CHAPTER 1: Introduction to Managerial Economics from marketing, production/ operations

management, and finance without understanding the

1.1 What is Managerial Economics? underlying economics, anyone who wants to
Economics - is the study of the production, distribution, understand the why and how behind the technique
and consumption of goods and services. It indicates that needs to appreciate the economic rationale for the
economics includes any business, nonprofit organization, technique.
or administrative unit. (Standard Definition)  We live in a world with scarce resources, which is
why economics is a practical science. We cannot
Economics - is the study of choice related to the have everything we want. Further, others want the
allocation of scarce resources. It establishes that same scarce resources we want.
economics is at the core of what managers of these
organizations do. (Second Definition)  Organizations that provide goods and services will
survive and thrive only if they meet the needs for
Managerial Economics - is a subfield of economics that which they were created and do so effectively.
places special emphasis on the choice aspect in the Organization must create value for their customers,
second definition which presents the economic concepts which is the difference between what they acquire
and principles from its perspective. and what they produce. Those managers who
understand economics have a competitive
Purpose of Managerial Economics advantage in creating value.
 To provide economic terminology and reasoning for
the improvement of managerial decisions.
1.3 Managerial Economics Is Applicable to Different
 To apply economics for the improvement of
Types of Organizations
managerial decisions in an organization. (This is the
reason why most of the subject material in
Business or Firm - the organization providing goods
managerial economics has a microeconomic focus)
and services
- terms that connote a for-profit
Two (2) Different Conceptual Approaches to the
organization
Study of Economics:
Class of Manager - the regulator
Microeconomics - studies phenomena related to goods
and services from the perspective of individual decision-
Managerial Economics - is relevant to nonprofit
making entities—that is, households and businesses.
organizations and government agencies as well as
Microeconomic approach is essential for understanding
conventional, for-profit businesses.
the behavior of atomic entities in an economy.
NOTE: Underlying objective may change based on the
Macroeconomics - approaches the same phenomena at
type of organization, all these organizational types exist
an aggregate level, for example, the total consumption
for the purpose of creating goods or services for
and production of a region. Macroeconomic approach
persons or other organizations.
provides measures and theories to understand the overall
systematic behavior of an economy.
Market Regulation - the economic exchanges that
result from organizations and persons trying to achieve
NOTE: Understanding of how to interpret and forecast
their individual objectives may not result in the best
macroeconomic measures is useful in making
overall pattern of exchange unless there is some
managerial decisions since managers must consider the
regulatory guidance.
state of their environment in making decisions and the
environment includes the overall economy.
Economics - provides a framework for analyzing
1.2 Why Managerial Economics Is Relevant for
regulation, both the effect on decision making by the
Managers
regulated entities and the policy decisions of the
regulator.
 The responsibility for overseeing and making
decisions for these organizations is the role of
CHAPTER 2: Key Measures and Relationships
executives and managers.
 The value of studying applied business disciplines 2.2 Revenue, Cost, and Profit
like marketing, production/ operations management, Revenue - the total monetary value of the goods or
finance, and business strategy. Most managers can services sold. Total amount of money earns from sales
readily describe their role in their organization in over a year.
terms of one or more of those applied subjects.
 Economics provides key terminology and a Cost - the collective expenses incurred to
theoretical foundation. We can apply techniques
generate revenue over a period of time, expressed in
terms of monetary value. the total expense required to
create and sell products and services.
Variable Cost - cost element that is
related to the volume of sales
(sales go up, expenses)
- change based on the
amount of output produced
(labor, commissions and raw
materials)
ex) cost of raw materials
Fixed Cost - largely invariant to the
volume of sales, at least within a
certain range of sales volumes
- remain the same regardless
of production output (lease,
rental, insurance, and interest
payment)
Profit - the difference between the revenue and cost
- subtracting cost from revenue
Loss - when cost exceed revenue, there
is a negative profit
2.3 Economic Versus Accounting Measures of Cost
and Profit
 Accounting Costs
- represent anything your business
has paid for (revenue - expense)
- includes rent, utilities, food,
entertainment, travel, payroll,
salaries, supplies, insurance, and
other expense
 Economic Costs
- represent any “what if” scenarios
for your business (accounting
cost - implicit cost)
- often used by economists to
compare 2 separate courses of
action, looks on the impact each
action would have on a business
Accounting Profit vs. Economic Profit
 Accounting Profit
- is a company’s net earnings units
income statement whereas economic
profit is the value of cash flow that’s
generated above all other opportunity
cost (revenue - expenses = net
income/loss)
- source of revenue - sales of goods and
services, rental income, receipt
of interest
- types of expenses - cost of goods sold,
advertising expenses, travel
taxes
 Economic Profit
- is the money earned after taking explicit
and implicit costs into account
Explicit Cost - a transaction that
has measurable cost to a
firm (business expenses)
ex) purchase of new assets
hiring of workers
purchase of raw materials
Implicit Cost - a decision which
leads to lower income, but
is not recorded on balance
sheet
ex) giving workers a day off will
lead to a drop in sales and
income
Opportunity Cost
- the potential benefits that an individual, investor,
or business misses out on when choosing one
alternative over another
Sunk Cost
- refers to an investment already incurred that
can’t be recovered
Breakeven Point
- the level of production equal the revenues for a
point (no net loss)
Demand Curve
- follow a pattern called law of demand, when
price increases, demand increases; price
decreases, demand increase
- a graphic representation of the relationship
between product price and the quantity of the
product demanded
- shows when consumer’s responsiveness drops
and which price point elicits the highest demand
Margin Analysis
- current level of consumption of production of
goods
- an examination of the additional benefit of an
activity compared to the additional cost incurred
by that same activity
- companies use marginal analysis as a decision-
making tool to help them maximize their
potential (to understand the profitability of
companies)
Margin Revenue
- determines how much a company earns in
revenue for each additional unit sold
- measures the change in revenue in response to a
unit increase in production level or quantity

Margin Cost (Incremental Cost)

- the increase/decrease in the cost of
production/producing one more unit or more
customer
- the change in cost corresponding to a unit
increase In the production level

Profit Margin
- the measurement of a business, product, or
service’s profitability
- measures the change in profit resulting from a
unit increase in the quantity
Shut Down Rule
- in the short run, a firm should continue to
operate if price equals or exceeds average
variable cost
- firms must earn sufficient revenue to cover its
variable cost

Shut Down Point

- the point when the marginal cost curve crosses
the average variable cost curve
- if the firm is below average cost then the firm
should continue producing in the short run, but
exit in the long run