Managerial Economics script

Profit maximization

Introduction
• Generally, profits are the primarily measure of the success of any business.
 Profit maximization is a good thing for a company but can be a bad thing for a
consumer if the company starts to use cheaper products or decides to raise prices.

Important Terms
• . Total Revenues which mean the total amount of money that the firm receives from the
sales of its product or the total amount of money the firm collects in sales.
• Total Cost - It’s the cost of all factors of production.
• Marginal Cost- which means the per-unit cost of your item. Marginal cost is the
additional cost incurred in producing one more unit of output.
• Marginal Revenue- which means the per-unit selling price of your item. Marginal
revenue is the additional revenue earned by selling one more unit of a product.

Short run
 Short Run Profit- In an economic market all production in real time occurs in the short
run. Fixed cost has no impact on a firm’s short run decisions. However variable cost
revenues affect short run profits. In the short run, a firm could potentially increase output
by increasing the amount of the variable factors. An example of a variable factor being
increased would be increasing labor through overtime.
Long Run
In the long run, the firms already in an industry that have sufficient time to either expand
or contract their capacities. The number of firms in the industry may either increase or
decrease as new firms enter or existing firms leave.

Managerial Decisions
 Financing; ex. a decision to open line of credit or to issue a bond.
 Investing; ex. an IT company that decides to invest capital by building a new data
center.
 Strategic; ex. an automotive company that invest in research and development to try to
improve its batteries. This could create a larger competitive advantage.
 Tactical; ex. launching an ad campaign that highlights the reliability of your products
after a competitor has a series of well publicized quality failures in their product.
 Policy decision; ex. A bank that decides to exclude a certain type of house construction
from mortgage eligibility as a matter of policy.

Market Power
So, raise price above its marginal cost. and in this case the ability of a firm to do this
depends on its elasticity of demand. For a firm with an elastic demand curve, this is
when the price goes up and quantity demanded drops proportionally more, its market
power is quite constrained so they don’t have that much market power however when a
firm has an inelastic demand curve it can raise its price and lose proportionately less
customers in which case it has a market power.
 So, move on now to market structures, and market power to large degree determines
the type of market structure that your firm is operating in, so if we look at one extreme
which is oligopoly.
What you have is just a small number of firms doing business as small competitors in a
monopoly. This might be, for example, mobile providers, the airline industry, or
supermarkets where you have certain barriers to entry that block firms from setting up here.
We also have a small number of firms that are interdependent on one another in terms of
pricing. They react to one another in terms of pricing, and soon this gives them a kink in
their demand curve if it’s a competitive oligopoly or a downward-sloping demand curve if
firms operate together. Finally, in this market, market power ranges from a loss in terms of
collusive oligopoly to very little if it is a kink demand curve competitive oligopoly.
Finally, we will move on to the opposite extreme where market power is the highest. This is
called a monopoly market structure, and a monopoly is a market structure with just one
firm or one very dominant firm operating in this market. A one big firm is dominant. The
reason that they are dominant is usually because of large barriers to entry, and in this case,
there are no close substitutes. So, you have a monopoly because you don’t have
competitors in the market or very few. This gives it a downward sloping demand curve.
These firms have the ability to raise prices and reduce their quantity, make the product
scarce, increase their profits, and finally, because of this, they have quite a bit of market
power.
Learner Index
It is measured by the difference between the output price of a firm and the marginal cost
divided by the output price.

Economies of Scale
Internal functions include accounting, information technology, and marketing. Economies
of scale are an important concept for any business in any industry and represent the
cost-savings and competitive advantages larger businesses have over smaller ones.