Module for

Managerial
Economics
Students Name:

Year & Section:

SY & Semester:

Prepared by: John Pius Mailes D.C. Donado

 BULACAN STATE UNIVERSITY
College of Business Administration
City of Malolos, Bulacan

Course Title : Managerial Economics

Course Code :
Course Credit : 3 Units

LEARNING MODULE FOR THE

SUBJECT MANAGERIAL ECONOMICS

Within this module will be discussed the study of the application of economic principles and
methodologies in making managerial decisions within organizations. Managerial Economics makes
use of economic theories as tools on how managers deal with issues and decisions in an
organization.

Learning Objectives:

After students have completed this module, the student should be able to:
1. Discuss the various theories and methods on Managerial Economics
2. Develop a greater knowledge of the types of problems faced by a manager in an organization
3. Discuss how managers make their decisions using economic principles and methods
4. Discuss the various business strategies and government policies founded on economic principles

Learning Output:
The student is expected to be able to have concrete and substantial knowledge on how to
apply economic theories and methodologies for efficiently making managerial decisions. The
students are expected to discern how various techniques in economics would fit in performing
different managerial functions.

Units for Discussion are:

1. Application of Microeconomic Concepts in Management
2. Analysis of Production and Cost
3. External factors Affecting Managerial Decisions

1
 UNIT 1: APPLICATION OF MICROECONOMIC CONCEPTS IN MANAGEMENT

Learning Objectives:

After students have successfully completed this module, the student should be able to:
1. Develop a greater knowledge of demand and supply analysis
2. Discuss the relevance of elasticities in making managerial decisions.
3. Develop models that define the relationship between buyers and sellers in a particular market.

Learning Output:
The student is expected to be able to have concrete and substantial knowledge on how to
apply microeconomic theories to situations faced by managers when making decisions.

Lesson 1: Introduction to Managerial Economics

Faithful to its discipline, Managerial Economics indoctrinates efficiency to make ends meet when
dealing with scarcity. While scarcity may be perceived in a lot of ways, in this subject, we will focus
on limitations manager face when making decisions and how economics presents myriad of
methods on how can managers analyze and walk through constraints to reach individual and
organizational goals.

Topics:
• What is Economics?
• What is Managerial Economics?
• Managerial Economics in Deciciosn Making
• Net Present Value

Duration: 3 hours

Pre-Test
Multiple Choice:

1. The study of how societies use scarce resources to produce valuable

goods and services and distribute them among different individuals
for consumption.
A) Management C) Entrepreneurship
B) Economics D) Marketing

2. The study of individual behavior of household, firms and market:

A) Economics B) Microeconomics
C) Macroeconomics D) Entrepreneurship

2
What is Managerial Economics?
• Managerial economics refers to the application of economic theory and the tools of
analysis of decision science to examine how an organisation can achieve its objectives
most effectively (Salvatore)
• Managerial economics is the study of the allocation of scarce resources available to a
firm or other unit of management among the activities of that unit (Haynes, et. al.)

Having knowledge in managerial economics can help managers make decisions on pricing,
production process, and decisions on the volume of output. The person who manage a whole
organization or a single unit has power to decide on how resources, such as labor, tasks, raw
materials, etc., may be used for investments. Economic concepts geared towards efficient use of
resources are required competencies for managers to achieve goals of the organization.

How does economics actually fit in the managerial decision-making?

Since economics teaches us to efficiently manage resources to overcome constraints.

Decision-making starts from identifying goals, and in the lens of an economist, identifying goals also
entails identifying the constraints and the incentives an organization may gain given its limitations.

Economic
Theories and Business
Goals methodologies + Decisions
Decision Sciences

Understanding incentives may affect the decision-making abilities of managers. In

economics, the concept of incentives is a very crucial topic. Since the management strives to
maximize the firm’s profits it is inclined to take into consideration the economic profit which is
derived by including the opportunity cost as the basis of decision-making.

Every investment decision made means there are alternatives forgone. The cost of forgone
alternatives is what we call the opportunity cost. In reality, firms, just like any individual have limited
resources and have multitude opportunities for them to allot their investments in to. For example a
firm is planning to buy a new machine to improve the performance of its current machine. The
machine would cost the firm Php. 500,000.00 and would earn them revenues for the next five years.
But, if the money was used to invest in other ventures, it would 5% interest rate. Should the firm
spend Php. 500,000.00 or just use the money in another investment? The table below shows the
amount that will be earned by the firm using the new machine for the next five years:

3
 Year Amount
in Php
1 150,000
2 100,000
3 95,000
4 95,000
5 75,000

This is just an example of opportunity cost. You two options to spent a particular amount of
resource and you have to make sure that the option the firm have chosen will give them better
earnings than the option forgone. To solve this problem, we would have to use the net present value
(NPV).
Below is the formula for the NPV:

𝐶𝐹
𝑁𝑃𝑣 = ∑
(1 + 𝑟)𝑡
CF = Cash Flow
R = Interest rate
t = Time

Since the NPV is negative, it only means that the firm would earn more if it just used Php. 500,000.00
to engage in another investment instead of buying a new machine.

Amount Present
Year
in Php Value
0 -500,000
1 150,000 142,857.14
2 100,000 90,702.95
3 95,000 82,064.57
4 95,000 78,156.74
5 75,000 58,764.46
NPV = -47,454

This is just a glimpse of how economic concepts can be used to reinforce managerial
functions. In the next lessons to come we will learn to utilize economic tools in more ways than just
simple investment decisions.
References:

1. Wilkinson (2005). Managerial Economics: A Problem Solving Approach, Cambridge

University Press

2. Baye (2010). Managerial Economics: A Problem Solving Approach, McGraw-Hill

4
 Post Test 1

Problem Solving:
Firm X plans to engage in an investment A that will cost the firm Php. 300,000.00 and would earn them
revenues for the next five years. But, if the money was used to invest in other ventures, it would 5% interest
rate. Should the firm spend Php. 300,000.00 or just leave the money in the bank? The table below shows the
amount that will be earned by the firm using the new machine for the next five years:

Year Amount
in Php
1 60,000
2 70,000
3 80,000
4 90,000
5 90,000

5
Lesson 2: Demand and Supply Analysis

Perceived as rudimentary economic concepts, the realm of demand and supply analysis represent how the
interest of consumers and producers interact in the market, in a fashion that emphasize the importance of
price to keep both market players in check. This topic requires its learners to understand that the concepts
of demand and supply are nothing but mere representation of our behavior towards satisfaction of our needs
or wants, and how it relates to the conditions surrounding institutions or agents who took action to achieve
their agenda, whether earning profit or public service, by bringing commodities and services available at
certain price levels, to satisfy needs and wants.

Topics:
Law of Demand
Demand Shifters
Demand Analysis
Law of Supply
Supply Shifters
Supply Analysis
Market
Market Price Analysis

Duration: 9 hours

Pre-Test 2:
Determine what will happen to quantity demanded in the following situations:
1. Decrease in Price
a) Demand will increase
b) Demand will decrease

2. Increase in Price
a) Demand will increase
b) Demand will decrease

3. Which of the following is Surplus?

a) Demand < Supply
b) Demand > Supply
c) Demand = Supply

6
What is Demand?
The relationship between price and the quantity consumers are willing and able to buy, all
things held constant. The law of demand defines the relationship between quantity demand and
price.

Law of Demand
• States that, assuming all things are equal, the quantity demanded has an inverse relationship
with price
• As price increases, quantity demanded decreases and vice versa.

The law of demand reflects how consumers behave to changes in price. This concept is evident in
our everyday lives. Whenever we purchase commodities to satisfy our needs or wants, we tend to
choose products with lower prices.

Theories that explain the negative relationship between quantity demand and price:

Income Effect
States that people curb their consumption whenever the price of a good increases because their
current income will not allow them to spend more money from their saving or money allotted for
buying other goods. People have the opposite reaction when price of a good drops. The purchasing
power of their current income increases so they can buy more without having to spend more than
what they are already spending for buying the good.

This theory is evident whenever prices of goods with no substitute changes. For example, when
price of electricity increases, resulting to an decrease in the quantity demand of electricity. people
tend to lessen their electricity consumption and when the price of electricity decreases, they tend
to use electricity more often resulting to an increase in the quantity demand of electricity.

Substitute Effect
This theory explains the negative relationship of quantity demanded and price for goods with
substitutes. Whenever the price of a good increases, there are some of its consumers who would
shift their consumption to substitute goods, but if the price of a good decreases even consumers of
substitutes might shift their consumption towards the good that dropped its price.

Consumers of substitute goods such as pork, beef and poultry display the behavior stated by this
theory. When the price of pork increases, its consumers might shift their consumption towards, beef
or poultry resulting to a decrease in the quantity demand of pork. However, if the price of pork
decreases, consumer of beef and poultry might shift their consumption to pork resulting to an
increase in the quantity demand of pork.

To provide further understanding, let us make use of demand curve and demand schedule to aid us
in illustrating the law of demand.

The table below showing the corresponding quantity demand per price level is called demand
schedule.

7
 P Qd
1 50
2 40
3 30
4 20
5 10

To illustrate the relationship between the price and quantity demand shown by the demand
schedule, we will also show below the graphical relationship between price and quantity demand,
known as the demand curve.

Qd

The demand curve is downward sloping due to the negative relationship between price and
quantity demand. As shown by the graph, the quantity demand gets higher as price level drops.

When price drops from Php 4.00 to Php. 2.00, the quantity demand changed from 20 to 40.

Qd

Most of the time, demand curve is depicted in a linear fashion, which is why the demand function,
an equation showing the price and quantity demand relationship, is also expressed in negative linear
8
equation. Demand functions are necessary tools especially for decision making. It can provide an
estimate amount of quantity demanded at a given price level.

Below is an example of a demand function:

Qd = 8 – 2P

Let us imagine demand equation above is the function for the quantity demand of Product X. Using
the demand function above we can estimate the quantity demand for Product X if the price is Php
2.00.
Qd = 8 – 2 (2)
Qd = 8 – 4
Qd = 4
With the use of the demand function, we have estimated that the quantity demand is 4 when the
price of Product X is Php. 2.00.

Although the law of demand pertains to the relationship of price and quantity demanded, it does
not mean that quantity demand will only change in response to price changes. When quantity
demand changes in response to changes in price, we call this change in quantity demand. However,
there are other factors that may cause demand to change. When demand changes due to factors
other than price, we call this a change or shift in demand.

What are the factors that may cause Shift in Demand?

Consumer Income
Changes in consumer income will definitely change the capacity of consumers to buy more or less.
The way how changes in consumer income affects the demand of a particular good depends on the
kind of good. In relation to income, we have to kinds of goods, to wit Inferior and Normal goods.

• Normal Goods
Typical goods bought by consumers that have a positive relationship with income. If income
of consumers increases, demand of normal good will also increase and vice versa. A good
example of this good are IPhones. When people have high income, a lot of people can afford
to buy IPhones so the demand of IPhones will definitely increase. If people have low income
people will opt to buy other phone which cost less.

• Inferior Goods
Goods bought by consumers when they are low on income. These goods have negative
relationship with income. If income of consumers increases, demand of normal good will
also decrease and vice versa. Imitation products are the best example for these types of
goods. People only buy imitation products because they have low purchasing power, but if
their income gets higher, less people will buy these imitation products.

Price of Related Goods

There are two kinds of related goods that may affect the demand of a product.

9
 • Complementary Goods
These are goods that are usually consumed together. If the price of the product increases,
its demand will decrease along with the demand of the complementary goods. Therefore,
the price of the complementary goods has a negative relation with a product. A good
example of this is the price of coffee creamers affecting the consumption of coffee. If price
of creamers increases the demand for creamers will decrease along with the consumption
of coffee because some people might not like to drink coffee without creamers.

• Substitute Goods
As the name itself entails, substitute goods are consumed in exchange of another good. If
the price of a substitute good increases, its demand will decrease because its consumers will
shift their consumption to other products. The demand of a product has a positive
relationship with price of its substitute goods. A good example for this is the relationship of
the price of coffee to the demand of tea. Since coffee is a substitute product of tea, whenever
the price of coffee increases the demand for coffee will decrease and its consumer might
shift their consumption to tea, thus increasing the demand for tea.

Taste or Preference
Taste or preference of consumers dictates the amount of demand a product has. While preference
of people in a particular area may be hard to predict, it can be easily be influenced through various
advertising activities. The amount of advertising efforts exerted by a firm defines the volume of
consumers it might attract. The advertising cost for products usually has a positive relationship with
the demand.

Population
Another factor that affects demand is the population. If population rises, there would be more
potential consumers. The relationship of population and demand is positive.

Other factors
Aside from the factors discussed above, there are also other factors that affect demand of products,
such as consumer expectations, political events, weather, and other special cases.

What happens to demand curve when there is a shift in demand?

When factors that causes shift in demand enters the scene, demand will definitely change but price
will remain the same. To understand this, let us make use of the example demand function given
above. Let us say that we take into account the price of a substitute good.

Let the price of the original good be Px and the price of the substitute good be Py. What would be
the demand if Px remains at PhP 2.00 and Py is Php 3.00?
Qd = 8 – 2Px + 3Py
Qd = 8 – 2 (2) + 3(3)
Qd = 8 – 4 + 9
Qd = 17 - 4
Qd = 13

If you would notice Py is positive. If you wonder why, then the explanation is simple. Price of
substitute goods and demand have positive relationship. If Py is negative, then Py would pertain to
10
price of a complementary good. How would the increase in demand while price remains the same
reflect in the demand curve?

Qd1 Qd2

The graph below shows a shift in demand when demand decreases while its price remains the same.
The demand curve shifted leftward.

Qd2 Qd1

What is Supply?
The relationship between price and the quantity firms / producers are willing and able to sell, all things
held constant

Law of Quantity Supply

• States that, assuming all things are equal, the quantity demanded has a positive relationship
with price
• As price increases, quantity supplied also increases and vice versa.

Quantity supply reflects the behavior of firms or producers of goods and services used to satisfy
needs and wants. Firms themselves engage into producing goods and services in order to gain
something. Most firms strive to earn profit as an incentive to making goods and services available
for consumers, which is why when a good or service can be sold at a high price, more producers
would like to invest into producing such good or service and offer it to consumers.

The supply schedule and supply curve below illustrate the positive relationship between price and
quantity supply.

11
 P Qd
1 10
2 30
3 40
4 50
5 60

The supply curve is an upward sloping curve indicating that whenever the price increases the
quantity supply would increase as well and vice versa.

Supply Function
Supply function is an equation defining the relationship between price and quantity supply.

Given the supply function, Qs = 2 + 2P, what would be the quantity supply if the price is PhP 3.00?
Qs = 2 + 2 (3)
Qs = 2 + 6
Qs = 8
Same with the demand function, supply function can be used to estimate the quantity supply given
a certain price level. The main difference between demand and supply function is that the supply
function is positive because of its direct relationship of supply with price.

Same as demand, there are factors that may cause shifts in supply.

Prices of Inputs
A change in the prices of inputs can determine the willingness of producers to produce more. Price
of inputs is inversely related to supply because prices of inputs affects production cost. If price of
inputs increases, producers will produce less because of higher cost of production and vice versa.

Production Technology
An improvement in production technology results in to a much more efficient production, which
means more products may be produced using less amount of inputs. Production technology has a
positive relationship with supply.

Number of Firms
As the number of firms producing the same good increase, the more products will be available in
the market. So obviously, the number of firms is directly related with supply.
Substitutes in Production

12
Government Regulation
Government regulations such as incentives and taxes can affect supply. Incentives can help ease the
cost of production which is why it has a positive relationship with supply. Taxes, however, have
negative relationship in supply because as increase in tax imposed, can increase the price of inputs,
thus increasing the cost of production.

Shifts in Supply Curve

An increase in supply will shift the supply curve to the right as shown in the graph below:

Qs1 Qs2
A decrease in supply will shift the supply curve to the left as shown in the graph below:

Qs1 Qs2

Markets

Market is a mechanism. It caters to the interaction between the consumers and producers. Through
markets, the products wherein producers are supposed to allocate their resources into are
determined by its interaction with consumers through markets, leading to efficient use of scarce
resources.

Aside from efficiency on the allocation of resources, the forces of supply and demand may also be
controlled by markets, through price.

To discuss further the interaction of buyers and sellers in the market, let us refer to the graph below:

Let us say that Product X is being sold in the market at the price of Php. 4.00. At this price, there are
lot of interest for producers to invest their resources to produce this product, which is why the
supply of the product is at 40,000. However, consumers think that the price is so high that it only
generated a demand of 20,000 units.

13
 Product X
(expressed in 000)

Surplus

Qd Qs

Since the current price has generated more supply of Product X than its demand, a lot of Products
will not be bought and the resources used to produce the unsold goods are wasted. This situation
in the market wherein demand is less than supply is called surplus.

Now that there are unsold Product X, the firm decided to lower its price to Php. 2.00 in order to
attract customers to buy more Product X. Since the price is now lower, there are lots of consumers
who wants to buy Product X. Due to this development, lower price attracted buyers, but has less
suppliers are inclined to sell Product X. This resulted in a situation in the market called shortage,
wherein quantity demand is greater than the quantity supplied. Again there is no efficiency in this
situation because there are needs and wants that are left unsatisfied because less resources are
used to produce Product X.

,
Shortage

Qs Qd

To Lessen the number of demand and entice more production of Product X, the price was increased
to Php. 3.00. Using this price, efficiency in the allocation of resources was achieved. Php. 3.00 in this
situation is called the Market Price (Market Equilibrium), the price agreed upon by both buyers and
sellers, wherein all supplies are bought by consumers and all needs and wants are satisfied.

14
 Market Price /
Market
Equilibrium

Using demand and supply function, we can also determine the market price. Since market price is a
price where demand is equals the supply, then equilibrium is Qd = Qs. With the demand function
Qd = 12 – 2P, and supply function at Qs = 2 + 3P, we solve for the market price as shown below:

Qd = Qs
12 – 2P = 2 + 3P
3P + 2P = 12 – 2
5P = 10
P=2

To check if we got the correct market price, just substitute the derived P in the given demand and
supply functions.

For demand function:

Qd = 12 – 2 (2)
Qd = 12 – 4
Qd = 8

For supply function:

Qs = 2 + 3P
Qs = 2 + 3(2)
Qs = 2 + 6
Qs = 8

Since we derived 8 quantity demand and supply, by substituting the derived P in both demand and
supply function, then Php. 2.00 is the market price.

Changes in Market Price

Demand and Supply shifters might affect the current market price. Since market price is the
equilibrium between demand and supply, then if any of the demand or supply changes, then it
would create an imbalance between the market forces and a new market equilibrium shall emerge.
For example. Let us say that the due to the entry of foreign competitors, supply shifted to the right.

15
Because of this new development in the market, using the same price, wherein Qd and Qs are
previously equal, there is now surplus because of the additional supply. In order to lessen the
supply and encourage more consumers to buy, price will be lowered to derive the new market
price.

The movement in the market price reflects the all the things we have learned in this lesson. We have
learned the relationship between price and demand, as well as the relationship between price and
supply. In addition, we also learned the interaction between demand and supply in the market. In
the next lessons to come, there would be more topics to discuss how behavior of consumers and
firms are analyzed.

References:

1. Wilkinson (2005). Managerial Economics: A Problem Solving Approach, Cambridge

University Press
2. Baye (2010). Managerial Economics: A Problem Solving Approach, McGraw-Hill

16
 Post Test 2

Name: _________________________ Section: ______ Date: ______

I. Write the CAPITAL LETTER of the correct answer on the space provided.

Dor number 1- 7 refer to the graph below:

1. The price of substitute goods increased.

2. The price of the product increase.

3. The income of consumers of inrerior goods increased.

4. Which among the graph shows shifters increasing the demand?

5. The population increased.

6. The income of consumers of normal goods decreased.

7. The price of complementary goods decreased.

8. Which of the following would cause the demand curve for automobiles to shift to the left?
A. Decrease in income level
B. Increase in price of automobiles
C. Decrease in price of automobiles
D. Increase in population

9.-10. Choose among the following scenario for demand:

A. Increase
B. Shift to the left
C. Shift to the right
D. Decrease

9. The price of mobile phone increased, what will happen to the demand for mobile phones?

10. Ariel who sells rice in Banga, Malolos retained the price of his product even after a new batch families
are relocated to Banga. What will happen to the demand of his product?

11-15.Choose among the following:

A. Shortage
B. Surplus
C. Market price will increase
D. Market price will decrease

11. Which among the following situations in the market will describe an increase of income for inferior
good

12. Which among the following situations in the market will describe an increase of price of raw materials

13. Which among the following situations in the market will describe an increase in the price of the
complementary good
17
14. A situation where demand is less than supply.

15. Which among the following situations in the market will describe an decrease of income for normal
good

18
Lesson 3: Quantitative Demand Analysis

Topics:
Price Elasticity of Demand
Point Elasticity
Cross-Price Elasticity
Income Elasticity
Advertising Elasticity

Duration: 3 hours

The previous lesson taught students what would happen to demand or supply whenever price
changes. But what students did not learn was the quantity at which the demand has changed in
response to changes in prices or changes in shifters.

Pre-Test 3:
Put > or < on the blank to indicate the good that is will be more affected in terms of changes in
quantity demand.

Price Increase on the following:

1. Rice ____ Shirt
2. Electric Consumption ___ Digital watch
3. Gasoline ___ Playstation 4

The previous lesson taught students what would happen to demand or supply whenever
price changes. But what students did not learn was the quantity at which the demand has changed
in response to changes in prices or changes in shifters.

This lesson focuses on the concept of demand elasticity. Elasticity is a measure for the
responsiveness of one variable to another. In the case of price elasticity of demand, it measures
how much demand has changed in response to changes in price.

Below shows the mathematical expression of price elasticity of demand:

0⁄ 𝛥𝑄𝑑
𝑃𝐸𝐷 = 0
0⁄ 𝛥
0 𝑃

𝑄 𝑑2 − 𝑄 𝑑1 𝑃2 − 𝑃1
𝑃𝐸𝐷 = ∕
𝑄𝑑1 𝑃1 ⋅

19
Factors that Affects Elasticity:

Availability of Substitutes
Demand of products with substitutes are usually elastic, which means that its consumers are
responsive to price changes. If the price of a product increased even by the slightest, since
substitutes are available, consumers have more product to shift their consumption to. However, if
a product has little to none substitute, then consumers will be forced to be more tolerant to changes
on price because they have no other product to consume that can provide them with the same
satisfaction. This is the case with electricity, there are almost no alternative to electricity. When
price of electricity increases, consumers tend to retain its level of consumption.

Necessity
Demand of products that are deemed necessary, tend to be more inelastic. Its consumers are not
much responsive to price changes. The best example for this is rice. Since rice is a staple food in this
country, consumers are less likely to react to changes in the price of rice.

Time Horizon
The longer the time period between price changes, the more time the customers have to adjust its
consumption and look for substitutes. It simply means that the longer the gap between changes in
price, the more elastic the demand would be.

The range values derived from the price elasticity of demand may range from Elastic, Inelastic and
Unit Elastic.

Elastic Demand
When the absolute value of price elasticity of demand is greater than one, then the demand is
elastic. It simply means that the consumers of a product are responsive to price changes. A slight
change in price can lead to huge change in demand. Products with substitutes and luxury products
have elastic demands. For example, when the price of a product increased from Php. 2.00 to Php.
3.00, its demand changed from 15 to 5. Using the PED formula above we derived an elasticity of -
1.33. Means that a slight increase in price will result to a huge decrease in demand and vice versa.
When making price decisions, it is better to lower prices for elastic demands, since a lot can be
gained from a slight decrease in price and a huge decrease in demand will result from a slight
increase in price.

The demand curve for elastic demand looks spread to illustrate a slight change in price can lead to
a big change in demand.

20
There are cases when the demand is perfectly elastic. Even a slight change in price leads to zero
demand. There is usually a perfectly elastic demand in a situation wherein there are numerous
sellers of a homogenous good. Whenever sellers of homogenous goods compete, they compete
through price. If one seller decides to increase its price even by just a tiny bit, consumers will buy
the said product from other sellers selling lower prices since there are many competitors and they
are selling the same product.

The demand curve for perfectly elastic demand is a horizontal line since a change in price can lead
to zero demand.

Inelastic Demand
When the absolute value of price elasticity of demand is less than one, then the demand is inelastic.
Consumers of this demand are slightly responsive to price changes just like consumer of products
with no substitutes and necessity products. For example, when the price of a product increased
from Php. 5.00 to Php. 9.00, its demand decreased from 20 to 18. Using the PED formula above we
derived an elasticity of -0.13. Means that even if there is a huge increase in price it will result to only
a slight decrease in demand and vice versa. It is better to increase prices for inelastic demands, since
not much can be gained even from a huge decrease in price while not much decrease in demand
will result even from a huge price hike.

The demand curve for elastic demand looks steep to illustrate a slight responsiveness of demand to
changes in price.

There are cases when the demand is perfectly inelastic. The demand is unresponsive to any changes
in price. The perfect example for this type of demand are maintenance drugs for hypertension. Since
the drug is should be consumed necessarily at controlled amounts, even if the price goes very high,
consumers still needs to consume the amount prescribed by their doctors and they cannot consume
more, so even if its for free, the consumption will remain the same.

21
The demand curve for perfectly elastic demand is a vertical line because consumers are totally
unresponsive to changes in price.

Unit Elastic
A unit elastic or unitary demand is when the percentage change in price is equal to the percentage
change in demand. If the derived value of demand is 1, then it is a unit elastic demand. For example,
when the price of a product increased from Php. 2.00 to Php. 3.00, its demand decreased from 40
to 20. Using the PED formula above we derived an elasticity of -1. It simply means that the increase
in price will result in the same amount of decrease in demand.

Point Elasticity
Point Elasticity is a method used to determine the elasticity of a given price level based on the
demand curve.

𝑄 𝑑2 − 𝑄 𝑑1 𝑃2 − 𝑃1
𝑃𝐸𝐷 = ∕
𝑄𝑑1 𝑃1 ⋅

𝑄2 −𝑄1 𝑃
The PED formula above can be written as: 𝑃𝐸𝐷 = ⋅𝑄
𝑃2 −𝑃1

𝑄2 −𝑄1 𝑦2 −𝑦1 𝑄2−𝑄1

And since resembles the formula for slope: , then can be used to substitute
𝑃2 −𝑃1 𝑥2 −𝑥1 𝑃2 −𝑃1
for slope, so our new PED formula becomes PED = b(P/Qd)
b = slope of the demand function
P = Price
Qd = Quantity demand
A typical demand curve is a linear equation with an intercept and slope. The slope of a demand
function can be used to solve for elasticity of a particular price level.

Example: What would be the elasticity of a product at the price of Php. 2.00 with the demand curve
𝑄 −𝑄 𝑃 𝑄2 −𝑄1
of Qd = 15 – 4Px. Using 𝑃𝐸𝐷 = 𝑃2 −𝑃1 ⋅ 𝑄 , we can substitute the -4 to since -4 is the slope
2 1 𝑃2 −𝑃1
of the given demand curve.

22
So now our price elasticity of demand equation becomes -4 (P/Q). The P was given in the example
as Php. 2.00 and all we have to derive Q by substituting Php. 2.00 to Qd = 15 – 4Px.
b = -4
P=2
Qd = 7
PED = -4 (2/7)
PED = -1.14
Since the PED is greater than one, the demand is elastic when the price is Php. 2.00.

Cross – Price Elasticity

Since there are demand shifters, there are elasticities intended for shifters, and one of which is
cross-price elasticity. Cross-price elasticity measures the responsiveness of consumers to changes
𝑄 ⅆ2 −𝑄 ⅆ 𝑃𝑦
in the price of related goods. The formula for cross-price elasticity is ⋅
𝑃𝑦 2 −𝑃𝑦1 𝑄ⅆ

Income Elasticity
This elasticity measures the responsiveness of consumers to changes in income. The formula for
𝑄 ⅆ2 −𝑄 ⅆ 𝑚
income elasticity is ⋅
𝑚2 −𝑚1 𝑄ⅆ

Advertising Elasticity
Measures the responsiveness of the quantity demand of a specific good to the changes in the
advertising efforts of the firm or the cost of advertising. The formula for advertising elasticity is
𝑄 ⅆ2 −𝑄 ⅆ 𝐴
⋅
𝐴2 −𝐴1 𝑄𝑑
Given the demand equation Qd = 100 – 2Px + 3Py – 1M + 4A, determine the price, cross-price,
income and advertising elasticity given the following: Px = 5, Py = 2, M = 80, and A = 10.

Through substitution given values, Qd is derived as 56.

Price elasticity = -2(5/56) = -2(0.09) = -0.18

Consumers are slightly responsive to changes in price.

Cross-Price elasticity = 3(2/56) = 3(0.04) = 0.11

Consumers are slightly responsive to changes in price of substitute goods.

Income elasticity = -1(80/56) = -1(1.43) = -1.43

Consumers inferior goods are very responsive to changes in income.

Advertising elasticity = 4(10/56) = 4(0.18) = 0.71

Consumers are slightly responsive to changes in advertising efforts of firms.

These concepts quantitively estimate the amount of change in demand due to changes in price and
its shifters. Again, the importance of demand function as a tool to analyze demand is emphazied in
this topic. In the next lesson, there will shed light on how demand functions are derived.

23
References:

1. Wilkinson (2005). Managerial Economics: A Problem Solving Approach, Cambridge

University Press
2. Baye (2010). Managerial Economics: A Problem Solving Approach, McGraw-Hill

24
 Post Test 3

Name: Date: Section:

I. Multiple Choice. Write your answer at the space before the number.

A B C D

1. The consumers of Product X is slightly responsive to price changes. Which among the graph
above illustrates the elasticity of Product X?
2. Firm X lowers the price of its product. Which among the following would make Firm X earn
more revenue?
3. The consumers of Product X do not respond to any price change. Which among the graph
above illustrates the elasticity of Product X?
4. The consumers of Product X will accept no price change. Which is why the Product X will have
no consumers if the price changes. Which among the graph above illustrates the elasticity of
Product X?
5. The consumers of Product X is very responsive to price changes. Which among the graph
above illustrates the elasticity of Product X?
6. Firm X raised its price for its product. Which among the following elasticity would make Firm X
earn more revenues?
7. The demand curve for an individual seller of paint thinner, which is sold homogenously by
numerous sellers? As the price is raised by one seller, no one will buy their product. The
producers would not sell at a lower price because they would not earn profit so the consumers
will not be able to buy thinners at a lower price.
8. Which elasticity fits the consumption of Downy, a fabric conditioner, which is sold with
multiple variants by numerous sellers? If the price is raised, a lot of consumers can switch to
other brands of fabric conditioner. If the price is lowered a lot of consumers from other brands
can switch to Downy.
9. Which elasticity fits the consumption of insulin, a maintenance drug for diabetes? Even as the
price is raised or lowered, the consumption will not change because consumers will only buy
the amount that is prescribed by their doctors.
10. Which of the following graphs illustrates the consumption of LPG, which is necessary for
cooking meals in household and restaurants? The even as the price is raised, the consumers
will not be able to reduce their consumption. When the price lowers, the consumers will not
be able to increase their consumption exponentially more than what is necessary.

11. Which among the following price decision that would increase the revenue of Firm X its
demand changed from 35 to 30 when its price changed from Php. 5.00 to Php 15.00:
a) Increase
b) Decrease
c) No Price Change
d) None of the above

12. Which among the following price decision that would increase the revenue of Firm Y its demand
changed from 30 to 15 when its price changed from Php. 4.00 to Php 5.00:
a) Increase
b) Decrease
25
 c) No Price Change
d) None of the above

13. Which of the following would be the simple demand elasticity of a product whose demand
changed from 69 to 58 when its price changed from Php 2.00 to Php 8.00:
a) -0.14
b) -1.05
c) -1.14
d) -0.05

26
Lesson 4: Demand Estimation
Topics:
Linear Equiation
Ordinary Least Square Regression
Demand Curve

Duration: 3 Hours
Demand estimation can be done in various ways. It is important that investments and production
are aligned with the estimated amount of demand. Even demand functions do not magically appear
as equations with random numbers and coefficients. This lesson will focus on model specification
for demand since it is relative to previous lessons which make use of demand function.

Pre Test 4:
Answer the Following:
y = a + bx

1. Which of the variable is the dependent variable? __

2. Which of the variable is the independent variable? __
3. Which of the variable is the intercept? __
4. Which of the variable is the slope? __

In this lesson, you will learn how demand functions came to be. The demand schedule will be the
basis for deriving the demand function using the Ordinary Least Square (OLS) or simply called, simple
regression analysis. The regression analysis would result to a linear equation which would define
the relationship between price and quantity demand and enable us to estimate quantity demand
per price level and construct a demand curve. Below is a sample demand schedule of a firm.

Qd P
2,815 51
2,215 55
2,915 53
3,110 48
3,241 46
3,290 42
3,311 44
3,310 44
3,320 43
3,370 40
3,382 39

27
The regression analysis examines the type of relationship between variables. Below is a linear
equation:
Y = a + bX

Y = The dependent variable. The variable whose value is derived by the equation. The value of this
variable is dependent on the value of independent variable. In the case of demand equation, this is
the Quantity demand.

X = The dependent variable. The stand-alone variable whose value affects the value of the
dependent variable. In the case of the demand function, it is the Price.

a = The intercept is the value of Y when X is zero.

b = The slope. The rate at which Y would change, every time a unit of X changes.

In order to derive the demand schedule, all that is needed is to compute for the value of the
intercept and slope using the demand schedule above and the formula for intercept and slope
below:
𝑛𝛴𝑥𝑦 − ∑𝑥∑𝑦
𝑏=
𝑛𝛴𝑥 2 − (𝛴𝑥 )2
∑𝑦 ∑𝑥
𝑎= −𝑏
𝑛 𝑛
Let us first solve for slope. In order to lessen the burden of deriving the value of slope, let us first
determine n, ∑xy, ∑x, ∑y and ∑x2. The variable ‘n’ is the number of samples used in the study. In this
case, there are 11 so n = 11. In statistics, we have learned that ∑ simple means summation, so for
∑xy, we just have to multiply each X to its corresponding Y. As mentioned above, X is our
independent variable and, in this situation, X is price and our independent variable Y is dependent
variable. So, we will multiply Each Price to its corresponding demand then we would add them. The
same can be done for ∑x2 . we need to derive the square value of price, then add them all. For ∑x
and ∑y, we simply have to add all demand to get the value for ∑y, and add all price to get the value
for ∑x.
Qd P x2 xy
2,815 51 2,601 143,565
2,215 55 3,025 121,825
2,915 53 2,809 154,495
3,110 48 2,304 149,280
3,241 46 2,116 149,086
3,290 42 1,764 138,180
3,311 44 1,936 145,684
3,310 44 1,936 145,640
3,320 43 1,849 142,760
3,370 40 1,600 134,800
3,382 39 1,521 131,898
∑y = 34,279 ∑x = 505 ∑x2 = 23,461 ∑xy = 1,557,213
28
b = (11*1,557,213) – (505 * 34,279) / (11*23,461) – (505)2 .
b = -59.6

We can now use the slope derived to solve for the intercept.

a = (34,279/11) – (-59.6 *(505/11))

a = 5,852.61

The demand function is: Qd = 5,852.61 - 59.6P

This topic has provided us the answers as to why demand functions are used for demand estimation
and gave us an idea about its role one the market analysis. The next topic will focus more on
concepts that can help in efficient production and will focus more on the side of decision makers in
resource allocation for production.

References:

1. Wilkinson (2005). Managerial Economics: A Problem Solving Approach, Cambridge

University Press
2. Baye (2010). Managerial Economics: A Problem Solving Approach, McGraw-Hill

29
 Post Test 4

Problem Solving

The table below is the demand schedule from Product X. What will be the demand for Product X if
the product was raised to Php. 200.00?
P Qd
127 4215
129 4230
134 4200
139 4180
147 4107
151 4089
160 4000
168 3962
172 3901
180 3815

30
 COURSE SYLLABUS
MANAGERIAL
ECONOMICS
1ST Semester, AY 2020-2021

COLLEGE: COLLEGE OF BUSINESS ADMINISTRATION

DEPARTMENT: BUSINESS MANAGEMENT

COURSE CODE:

COURSE TITLE: MANAGERIAL ECONOMICS

CREDIT UNITS: 3 UNITS

PRE-REQUISITE:

FACULTY: JOHN PIUS MAILES D.C. DONADO

CONSULTATION HOURS:

COURSE DESCRIPTION:

The course provides an in-depth study of the application of economic principles and
methodologies in making managerial decisions within organizations. Managerial
Economics makes use economic theories as tools on how managers deal with issues and
decisions in an organization.

University Vision

Bulacan State University is a progressive knowledge-generating institution,

globally-recognized for excellent instruction, pioneering research, and responsive
community engagements.

University Mission

Bulacan State University exists to produce highly competent, ethical and service-
oriented professionals that contribute to the sustainable socio-economic growth and
development of the nation

31
 Core Values: SOAR BulSU!

Service to God and Community

Order and Peace
Assurance of Quality and Accountability
Respect and Responsibility
The BulSU Ideal Graduates Attributes (BIG A) reflect the graduate’s capacity as:
a. highly and globally competent;
b. ethical and service-oriented citizen;
c. analytical and critical thinker; and
d. reflective life-long learner.

Program Educational Objectives (PEO)

Program Educational Objectives (PEO) University Mission

AIG-a AIG-b AIG-c AIG-d

32
 Program Outcomes (PO)

The table below shows the expectation for students who have completed this course:

Program Educational Objectives

PROGRAM OUTCOMES
PEO PEO PEO
1 2 3
Utilize techniques necessary for the
quantitative analysis of market
forces.
Identify and analyze stages of
production.
Formulate recommendations and
strategies based on the
environment of firms.

Course Outcomes and Relationship to Program Outcomes

Course Outcomes Program Outcomes

After completing this course, the student must be able to: a b C

LO1. Apply microeconomic theories to situations faced by

managers when making decisions.

LO2. Analyze movements in market forces in the relationship of

buyers and sellers in a various market.

LO3. Develop strategies and formulate recommendations that

will respond to movement in factors causing shifts in market
forces.

LO4. Analyze the relationship of inputs and its associated cost and the
ability to analyze production during short-run and long-run.

LO5. Apply methodologies and techniques for decision-making during

short-run and long-run production.

LO6. Acquire knowledge on how to manage other factors/ that affects

production.

LO7. Understand how external elements affects the behavior of firms

and dictate performance of firms.

Note: (I) Introductory Course to an Outcome (E) Enabling Course to an Outcome (D) Demonstrative Course to an
Outcome

33
LEARNING EPISODES:

Learning
Outcomes TOPIC Week Learning Activities

LO1 Introduction to Managerial

1 Synchronous Discussion
Economics
Online Exercise
Break out Session
Asynchronous Learning
Asynchronous Activities
LO1 Demand and Supply 2-4
LO2 Synchronous Discussion
Analysis
LO3
Online Exercise
Break Out Sessions
Asynchronous Learning

Asynchronous Activities
Quantitative Demand 5
LO1 Asynchronous Learning
LO2 Analysis
LO3 Asynchronous Activities
LO1 Demand Estimation 6
LO3 Synchronous Discussion
Break out Session

Asynchronous Activities
Midterms

LO1 Production Analysis 7-8

LO4 Synchronous Discussion
Break out Session

Asynchronous Activities
LO1 Cost Analysis 9
LO4 Synchronous Discussion
LO5
Break out Session

Asynchronous Activities
LO6 Other Factors 10
Affecting Managerial Asynchronous Learning
Decision
Asynchronous Activities
LO1 Market Structure 11-12
LO2 Synchronous Discussion
LO3
LO7
Online Exercise
Break out Session
Asynchronous Learning

Asynchronous Activities
34
LO6 Industry Analysis 13 -14
LO7 Asynchronous Learning

Asynchronous Activities
LO1 Role of Government in 15
LO6 the Economy Asynchronous Learning
LO7
Asynchronous Activities
Finals

35
FINAL COURSE OUTPUT:RESEARCH PAPER

RUBRIC FOR ASSESSMENT:

OTHER REQUIREMENTS AND ASSESSMENTS:

GRADING SYSTEM:
Term Examinations 30%
Quizzes/Activities 20%
Project 30%
Participation/Recitation 10%
Attendance/ Promptness 10%
TOTAL 100%
Final Grade = Midterm Grade + Tentative Final Grade Period

Range Grad
e
97-100 1.00

94 – 96 1.25

91 – 93 1.50

88 – 90 1.75

85 – 87 2.00

82 – 84 2.25

79 – 81 2.50

76 – 78 2.75

75 3.00

74 and 5.00
below

36
 References:

3. Wilkinson (2005). Managerial Economics: A Problem Solving Approach, Cambridge

University Press

4. Baye (2010). Managerial Economics: A Problem Solving Approach, McGraw-Hill

Online Resources:
https://www.cambridge.org/core/books/managerialeconomics/FF6133FA445BF3848C4CD7EADC3
1CA03

https://www.academia.edu/35152230/Managerial_economics_and_business_strategy_7th_edition
_Baye

Class Policies:

The students’ listed in the master list from the MIS office shall be permitted to attend
the class.

1. Enrolled students must go to the class promptly. Must come to each class prepared.
2. Students are expected to take all examinations on the date scheduled and participate
actively in the discussion as well as the different activities involved on the subject and the
college as well.
3. Cheating is equivalent to lower grade to a failing grade in the subject. (see Student
Handbook pp. 40)
4. Requirements eg. project, term paper, case study etc. which not submitted on or before
the due date will no longer be accepted.
5. The use of electronic gadgets like cell phones, tablets, laptops, mp3, etc. are not allowed
during class hours unless needed.
6. Sit in students may attend the class upon the approval of the subject teacher.
7. Always maintain the cleanliness and orderliness of the room before and after the class.

37
Prepared by:

JOHN PIUS MAILES D.C. DONADO

Teacher

Noted by:

GENEVEVA T. DUNGCA
Head, Economics Department

Approved by:

Dr. EMERLITA S. NAGUIAT

Dean, College of Business Administration

38
Declaration

I have read and understood the above syllabus in full and in participating in this course I agree
to the above rules. I have a clear understanding of the policies and my responsibilities, and I
have discussed everything unclear to me with the instructor.

I will adhere to the academic integrity and policy and I will treat my fellow students and my
teacher with due respect.

I understand that this syllabus can be modified or overruled by announcements of the

instructor in class or on any social media site at any time

Student’s Printed name Signature Date

Parent’s Printed name Signature Date

Student’s Copy

-------------------------------------------------------Cut here----------------------------------------------------------

Declaration

I have read and understood the above syllabus in full and in participating in this course I agree
to the above rules. I have a clear understanding of the policies and my responsibilities, and I
have discussed everything unclear to me with the instructor.

I will adhere to the academic integrity and policy and I will treat my fellow students and my
teacher with due respect.

I understand that this syllabus can be modified or overruled by announcements of the

instructor in class or on any social media site at any time

Student’s Printed name Signature Date

Parent’s Printed name Signature Date

Instructor's Copy

39
 Republic of the Philippines
BULACAN STATE UNIVERSITY
City of Malolos, Bulacan

GRAMMAR EDITING FORM

_____________
Date
Course Title: _Managerial Economics__

College / Campus: __College of Business Administration, Main Campus_

Module Writer(s):
Sole Author: _ John Pius Mailes D.C. Donado (maincampus)

Initial Grammar Report:

Percentage of Correct Grammar: __________
Name of College / Campus Librarian: ___________________________
Signature: ______________________
Date: ___________________

CERTIFICATION

I/We certify that the Course Module had undergone grammar editing on ___________.

Name & Signature of Editor(s):

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Witness:
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Date: __________________

Note:
40
• The Sole Author/Team Leader shall fill out this Form and give to the Grammar Editor(s)
along with the hard copies or soft copies of the Module. Once the editing is done, the
Grammar Editor(s) shall fill out the Certification of Editing and return this form to the
Author/ Team Leader with the corrected manuscript.
• The Author / Team Leader shall submit the final copy of the Module (both soft and hard
copies) attached with this Form to the Chairman of Instructional Committee.
• The Chairman of Instructional Committee shall keep this Form as Basis of the
Grammar Editor(s) Honorarium(a).

Republic of the Philippines

BULACAN STATE UNIVERSITY
City of Malolos, Bulacan

CONTENTS EDITING FORM

September 26, 2020

Date
Course Title: _Managerial Economics__

College / Campus: __College of Business Administration, Main Campus_

Module Writer(s):
Sole Author: _ John Pius Mailes D.C. Donado (maincampus)

Plagiarism Report:
Similarity Percent: __________
Name of College / Campus Librarian: ___________________________
Signature: ______________________
Date: ___________________

CERTIFICATION

I/We certify that the Course Module had undergone contents editing on _9/25-26/2020_.

Name & Signature of Editor(s):

41
 9-26-2020
_________ELIZABETH A. CHUA, Ph.D._________

______________________________ ______________________________

Witness:
Module Writer/Team Leader: _________________________
Date: __________________

Note:
• The Sole Author/Team Leader shall fill out this Form and give to the Grammar Editor(s)
along with the hard copies or soft copies of the Module. Once the editing is done, the
Content Editor(s) shall fill out the Certification of Editing and return this form to the
Author/ Team Leader with the corrected manuscript.
• The Author / Team Leader shall submit the final copy of the Module (both soft and hard
copies) attached with this Form to the Chairman of Instructional Committee.
• The Chairman of Instructional Committee shall keep this Form as Basis of the Content
Editor(s) Honorarium(a).

42