REVIEWER IN MANAGERIAL ECONOMICS Basic Needs

REFRESHER IN ECONOMICS -Man’s need for survival

Traditional System 15 year’s old

-Production decisions are made according to -age under the Philippine Labor law who is
customs and traditions. allowed to work.

Command System Opportunity cost

-The system works under the principle that the -The cost for choosing to use resources for one
interest of society should prevail over that purpose to sacrifice the next best alternative for
individual. the use of those resources.

Market System CHAPTER 1-QUIZ

-Market prices served as signals to producers Owned-supplied resources

about what goods to produce and how much of
-Resources owned by a firm
these goods should be produced.
Opportunity cost
Mixed System
-It is what firm’s owner gives up to use
-The economic problems are answered
resources to produces goods or services.
predominantly through the price mechanism
and modified through government intervention. Market Supplied Resource

Household -Resources owned by others and hired, rented

or leased in resources market.
-Basic consuming unit.
Accounting Profit
Land
-total revenue less explicit equal cost.
-Considered the natural resources such as trees,
water, mineral and oil. Strategic Decisions

Labor -Business actions taken to alter market

conditions and behavior of rivals in ways that
-Man’s mental and physical effort exerted in
increase and/or protect the strategic firm’s
production.
profit.
Capital
Risk Premium
-Machines, tools, equipment used in
-An increase in discount rate to compensate
production.
investors for uncertainty in the future.
-Input’s used in production.
Industrial Organization
Entrepreneur
-Provides foundation for understanding
-The brain behind the business. strategic decisions through application of game
theory.
Interest
Value of the Firm
-Price of Capital
-the price on which the firm can be sold, which
equals the present value of the future profits.
Wages Implicit Cost
-Payment made to labor -Non monetary opportunity cost of the owner-
Rent supplied resources.

-Payment for the use of land. Managerial Economics

Macroeconomics -Applies the most useful concepts and theories

from two closely related areas of economics, to
-National income analysis create systematic, logical way of analyzing
Microeconomics business practices or tactics.

-Known as price theory

Perfect Competition
-A large number of relatively small firms sell an
undifferentiated product in a market with no
barriers to the entry of new firms.
Market Structure
-Market characteristics that determine the
economic environment in which a firm
operates.
Price-Taking Firms
A firm that cannot sell the price of the product
it sells, since price of the product is determined
strictly by the market forces of demand and
supply.
Price-setting Firm
-A firm that can raise its price without losing of
its sales.
Total Economic Cost
-Sum of opportunity cost of market supplied
resources plus opportunity cost of owner
supplied resources.
Monopoly
-A single firm, protected by some kind of barrier
to entry, produces a product for which no close
substitutes are available.
Explicit Cost
-Monetary opportunity cost of using market
supplied resources.
Business Practices and Tactics
-Routine/everyday business decision managers
must make to earn the greatest profit under the
greatest profit under prevailing market
conditions facing the firm.
Transaction Cost
-Cost of making a transaction happen, other
that the price of the good or service itself.
Economic Theory
-It helps managers to understand real world
business problems, it uses simplifying
assumptions to turn complexity into relative
simplicity.
CHAPTER 2-QUIZ
Floor Price
-The minimum price the government permits
seller to charge for a good. When the price is
above equilibrium, a surplus occurs.
Technology
-The state of knowledge concerning the
combination of resources to produce goods and
services.
Change in Quantity Supplied
-A movement along a given supply curve that
occurs when the price of good changes.
Shortage
-Exists when the quantity demanded exceeds
quantity supplied.
Direct Demand Function
-A table, a graph, or an equation that shows
how quantity demanded is related to produce
price, holding constant the five other variables
that influence demand.
Substitutes in Production
-Goods in which an increase in the price of one
good relative to the price of another good
causes producers to increase production of the
now higher priced goods and decrease
production of other good.
Quantity supplied
-The amount of a good or service offered for a
sale during a given period of time (week,
month, etc.)
Economic Value
The maximum amount of any buyer in the
market is willing to pay for the unit which is
measured by the demand price for the unit of
the good.
Substitutes
-An increase (decrease) in the price of one of
the goods causes consumers to demand more
(less) of the other good, holding all other
factors constant.
Complements in production
-Goods on which an increase in the price of one
good, relative to the price of another good,
causes producers to increase production for
both goods.
Ceiling Price
-The maximum price the seller to charge for a
good. When the price is below equilibrium, a
shortage occurs.
Producer Surplus
-For each unit supplied, the difference between
market price and the minimum price producers
would accept to supply the unit. (its supplies
price)
Market Equilibrium
-A situation in which at the prevailing price
consumers can buy all of the good they wish
and producers can sell all of the good they wish.
Demand Curve
-A graph showing the relation between quantity
demanded and price when all other variables
influencing quantity demanded are held
constant.
Social Surplus
-The sum of consumer surplus and producer
surplus, which is the area below demand and
above supply over the range of output
produced and consumed.
Intermediate
-Term referring to the unpredictable change in
either equilibrium price or quantity when the
direction of change depends upon the relative
magnitudes of the shifts in demand and supply
curves.
Quantitative Forecast
-A Forecast that predicts both the direction and
the magnitude of the change in economic
variable.
Quantity Demanded
-the amount of good or services are willing and
able to purchase during a given period of time
(week, month, etc.)
Market Clearing Clearance
-The price of a good at which buyers can
purchase all they want and sellers can sell all
they want at that price.
Complements
-An increase (decrease) in the price of one of
the goods causes consumers to demand less
(more) of the other good, all other things held
constant.
CHAPTER 3
Maximization problem
An optimization problem that involves
maximizing the objective function.
Minimization problem
An optimization problem that involves
minimizing the objective function.
Unconstrained optimization
An optimization problem in which the decision
maker can choose the level of activity from an
unrestricted set of values
Ex., profit maximization in the long-run
Constrained optimization
An optimization problem in which the decision
maker chooses values for the choice variables
from a restricted set of values.
Ex. optimal combination of capital and labor
given a cost constraint
Continuous variables
Can choose from uninterrupted span of
variables
Discrete variables
Must choose from a span of variables that is
interrupted by gaps.
Marginal benefit (MB)
Change in total benefit (TB) caused by an
incremental change in the level of the activity
Marginal cost (MC)
Change in total cost (TC) caused by an
incremental change in the level of the activity.
Marginal variables
measure rates of change in corresponding total
variables
Marginal benefit & marginal cost
are also slopes of total benefit & total cost
curves, respectively
If marginal benefit > marginal cost
Activity should be increased to reach highest
net benefit
If marginal cost > marginal benefit
Activity should be decreased to reach highest
net benefit
Optimal level of activity
When no further increases in net benefit are
possible.
Sunk costs
Previously paid & cannot be recovered
Fixed costs

Constant & must be paid no matter the level of

activity

Average (or unit) costs

Computed by dividing total cost by the number

of units of the activity.

Typical constrained maximization problem:

 Multiple beneficial activities

 Constraint on the total resources
available. The resources must be
allocated efficiently among the
activities.
 Scarce resources must be allocated
among various activities so as to
maximize total benefit

Ratio MB/P

-represents the additional benefit per additional

dollar spent on the activity

-Ratios of marginal benefits to prices of various

activities are used to allocate a fixed number of
dollars among activities

STEPS IN DECISION PROCESS:

1. Calculate marginal benefit of additional

resources for all activities.
2. Calculate marginal benefit from last
dollar spent on resources devoted to
each activity.
3. Allocate each additional dollar of the
resource to the activity that provides
the greatest additional benefit