D0992 MANAGERIAL ECONOMICS

Session 01
Fundamentals of Managerial Economics
 Fundamentals Economic Managerials

Definition of Economics

– All economic questions arise because we want more

than we can get.
– Our inability to satisfy all our wants is called scarcity.
– Because we face scarcity, we must make choices.
– The choices we make depend on the incentives we
face.
– An incentive is a reward that encourages an action
or a penalty that discourages an action.

Bina Nusantara
 Definition of Economics

Economics is the social science that studies the

choices that individuals, businesses, governments
and entire societies make as they cope with scarcity
and the incentives that influence and reconcile those
choices.

Bina Nusantara
 Fundamentals Economic Managerials

1. The Manager
A person who directs resources to achieve a stated goal.

2. Economics
The science of making decisions in the presence of scare resources.

3. Managerial Economics Defined

The study of how to direct scarce resources in the way that most
efficiently achieves a managerial goal.

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 Purpose of Economics

1. Identify Goals and Constraints

2. Recognize the Nature and Importance of Profits
3. Understand Incentives
4. Understand Markets
5. Recognize the Time Value of Money
6. Use Managerial Analysis

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 Fundamentals Economic Managerials

1. Identify Goals and Constraints

The goal of maximizing profits requires the manager to decide the
optimal price to charge for a product, how much to produce, which
technology to use, how much of each input to use, how to react to
decisions made by competitors, and so on.

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 Fundamentals Economic Managerials

2. Recognize the Nature and Importance of Profits

A. Economic Versus Accounting Profits
Accounting Profit:
The total amount of money taken in from sales (total revenue,
or price times quantity sold) minus the dollar cost of producing
goods or services.
Economic Profit:
The difference between the total revenue and the total
opportunity cost of producing the firm’s goods or services.
B. The Role of Profits
Profits signal the owners of resources where the resources are
most highly valued by society.
C. The Five Forces Framework and Industry Profitability
This framework organizes many complex managerial economics issues
into five forces: (1) entry, (2) power of input suppliers, (3) power of
buyers, (4) industry rivalry, (5) substitutes and complements. 7
 Fundamentals Economic Managerials

3. Understand Incentives
Incentives affect how resources are used and how hard workers
work.

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 Fundamentals Economic Managerials

4. Understand Markets
There are two sides to every transaction in a market: for every
buyer of a good there is a corresponding sellers.
The final outcome of the market process depends on the relative
power of buyers and sellers in the marketplace.
The power or bargaining position of consumers and producers in
the market is limited by three sources of rivalry that exist in
economic transactions: consumer-producer rivalry, consumer-
consumer rivalry and producer-producer rivalry.

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 Fundamentals Economic Managerials

5. Recognize the Time Value of Money

A. Present Value Analysis
Present value (PV) of an amount received in the future is the
amount that would have to be invested today at the prevailing
interest rate to generate the given future value.
General formulas:

B. Present Value of Indefinitely Lived Assests

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 Fundamentals Economic Managerials

6. Use Marginal Analysis

Marginal analysis states that optimal managerial decisions involve
comparing the marginal (incremental) benefit s of a decision with
the marginal (or incremental) costs.
A. Discrete Decisions:
Marginal net benefit = marginal benefit – marginal cost
MNB(Q) = MB(Q) – MC(Q)
The result is in discrete number of quantities (Q).
B. Continuous Decisions

dB(Q)
C. Incremental Decisions MB 
dQ
In the case of yes-or-no decision, dC (Q)
MC 
the additional revenues derived from dQ
a decision are called incremental MNB 
dN (Q)
revenues and additional costs that stem dQ

from the decision are called incremental costs. 11

THANK YOU