORTIONAL

B. (YED) Income Elasticity of Demand

 - degree of responsiveness of a percentage change in
quantity demanded with a percentage change in
income.
- Demand is not only a function of Price but also of
income of an individual. However income and
demand hold a direct relationship such that Income
and Quantity rise or fall together.
- Measures a product’s percentage in income which
caused a change in quantity.
- Causes a shift in the demand curve
Characteristics of goods / commodities.
1. The good is considered superior or a luxury.
- Demand and Income is ELASTIC
- Greater than 1.
- This happens when an increase in a
consumer’s income has caused a substantial
increase in the demand for the product.
EXAMPLE:
- Air travel, cars, resorts
2. The good is considered as necessity.
- Demand and income is INELASTIC
- Less than 1.
- An increase in income is accompanied by
less than a proportional increase in quantity
demanded
3. Common or normal goods
- UNITARY DEMAND
- An increase in income is accompanied by a
proportional increase in quantity demanded.
- Equals 1.
EXAMPLE:
- shampoo, soap, and toothpaste.
4. Sticky or Cheap Goods
- Zero income elasticity of demand.
- A change in income has no effect on the quantity
bought.
EXAMPLE:
- salt, newspapers, matches
5. Inferior goods
- Less than zero. negative
- With some goods & services, we may actually notice
a decrease in demand as income increases. These are
goods that will be dropped by a consumer who
receives a salary increase. As incomes rise, one
tends to purchase more expensive, appealing and
nutritious foods.
C. (XED) Cross Elasticity of Demand
- degree of responsiveness for a percentage change in
quantity of a good with a percentage change in price
of other goods
EQUATION:
*Must keep the negative sign ( -) now! Without it you cannot
know the answer!
Positive cross elasticity – indicates that a good is a substitute
of the other (positively related)
Negative cross elasticity - means that the goods are
complementing each other (negatively related)
CHAPTER 4: The Theory of Individual
Behavior
Consumer Behavior
● Consumer opportunities
○ Set of possible goods and services
consumers can afford to consume (budget).
○ Budget line
● Consumer preferences
○ Determine which set goods and services will
be consumed(satisfaction).
○ Preference/ satisfaction
○ higher location = higher satisfaction
○ Indifference curve
Properties of Consumer Preferences
PROPERTY 1- COMPLETENESS:
For any two bundles of goods either:
- A>B
- B>A
- A ~ B (Indifferent, it doesn’t matter)
PROPERTY 2- MORE IS BETTER:
- If bundle A has at least as much of every good as
bundle B and more of some good, bundle A is
preferred to bundle B.
- The more quantity; the better
- Indifference Curve - combination of two goods that
give a consumer the same level of satisfaction
- Marginal Rate of Substitution - consumer willing to
substitute one good for another good and still
maintain the same of satisfaction
PROPERTY 3- DIMINISHING MARGINAL RATE OF
SUBSTITUTION
- As a consumer obtains more of good X, the amount
of good Y the individual is willing to give up to
obtain another unit of good X decreases.
- Negatively related
- X good(decreases) ; Y good (increases)
PROPERTY 4- TRANSITIVITY:
- For any three bundles, A, B, and C, either:
- If A > B and B > C, then A > C.
- If A ~ B and B ~ C, then A ~ C.
Constraints
- While any decision-making environment faces a host
of constraints, the focus of managerial economics is
to examine the role prices and income play in
constraining consumer behavior.
The Budget Constraint
- Restriction set by prices and income that limits
bundles of goods affordable to consumers.
The Budget Constraint In Action
*lies = not affordable
*budget set = affordable
The Market Rate of Substitution
 - Which one good may be traded for another in the
market; slope budget line
- Bundle line = maximum you can spend
- Bundle set(Below the bundle line) = Affordable
- Beyond the Bundle line = Not affordable
Changes in Income Shrink or Expand Opportunities
- The arrow to the right indicates that you can consume
more of X, Y
- The arrow to the left indicates that you can consume
less
A Decrease in the Price of Good X
2 CHANGES: Changes in income; Changes in Price
- Both can affect your budget line and budget set
*income and budget - directly proportional
*price and budget - inversely proportional
The Budget Constraint in Action
- Consider the following budget line:
100 = 1X + 5Y
- What is the maximum amount of X that can be
consumed?
- What is the maximum amount of Y that can be
consumed?
- What is the rate at which the market trades goods X
and Y?
Consumer Equilibrium
- Consumption bundle that is affordable and yields
the greatest satisfaction to the customer.
- Consumption bundle where the rate a consumer
chooses (marginal rate of substitution) to trade
between goods X and Y equals the rate at which
these goods are traded in the market (market rate of
substitution).
- MRS Curve = MRS budget line = highest location
*MRS Budget curve = MRS Budget line
“C” - lies with the highest indifference curve
- Affordable
- Gave you the highest satisfaction
“D” - not affordable
Price Changes and Consumer Behavior
- Price and income changes impact a consumer’s
budget set and level of satisfaction that can be
achieved.
- This implies that price and income changes will lead
to consumer equilibrium changes.
Price Changes and Equilibrium
- Price increases (decreases) reduce (expand) a
consumer’s budget set.
- Expand (shift to the right)
- Decrease (shift to the left)
The new consumer equilibrium resulting from a price change
depends on consumer preferences:
– Goods X and Y are:
substitutes when an increase (decrease) in the price of
X leads to an increase (decrease) in the consumption
of Y.
- Price change - increases (other goods)
- Positively related
complements when an increase (decrease) in the price
of X leads to a decrease (increase) in the
consumption of Y.
- Price change -decreases (other goods)
- Negatively related
Price Changes and Equilibrium in Action
SUBSTITUTES:
Price of X = Consumption of Y
X (↓) = Y (↓)
* When X decreases, the consumption for Y also decreases
COMPLEMENTS
Price of X = Consumption of Y
X (↓) = Y (↑)
* When X decreases, the consumption for Y increases
Income Changes and Consumer Behavior
- Income increases (decreases) reduce (expand) a
consumer’s budget set.
- The new consumer equilibrium resulting from an
income change depends on consumer preferences:
Good X is:
 a normal good when an increase (decrease) in income
leads to an increase (decrease) in the consumption of
X.
- Positively related
- Income (↑) = Normal Good (↑)
an inferior good when an increase (decrease) in
income leads to a decrease (increase) in the
consumption of X
- Negatively related
- Income (↑) = Inferior good (↓)
Income Changes and Consumption Labor-Leisure Choice Model

Labor-Leisure Budget Set in Action

Substitution and Income Effects

- Moving from one equilibrium to another when the Indifference and Demand Curves
price of one good changes can be broken down into - Indifference curves along with price changes
two effects: determine individuals’ demand curves.
Substitution effect: The movement along a given - Market demand is the horizontal summation of
indifference curve that results from a change in the individuals’ demands.
relative prices of goods, holding real income From Indifference Curves to Individual Demand
constant.
Income effect: The movement from one indifference
curve to another that results from the change in real
income caused by a price change.
Substitution and Income Effects in Action

From Individual to Market Demand

Applications of Indifference Curve Analysis

● Choices by consumers
– Buy one, get one free
– Cash gifts, in-kind gifts, and gift certificates
● Choices by workers and managers
– Income-leisure choice
– Managers preferences

Consumer Choice with a Gift Certificate QUIZ 1 ECON

 23. Positively Related - When one variable
1. Manager - directs the effort of others including increases, the other also increases.
delegating tasks within an organization. 24. Negatively Related - Relationship between
2. Economics - The science of making decisions in income and inferior good.
the presence of scarce resources. 25. Complements - When the price of one good
3. Economic Profit - Total revenue minus the total rises, the other related good decreases.
opportunity cost of producing the goods and 26. Rightward shift - The impact of advertising on
services. the demand curve.
4. Opportunity Cost - The explicit cost of a 27. Demand Function - A summary of all the
resources plus the implicit cost of giving up its factors that influence demand.
best alternative use. 28. Linear Demand Function - an equation
5. Entry - It heightens competition and reduces the representing the demand for a given good.
margin of existing firms in a wide variety of 29. Consumer Surplus - The extra value consumers
industry settings. get from a good but not have to pay for.
6. Five Forces Framework - A tool for helping 30. Surplus - A price floor is a price imposed when
managers to see the big picture and a schematic there is.
to organize industry conditions.
7. Consumer-Consumer Rivalry - When limited
quantities of goods are available, consumers
compete with another for the right to purchase
the available goods.
8. Present Value - The amount that would have to
be invested today at the prevailing interest rate
to generate the given future value.
9. Net Present Value - If the result is positive, the
project is profitable but if it is negative, a
manager should reject a project.
10. Marginal Analysis - Optimal Managerial
decisions involve comparing the marginal
benefits with the marginal cost.
11. Profit maximization - When marginal benefit
equals marginal cost.
12. Government - Intervenes on behalf of agents on
either side of the market who find themselves
disadvantaged in the market process.
13. Constraints - They make it difficult for
managers to achieve goals.
14. Profits - A signal to resource holders where
resources are most highly valued by society.
15. Supply and demand analysis - A qualitative
forecasting tool to predict trends in competitive
markets and the driving forces behind the
market.
16. Market demand curve - Interpolates the
quantities consumers would be willing and able
to purchase at a given price, ceteris paribus.
17. Demand shifters - Variables other than price that
can influence demand.
18. Change in quantity demanded - When there is a
movement along a demand curve or changes in
price lead to change in QD.
19. Ceteris Paribus Assumption Theory - Holding
all variables constant.
20. Excise Tax - It has the effect of decreasing the
supply of a good.
21. Change in Demand - When the position of the
entire demand curve shifts.
22. Leftward shift - Decrease in demand.