FRISCO, AYANNA MAE C.

Note:
1ST YEAR BSA2112-A
✓ Managerial Economics sought to achieve
OPTIMAL SOLUTIONS to MANAGERIAL
DECISION PROBLEMS
TOPIC REVIEW:
MANAGERIAL ECONOMICS (Optimal solutions – it may not be right or
correct but it is the best solution)

Chapter 1: The Nature and Scope of Theory of the Firm

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

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

Decision Sciences Alternative Theories

(a) Mathematical Economics – methods of [1] Sales Maximization
mathematics to create economic theories and
- adequate rate of profit
such (e.g. equilibrium model)
(to make the most of sales revenue possible
(b) Econometrics – statistical methods (e.g.
without taking a loss)
regression model)

[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
enforceable laws
The Changing Environment of Managerial
Economics
a. Globalization of Economic Activity
(this is how trade and technology have made
the world into a more connected and
interdependent place)
- Goods and Services
- Capital Changes in Demand
- Technology • Change in Buyers’ Taste
- Skilled Labor • Change in Buyers’ Income
- normal goods (increase income, higher
demand)
b. Technological Change
- inferior goods (increase income, fall in
(This is the improvement of the already
demand)
existing technologies)
• Change in the Number of Buyers
- Telecommunications Advances
• Change in the Price of Related Goods
- The Internet and The World Wide Web
- substitute goods (serves same purpose)
- complementary goods (adds value)

Chapter 1: Appendix
Law of Supply (perspective of producers)
The Basics of Demand, Supply, and
- a decrease in price of a good, while all other
Equilibrium
things held constant, will cause a decrease in
the quantity supplied of the good. P (constant
factors) Q
Law of Demand (perspective of a consumer)
- an increase in the price of a good, while all
- a decrease in the price of a good while all
other things held constant, will cause an
other things held constant will cause an
increase in the quantity supplied of the good. P
increase in the quantity demanded of the good.
(constant factors) Q
P (constant factors) Q
- a increase in the price of a good while all
other things held constant will cause a Change in Quantity Supplied
decrease in the quantity demanded of the
- a decrease in price causes a decrease in
good. P (constant factors) Q
quantity supplied (leftward shift in the market
supply curve //)
Change in Quantity Demanded - an increase in price causes an increase in
quantity supplied (rightward shift in the
- an increase in price causes a decrease in
market supply curve //)
quantity demanded (rightward shift in the
market demand curve \\)
- a decrease in price causes an increase in Changes in Supply
quantity demanded (leftward shift in the
• Change in Production Technology
market demand curve \\)
• Change in Input Prices
• Change in the Number of Sellers ✓ Optimization, in economics, it is not really
important if it’s right or wrong but it should be
the best
Market Equilibrium (to know kung kailan ka
lugi o hindi)
Terms Abbreviations:
- it is determined at the intersection of the
market demand curve and the market supply TR – TOTAL REVENUE
curve
Q – QUANTITY
- equilibrium price causes quantity demanded
AC – AVERAGE COST
to be equal to quantity supplied
TC – TOTAL COST
MC – MARGINAL COST
Market Equilibrium of Demand
• an increase in demand will cause the market
equilibrium price and quantity to increase
( D P Q) Expressing economic relationships
• a decrease in demand will cause the market Equation: TR = 100Q – 10Q²
equilibrium price and quantity to decrease
- The result of the graph makes an example of
(D P Q) a linear regression
- This is to show if x has relationship with y
Market Equilibrium of Supply - The dependent variable is affected by
independent variable
• an increase in supply will cause the market
equilibrium price to decrease and quantity to
increase
Total, Average, and Marginal Cost
(S P Q)
Average Cost – computes the mean
• a decrease in supply will cause the market
Equation: AC = TC/Q
equilibrium price to increase and quantity to
decrease
(S P Q) Marginal Cost – computes the median
Equation: MC = 🔺TC/🔺Q
(note: 🔺means change)

Chapter 2: Optimization Techniques

and New Management Tools (note: break even point in the graph of AC and
MC , indicates that the cost will rise again)

[ Notes:
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)