FRISCO, AYANNA MAE C.

(a) Mathematical Economics – methods

of mathematics to create economic
1ST YEAR BSA2112-A theories and such (e.g. equilibrium model)

(b) Econometrics – statistical methods

(e.g. regression model)
TOPIC REVIEW:
MANAGERIAL Note:

ECONOMICS ✓ Managerial Economics sought to

achieve OPTIMAL SOLUTIONS to
MANAGERIAL DECISION PROBLEMS

Chapter 1: The Nature and Scope (Optimal solutions – it may not be right or
correct but it is the best solution)
of Managerial Economics

Theory of the Firm

Economics
- Combines and organizes resources for
- it is the allocation of scarce resource to
the purpose of producing goods and/or
satisfy human wants or needs.
services for sale.
- managing households
- Internalizes transactions, reducing
transaction costs.

Managerial Economics - Primary Goal: maximize wealth/value of

the firm
- It is the application of economic
theory and decision science tools to
solve managerial decision
A firm exist..
problems
(1) to increase profitability/revenue
(2) to satisfy customer
Economic Theories
(3) sustainability ||ability to meet the
(a) Microeconomics – it is the economic
current needs of society without
behavior of individual units or specific
compromising the future, e.g. nokia, sony||
segments of the whole economy

(b) Macroeconomics – it is the economic

behavior of the whole economy itself. Value of the firm

- The present value of all expected

future profits
Decision Sciences
Alternative Theories
[1] Sales Maximization
- adequate rate of profit
(to make the most of sales revenue
possible without taking a loss)
[2] Management utility maximization
- principle-agent problem
(to achieve highest level of satisfaction
from their economic decision)
[3] Satisficing Behavior
(acceptable option rather than the optimal
one)
Definition of Profits
• Business Profit:
- Total revenue minus the explicit or
accounting costs of production
• Economic Profit:
- Total revenue minus the explicit
and implicit costs of production
• Opportunity Cost:
- Implicit value of a resource in its
best alternative use
(value of the option not taken when a
business makes a decision)
Notes:
✓ explicit costs – audited / involves
monetary values
✓ implicit costs – unaudited / non
monetary / no receipts (resources
belonging to the owner such as capital and
inventory)
Theories of Profit
• Risk-Bearing Theory of Profit (profit by
risk)
• Frictional Theory of Profit (profit by
competing)
• Monopoly Theory of Profit (one
seller/producer)
• Innovation Theory of Profit (Profit is the
Reward for Successful Innovation)
• Managerial Efficiency Theory of Profit
(firms that enjoy higher levels of profit do
so because they are more efficient than
their competitors)
Function of Profit
• Profit is a signal that guides allocation of
society’s resources
• High profits signals that buyers want
more of what the industry produces
• Low(negative) profits signals that
buyers want less of what the industry
produces
Business Ethics
• Types of behavior that businesses and
employees should not engage in
• Source of guidance that goes beyond - a increase in the price of a good while all
enforceable laws other things held constant will cause a
decrease in the quantity demanded of the
good. P (constant factors) Q
The Changing Environment of
Managerial Economics

a. Globalization of Economic Change in Quantity Demanded

Activity - an increase in price causes a decrease in
(this is how trade and technology have quantity demanded (rightward shift in the
made the world into a more connected and market demand curve \ \)
interdependent place) - a decrease in price causes an increase in
- Goods and Services quantity demanded (leftward shift in the
market demand curve \ \)
- Capital

- Technology
Changes in Demand
- Skilled Labor
• Change in Buyers’ Taste

• Change in Buyers’ Income

b. Technological Change
- normal goods (increase income, higher
(This is the improvement of the already
demand)
existing technologies)
- inferior goods (increase income, fall in
- Telecommunications Advances
demand)
- The Internet and The World Wide Web
• Change in the Number of Buyers

• Change in the Price of Related Goods

- substitute goods (serves same purpose)

Chapter 1: Appendix - complementary goods (adds value)
The Basics of Demand, Supply,
and Equilibrium
Law of Supply (perspective of producers)

- a decrease in price of a good, while all

Law of Demand (perspective of a other things held constant, will cause a
consumer) decrease in the quantity supplied of the
good. P (constant factors) Q
- a decrease in the price of a good while all
other things held constant will cause an - an increase in the price of a good, while
increase in the quantity demanded of the all other things held constant, will cause an
good. P (constant factors) Q increase in the quantity supplied of the
good. P (constant factors) Q
 • an increase in supply will cause the
market equilibrium price to decrease and
Change in Quantity Supplied
quantity to increase
- a decrease in price causes a decrease in
( S P Q)
quantity supplied (leftward shift in the
market supply curve / /) • a decrease in supply will cause the
market equilibrium price to increase and
- an increase in price causes an increase in
quantity to decrease
quantity supplied (rightward shift in the
market supply curve / /) ( S P Q)

Changes in Supply
• Change in Production Technology Chapter 2: Optimization
• Change in Input Prices Techniques and New Management
Tools
• Change in the Number of Sellers

Market Equilibrium (to know kung
kailan ka lugi o hindi)
- it is determined at the intersection of the
market demand curve and the market
supply curve
[ Notes:
✓ Optimization, in economics, it is not
really important if it’s right or wrong but it
should be the best

- equilibrium price causes quantity Terms Abbreviations:

demanded to be equal to quantity supplied
TR – TOTAL REVENUE

Q – QUANTITY
Market Equilibrium of Demand
AC – AVERAGE COST
• an increase in demand will cause the
market equilibrium price and quantity to TC – TOTAL COST
increase MC – MARGINAL COST
( D P Q)

• a decrease in demand will cause the

market equilibrium price and quantity to
Expressing economic relationships
decrease
Equation: TR = 100Q – 10Q²
( D P Q)
- The result of the graph makes an
example of a linear regression
Market Equilibrium of Supply
- This is to show if x has relationship with
y

- The dependent variable is affected by

independent variable

Total, Average, and Marginal Cost

Average Cost – computes the mean

Equation: AC = TC/Q

Marginal Cost – computes the median

Equation: MC = TC/ Q

(note: means change)

(note: break even point in the graph of AC

and MC , indicates that the cost will rise
again)

Profit maximization

Equation: TR-TC

(note: break even point in the graph of

profit maximization indicates where you
are not profiting nor at loss or hindi ka
lugi)