Managerial economics is a branch of economics catering

to the needs of business and management concepts.

Some important fundamentals of managerial economics are:

o Goals and constraints

o Profits
o Incentives
o Markets
o Time value of money
o Marginal analysis
 Goals and Constraints
 A goal may be to increase profits by 15% in the next fiscal
year or to enter in a new product market.
 Constraints may be: limited hours per day that an employee
can work on or there is only so much money that the
organization may devote to marketing sales and operations.
 The interplay between goals and constraints is the
fundamental concern of managerial economics: how can an
organization maximize the achievement of its goals when
faced with constraints?

Profits
 For most organizations, the ultimate goal is to generate profit from
their business operations.
 Accounting profits are generated when the business brings in more
money than it spends.
 Economic profits on the other hand, take opportunity costs into
account.
 For example, if a business has expenses of P500 and revenues of
P1,000, it has an accounting profit of P500. Using the same, if that
P500 could have generated P1,500 in another investment, there would
be no economic profit. In fact there would be an economic loss of
P500.
Incentives
 an incentive is any factor (financial or non-financial) that enables or
motivates a particular course of action, or counts as a reason for
preferring one choice to the alternatives.
 Incentives drive the behavior of businesses, consumers and
employees. So understanding what incentives are most important to
these groups is essential in driving their behavior.

Markets
 Markets have two general categories of participants: buyers and
sellers. Various factors will influence the relative strength of these
groups and their corresponding influence on the market and prices
within the market.
 For example, in a market dominated by a single seller (a monopoly),
the seller has much greater power than in a market in which there are
numerous sellers selling identical products.

Time Value of Money

 is the value of money figuring in a given amount of interest earned
over a given amount of time.
 Important when making investment decisions and is the fundamental
principal underlying industries such as banking and insurance.
Marginal Analysis
 technique by which very small changes in specific variables are
studied in terms of the effect on related variables and the system as a
whole. Also called as incremental analysis.
 It examines how the costs and benefits change in response to
incremental changes in actions.
 The central question is whether the expected benefits of that action
exceed the added cost.
Demand
 Quantity of a product a consumers are willing and able to buy at
different prices in a specified time period, all other factor being held
and constant
 The law of demand states that, if all other factors remain equal, the
higher the price of a good, the less people will demand that good. In
other words, the higher the price, the lower
  the quantity demanded.

 A,B and C are points on the demand curve. At point A, the quantity
demanded will be Q1 and the price will be P1, and so on.
The demand relationship curve illustrates the negative
relationship between price and quantity demanded. The
higher the price of a good the lower the quantity
demanded (A), and the lower the price, the more the
good will be in demand (C).

Determinants of Demand
factors that affect demand
 Income available to the consumer
 Consumer tastes and preferences
 Prices of related goods and services
 substitute goods
 complimentary goods
 Expectations
 Number of buyers
Supply
 Quantity of a product or service that a producers is willing and able to
sell/supply onto the market at a given price in a given time period, all
other factor being held and constant.
 The law of supply demonstrates the quantities that will be sold at a
certain price. But unlike the law of demand, the supply relationship
shows an upward slope. This means that the higher the price, the
higher the quantity supplied. Producers supply more at a higher price
because selling a higher quantity at a higher price increases revenue.
Determinants of Supply
factors that affect supply
 Changes in production costs
 The technology of production
 Government taxes and subsidies
 Climactic conditions (important for agricultural supply
 Prices of related goods and services
 substitute goods
 complimentary goods
 Firm’s expectations about future prices
 Changes in number of producers/suppliers in the market
Four basic laws of supply and demand:

1. If demand increases and supply remains unchanged then higher

equilibrium price and quantity.

2. If demand decreases and supply remains the same then lower

equilibrium price and quantity.

3. If supply increases and demand remains unchanged then lower

equilibrium price and higher quantity.

4. If supply decreases and demand remains the same then higher

price and lower quantity.
Supply and demand relationship examples
Imagine that a special edition CD of your favorite band is released
for P50. Because the record company's previous analysis showed
that consumers will not demand CDs at a price higher than P50, only
10 CDs were released because the opportunity cost is too high for
suppliers to produce more. If, however, the 10 CDs are demanded
by 20 people, the price will subsequently rise because, according to
the demand relationship, as demand increases, so does the price.
Consequently, the rise in price should prompt more CDs to be
supplied as the supply relationship shows that the higher the price,
the higher the quantity supplied.
If, however, there are 30 CDs produced and demand is still at 20, the
price will not be pushed up because the supply more than
accommodates demand. In fact after the 20 consumers have been
satisfied with their CD purchases, the price of the leftover CDs may
drop as CD producers attempt to sell the remaining ten CDs. The
lower price will then make the CD more available to people who had
previously decided that the opportunity cost of buying the CD at P50
was too high.
 Consumer Surplus

 is the difference between the total amount that consumers are

willing and able to pay for a good or service (indicated by the
demand curve) and the total amount that they actually do pay (i.e.
the market price for the product). The level of consumer surplus is
shown by the area under the demand curve and above the ruling
market price.