Managerial Economics

Thursday, January 12, 2012

Dr. S. Jain

Managerial economics is the study of how individual firms or consumers do and/or should make economic decisions taking into account such things as:
1. 2. 3. 4. 5. Their goals, incentives, objectives. Their choices, alternatives, problems. Constraints such as inputs, resources, money, time, technology, competition. All (cash & noncash) incremental or marginal benefits and costs. The time value of money.

Thursday, January 12, 2012

Dr. S. Jain

Goals, Incentives, Objectives

A fundamental economic truth is that individual firms or decision makers respond to economic incentives. What these incentives are (i.e. money, profits, utility, etc.) and how they influence economic decision making are key topics for study and analysis in business (or managerial) economics.

Thursday, January 12, 2012

Dr. S. Jain

Managerial Goals (examples)

$ sales, total revenue, gross income, market share Q sales, Q of output, output per unit of input (production efficiency) $ costs, total costs, cost per unit of output (cost efficiency) $ profits, total profits, profit per unit of output

Thursday, January 12, 2012

Dr. S. Jain

Managerial Choices
(examples)

Output quantity Output quality Output mix Output price Marketing and advertising

Production processes (input mix) Input quantity Production location Production incentives Input procurement

Thursday, January 12, 2012

Dr. S. Jain

Marginal Analysis
Analysis of marginal costs and marginal benefits due to a change Marginal = additional or incremental Costs and benefits that are constant (i.e. fixed, don t change) are excluded from the analysis Changes occurring at the margin are all that matter Two important dimensions of change: direction, magnitude

Thursday, January 12, 2012

Dr. S. Jain

Good Economic Decisions

Marginal benefits > marginal costs Examples of marginal benefits: profit revenue cost safety risk Marginal costs = opposite of above examples
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The firm : real world vs economic theory

The real world: an incredible diversity
Size: from corner store to Microsoft Operations: from one outlet to almost all countries Diversity:
from single product (wheat farm) to many (Sony) From one industry to many

Ownership: from sole proprietor to multinational listed company Structure:

from one person operations to multi-department From sole operations (production to sale) to specialisation in manufacturing, wholesale, retail, marketing, consulting
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Economic theory of the firm

Profit maximising behavior:
Seeking highest possible profit given constraints of
Falling price as quantity offered for sale rises Rising costs as quantity offered for sale rises

Falling price as quantity offered for sale rises:

Law of demand : can only sell additional units if price is lowered Mathematically: a negative relationship between price and quantity
To oquantity sold must q price Simple example: linear demand curve P(Q) = a b Q
Thursday, January 12, 2012 Dr. S. Jain 9

Why Managerial Economics?

A powerful analytical engine . A broader perspective on the firm.
what is a firm? what are the firm s overall objectives? what pressures drive the firm towards profit and away from profit

The basis for some of the more rigourous analysis of issues in Marketing and Strategic Management.

Thursday, January 12, 2012

Dr. S. Jain

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