MANAGERIAL ECONOMICS
economic theory and decision science
 Module Discussion is divided to two
o Theoretical
o Mathematical (Formulas) – Eto ‘yung
id-discuss talaga ni sir
 Module Discussion
o 1st part ng module – asynchronous
o 2nd part – si sir
 Module Assignment
o We will be grouped into 5 members
(Group 4)
o Instructions
 Submission: One per group
o August 28
 Grading System
o Quiz: Add all then divide by number of
quizzes (Average)
 Applies also to module
assignments
o Attendance adds points (if perfect ka
dito, 20 points sa module assignment)
o Recitation – Sir will call at least 5
students
 5% of the grade
o Module Assignment – 15% of grade
o Final Examination – 40%
o Performance Tasks – 40% (?)
o Module 1 Quiz – September 1 (?)
Fundamentals of Managerial Economics
 Economics
o science of making decisions in the
presence of scarce resources
o Resources – anything used to produce
a good/service/to achieve a goal
o Decisions – essential since scarcity
implies trade-offs
 Managerial Economics
o Economics applied in decision-making
o Branch of economics that applies
methodology
 Manager
o Direct resources to achieve goals
o Directs the efforts of others
o Purchases inputs used in the production
of the firm’s output
o Directs the product price/quality
decisions
Economics of Effective Management
o 6 Basic Principles Comprising Effective
Management
 Identify goals and constraints
 Sound decisions are made through
underlying goals
 Different goals = Different
decisions
 Different units within a firm may
be given different goals
 Example
 Marketing department use
their resources to maximize
sales/market share
 Finance Department might
focus on earning growth/risk
reduction strategies
 Constraints make achieving goals
difficult for managers
 Example of constraints
 Available technology
 Availability of capital
 Labor and the price
inputs used in production
 Recognize the nature and importance
of profits
 Effective managers do this
 profits are a signal to resource
holders where resources are most
highly valued by society
 A firm meets the needs of society
by pursuing its self-interest the
goal of maximizing profits (Adam
Smith)
  Induces new firms to enter the producer negotiates high
market where economic price
profits are available  Consumers and
 More firms enter the industry producers attempt to rip
= market price falls and off each other
economic profits declines  Consumer-consumer rivalry
 Arises because of the
Accounting Total amount of AP = TR –
Profit money taken in from Explicit Costs economic doctrine of
sales (total revenue) scarcity
minus the amount of
cost of producing  Consumers compete with
goods or services. one another for the right
Economic The difference EP = TR - to purchase limited
Profit between total revenue Opportunity
and opportunity cost. Costs
quantities of goods
available
 Producer-producer rivalry
 Firms that offer the best-
Opportunity The explicit cost of a OP = EC + IC quality product at the
Cost resource plus the
implicit cost of giving lowest price earn the
up its best alternative. right to serve the
customers
Note: Explicit costs – wages, rent and cost of
 When two producers
materials; Implicit costs - forgone salary or compete on lower prices
forgone  Government and the market
Ren
 Plays a key role in
 Sample Problems
disciplining the market
process
 When agents on either
side of the market find
themselves
disadvantaged in the
market process, they
frequently attempt to
induce the government to
intervene on their behalf
o Recognize the time value of money
o Use marginal analysis

Five Forces Framework

 Understand incentives  Pioneered by Michael Porter (academician

 Understand markets and management guru)
 Bargaining position of consumers  He explained that this framework can be
and producers is limited by three used to identify
rivalries in economic transactions o State of competition
 Consumer-producer rivalry o Profitability of an industry
 Consumers attempt to
negotiate low prices;
 o High Buyer Power – Buyer is price
sensitive and well-educated about the
product
o High Buyer Power – If substitute
products are available
o High Buyer Bargaining Power – If
buyer purchases large volumes of
standardized products
 Industry Rivalry
 Entry o Sustainability of industry profits also
o Heightens competition, reduces depends on the nature and intensity of
margins of existing firms in a wide rivalry among firms competing in the
variety of industry settings industry
o Factors that affect the ability of entrants o Rivalry is less intense in concentrated
to erode: industries those with relatively few
 Entry costs firms, so sustaining profits are most
 Sunk costs likely higher
 Economies of scale  Threat of Substitutes and Complements
 Network effects o availability of a substitution threat
 Reputation affects the profitability of an industry
 Switching costs because consumers can choose to
 Government restraints purchase the substitute instead of the
o Example industry’s product
o level and sustainability of industry
profits also depend on the price and
value of interrelated products and
services.
o Porter’s five forces framework
emphasized that the presence of close
substitutes erodes industry profitability.

Time Value of Money Marginal Analysis.pdf

 Power of Input Suppliers
o Industry profits tend to be lower when
suppliers have the power to negotiate
favorable terms for their inputs
o Supplier power is low when inputs are
relatively standardized and relationship-
specific investments are minimal, input
markets are not highly concentrated or
alternative inputs are available with
similar marginal productivity
 Power of Buyers
o Industry profits are lower when buyers
have the power to negotiate favorable
terms for the products/services
produced
Market Forces.pdf
 Rules of Differentiation
o A process of finding the derivative of a
function
o Applying a few basic rules or formulas
to a given function
o In explaining the rules of differentiation
for a function such as y = f(x), other
functions such as g = f(x) and h = f(x)
are commonly used, where g and h are
both unspecified function of x and
assumed differentiable
o Kukunin ang slope
 o All constants have a derivative of 0  The derivative of a product
between two functions is equal to
the first function times the
derivative of the second function
plus the second functions times the
 RULES derivative of the first function
o Constant Function Rule

o Linear Function rule

 derivative of a liner function f(x) =
mx + b is equal to m, the
coefficient of x. The derivative of
a variable raised to the first power
is always equal to the coefficient
of the variable, while the
derivative of a constant is zero.
o Quotient Rule
 The derivative of a quotient of two
functions is equal to the
denominator times the derivative
of the numerator, minus the
numerator times the derivative of
the denominator, all divided by the
squared denominator

o Power Function rule

 The derivative of a power
n,
function, f(x) = kx where k is a
constant and n is any real number,
is equal to the coefficient k times
the exponent n, multiplied by the
variable x raised to the (n-1) power

o Rule for Sum and Difference

 The derivative of a sum of two
functions, is equal to the sum of
the derivatives of the individual
functions
 Similarly, the derivative of
difference of two functions is
equal to the difference of the
derivatives of the two functions

o Product Rule