MANAGEMENT – set of principles relating to the function of planning, organizing, directing and

controlling the utilization of resources efficiently and effectively to achieve organizational goals.

MANAGER – person who directs resources.

ECONOMICS – science of making decisions in the presence of scarce resources.

RESOURCES – anything used to produce a good or service

MANAGERIAL ECONOMICS – study of how to direct scarce resources in the way that most efficiently
achieves a managerial goal. (Michael r. baye)

MANAGERIAL ECONOMICS – described as the application of economic theory. (Dominick Salvatore)

NATURE OF MANAGERIAL ECONOMICS:

- Art and Science

- Pragmatic
- Management Oriented
- Prescriptive/Normative Discipline
- Micro-economics
- Uses Macro-economics
- Multi-disciplinary

Micro-economics applied to operational issues:

- Theory of Demand
- Theory of Production & production decisions
- Pricing theory & analysis of market structure
- Profit analysis & management
- Theory of capital & investment decisions

Macro-economic applied to business environment:

- Economic environment
- Social environment
- Political environment

MATHEMATICAL ECONOMICS – applicative method that is used in various branches of economics.

- More precise, more concise, more systematized.

ECONOMETRICS – measurement of economic data

- Use of statistical methos, techniques and qualitative techniques.

REVENUE – total monetary value of the goods or services sold.

- Total revenue = quantity of units sold x unit price

COST – collective expenses incurred to generate revenue over a period of time, expressed in terms of
monetary value.
VARIABLE COST – cost elements that are related to the volume of sales

FIXATED COST – costs are largely invariant to the volume of sales

TOTAL COST = fixted cost + (quantity of unit sold x variable unit cost)

PROFIT – difference that arises when a firm’s total revenue is greater than its total cost

LOSS – when costs exceed revenue, there is a negative profit

 Profit/loss = total revenue – total cost

ACCOUNTING PROFIT – total amount of money taken in from sales (total revenue) minus the cost of
producing goods or services

 Determined by GAAP
 Considers only explicit cost
 Single entity accounting period view

ECONOMIC PROFIT – are the difference between the total revenue and the total opportunity cost of
producing the firm’s goods or services

 Considers both explicit and implicit costs

 Determined by economic principles
 Macro market or whole project timeline view

OPPORTUNITY COST – foregone benefit for not choosing an alternative; using a resource includes both
explicit (or accounting) cost of the resource and the implicit cost of giving up the best alternative use of
the resource.

TOTAL OPPORTUNITY COST = explicit cost + implicit cost

 Explicit cost – is a payment made to others during the course of running a business that
represents the outflows of cash.
 Implicit cost – represents the opportunity costs that occur from allocating resources for a
specific purpose that can’t be assigned a monetary value.
 Sunk cost – a cost that has already been incurred and cannot be recovered.

PORTER’S FIVE FORCES:

- Competitive rivalry
- Threat of new entries
- Power of input suppliers
- Power of consumers
- Substitutes and complements

3 SOURCES OF RIVALRY

- Consumer – Producer Rivalry

- Consumer – consumer rivalry
- Producer – producer rivalry
MARGINAL ANALYSIS – states that optimal managerial decisions involve comparing the marginal
benefits of a decision with the marginal costs.

DEMAND:

- Behavior of potential buyers in the market

- Entire relationship of price and quantity
- Desire, ability, and willingness to buy the products or services

LAW OF DEMAND:

- As price increase, demand decreases

- As prices decrease, demand increases

 People substitute lower priced goods for a higher priced goods.

 Law of diminishing marginal utility

WAYS TO REPRESENT THE LAW OF DEMAND:

- Curve (P↑ Qd ↓)

P ↓ Qd ↑

- Schedules

INDIVIDUAL DEMAND CURVE – represents the quantity of a good that a consumer will buy at a given
price, holding all else constant.

MARKET DEMAND CURVE – is the sum of all the individual demand curves in the market

CHANGE IN QUANTITY DEMANDED - a movement from one point to another point on the same demand
curve caused by a change in price of a good.

CHANGE IN DEMAND = shift in demand (entire curve)

DEMAND SHIFTERS:

- Changes in total income

 Inferior good
 Normal good
- Prices of related products
 Substitute
 Complementary
- Future expectations
- Tastes and preferences
- Environmental factors
- Population
CHANGE IN CONSUMER INCOME – change in salary, tax rates, spending habits etc. ; rise in income leads
to

- Increased demand for normal goods

- Decreased demand for inferior goods

SUBSTITUTE – products that can replace each other

COMPLEMENTARY – products that are used together

LAW OF DEMAND – fundamental principle of economics that states that at a higher price consumer will
demand a lower quantity of a good

 Demand in a market can be depicted as an downward-sloping demand curve

LAW OF SUPPLY – law that states all other factors being equal.

SHORTAGE – is a condition where the quantity demanded is greater than the quantity supplied at a
market price

SURPLUS – is a condition where the supplied is greater than the quantity demanded at the market price

When you combine the supply and demand curves, there is a point where they intersect.

ECONOMIC SURPLUS – also known as total welfare, sum of the consumer surplus and the producer
surplus in an economy.

CONSUMER SURPLUS – is the difference between the highest price a consumer is willing to pay and the
actual price they do pay for the good.

PRODUCER SURPLUS – producers are willing to sell their products or services at a certain price. If they
manage to sell them at a higher price than the minimum price they would be willing to sell.

ECONOMIC SURPLUS = consumer surplus + producer surplus

CONSUMER SURPLUS = ½ (base x height) or (base x height) /2

CS = 1/2bh or CS = bh/2

 Where ½ is constant, base is on the quantity demanded (x axis) height is on the y axis (price)

CONSUMER SURPLUS = marginal benefit – actual cash paid

TOTAL CONSUMER SURPLUS =bh/2

TOTAL MARGINAL BENEFIT – beyond the price paid (market equilibrium) for all the consumers

DEMAND FUNCTION – mathematical equation which expresses the demand of a product or service as a
function of its price and other factors such as the prices of the substitutes and complementary goods,
income, etc.

- Creates a relationship between the demand (in quantities) of a product (which is dependent
variable) and factors that affect the demand.
If quantity demanded is dependent solely at price

Y-intercept is a point where the graph of a function intersects the y-axis

x-intercept is a point where the graph of a function intersects the x-axis

y-intercept = price intercept

x-intercept = quantity demanded intercept

SUPPLY – relationship between the price of a particular good and the quantity of the good that firms
are willing to sell at that price.

INDIVIDUAL SUPPLY – supply of a commodity by an individual firm in the market

MARKET SUPPLY – supply of a commodity by all the firms in the market

CHANGE IN SUPPLY – refers to an increase or decrease in supply that is brought by a change in the
other factors, except price.

CHANGE IN QUANTITY SUPPLIED – refers to the variation in producers’ supply of a commodity due
to a change in its price, other factors remaining constant.

SUPPLY SHIFTERS:

- Technology
 - Input prices
- Number of firms
- Substitute in production
- Government (yuck)
- Producer expectations/expectation of future prices

SUPPLY FUNCTION – describes how much of the good will be produced at alternative