Introduction to Managerial Economics - Management Oriented – managerial

economics acts as a tool.

UNIT 1: APPLICATION OF MICROECONOMIC
- Pragmatic – managerial economics is
CONCEPTS IN MANAGEMENT
objective. Fact based. Not biased.
Oiko - family, household, estate
Managerial economics help us in decision
Nomos – law, system of management making.

Oikonomos – household management How does economics actually fit in the

managerial decision-making?
Major Branches of Economics
- Goals
Economics - The study of how societies use - Economic Theories and Methodologies
scarce resources to produce valuable goods and + Decision Sciences
services and distribute them among different - Business Decisions
individuals for consumption.
Opportunity Cost in Managerial Economics
Microeconomics – (specific) the study of
individual behavior of households, firms, and - Opportunity Cost is the foregone
market. benefit that would have been derived
by an option not chosen.
Macroeconomics – study of the economy as a - Opportunity cost of a decision is the
whole. sacrifice of alternatives required by that
decision.
- Opportunity cost represents the
Managerial Economics benefits or revenue foregone by
- The application of economic theory and pursuing one course of action rather
the tools of analysis of decision science than another.
to examine how an organization can
achieve its objectives most effectively.
- The study of the allocation of scarce
resources available to a firm or other
unit of management among the
activities of that unit.

Nature of Managerial Economics

- Art and Science – applying theories,

methods...
- Micro Economics
- Uses Macro Economics
- Multi-disciplinary – managerial
economics involve in different fields.
- Prescriptive/Normative Discipline –
aims to achieve goals and objectives by
doing the right decision making
If negative, it is better to invest in other
business

If positive, it is better to buy a new machine.

It also shows a glimpse on how economic

concepts are reinforce in managerial functions.

Demand And Supply Analysis

What is Demand? What is Supply?

- The relationship between price and the
quantity consumers are willing and able
to buy.
- The Law of Demand states that quantity
demanded has an inverse relationship
with price.
- The relationship between price
and the quantity firms/producers
are willing and able to sell.
- The Law of Supply states that
quantity supplies has a positive
relationship with price.

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.
- Substitute Effect - Whenever the price
Factors that may cause Shift in Supply
of a good increases, there are some
consumers who would shift their • Prices of Inputs
consumption to substitue goods.
• Production Technology

• Number of Firms

• Government Regulation

Equilibrium

- The state of balance between demand

Factors that may cause Shift in Demand and supply.
- Consumer Income - Market Equilibrium – the meeting
o Normal Goods of supply and demand in a market.
o Inferior Goods - Equilibrium market price – the price
- Price of Related Goods agreed by the seller to offer
o Complementary Goods its good or service for sale and
o Substitute Goods for the buyer to pay for it.
- Taste or Preference
- Population
- Other Factors – consumer expectations,
political events, weather cases

Quantitative Demand Analysis
Elasticity – in Physics, it refers to the expansion
or contraction of physical matter. While in
Economics, it refers to the degree of
responsiveness of one variable to another.
Demand Elasticity – refers to the buyer’s
reaction or response to changes in the prices of
goods and services.
Factors that affect Demand Elasticity
- Availability of substitutes
- Necessity
- Time Horizon
Elastic Demand – when the absolute value of
price elasticity of demand is greater than one,
then the demand is elastic.
- It simple means that the consumer of a
product are responsive to price
changes.
Perfectly Elastic Demand
- 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.
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.
Perfectly Inelastic Demand (fixed na)
- There are cases when the demand is
perfectly inelastic. The demand is
unresponsive to any changes in price.
Unitary Demand
- A unit elastic or unitary demand is
when the percentage change in price is
equal to the percentage change in
demand.
Point elasticity – is a method used to determine
the elasticity of a given price level based on the
demand curve.
Cross-Price Elasticity – measures the
responsiveness of consumers to changes in the
price of related goods.
Income Elasticity – measures the
responsiveness of consumers to changes in
income.
Advertising Elasticity – measures the
responsiveness of the quantity demand of a
specific good to the changes in the advertising
efforts of the firm of the cost of advertising.
Consumer Theory
Consumer Behavior
- Consumer is the one who demand
goods and services
- King of Producers
- Consumer Goods
3 Steps Involved in Studying Consumer
Behavior
- Consumer Preferences – describe how
and why people prefer one good to
another.
- Budget Constraints – this means that
people have limited income.
- Consumer Choices – combination of
consumer preferences and budget
constraints.
Utility Theory
- Refers to the satisfaction or pleasure
that an individual/consumer gets from
consuming a good/service
- Marginal Utility
- Total Utility
- Law of Diminishing Marginal Utility
Indifference Curve
- Showing no bias or being neutral

Budget Line – is also called as consumption
possibility line, indicated the various
combination of two products, which can be
purchased by the consumer with his income,
given the prices of the products.
Production Analysis
Short-Run Production Analysis
- Production involved with at least a
single fixed input is short-run
production.
- Law of Diminishing Marginal Returns –
adding an additional factor of
production results in smaller increases
in output.
Variable inputs – nag babago, in day to day
operation, nag babago yung amount, yung
dami. For example, gasolina, pasahod.
Fixed Inputs – remain constant. For example,
building, lease ng warehouse. Meron or wala
man siyang production, nandoon na yung
warehouse. Bayad na for 10 years.
Factors of Production
- Land labor capital and entrepreneur
Average Product – is the quantity of output
produce for each single amount variable input
used for production.
Marginal Product – is the additional output
produced per additional variable input added to
production.
Long-Run Production Analysis

- During long-run production, all inputs

are variable inputs. The anaylsis of long-
run production involves two concepts –
isoquant & isocost.

Isoquant

- is a curve of various combination of inputs that

yields the same level of output.

- Marginal Rate of Technical Substitution CHAPTER 5: Economic Growth

(MRTS) – a decrease in one inputs should be
Macroeconomics – the branch of economics
matched with an increase of another input.
that concerns itself with market systems that
operate on a large scale.

Economic Growth – is the period of steady

growth in output, along with an improvement in
living standards.

Gross Domestic Product – is the market value

of all final goods and service produce within a
nation in a given time.

Nominal GDP – measure of output is based

Isocost
- Is a line showing the combination of
inputs that have the same cost.
- Compared to the isoquant, isocost are
expressed in linear equation to define
the relationship of the cost of
production.
on current prices.
Real GDP – output is based on changes in
inflation.
GDP = C + I + G + (X-M)
C-Consumption, I-Investment, G-Government
Expenditure, X-Export, M-Import
Expenditure Approach – Gdp is based on
households, businesses, and the government in
a given period.
Income Approach – GDP is based on the
earnings of the households, businesses, and the
government in a given period.
Flow of Product Approach – GDP is the sum of
the amount of final goods.
Gross Value Added (GVA) Approach – GDP is
the sum of the output of the economy’s major
industries for a given period.
Rules on measuring GDP
- Only final goods are included in the
calculation of GDP
- The secondary sale of a good is not
included.
- Only final goods for the period
considered are included in the
calculation.
Limitations of GDP
- GDP does not include non-market
activities
- GDP does not include the informal
sector.
- GDP does not included externalities.
GREEN GDP
Other measures of Economic Growth
GNP (Gross National Product) – the market
value of all final goods and services produced by
nationals of a country for a given period.
GNP = GDP + NFIA (NET FACTOR INCOME
ABROAD)
NI (National Income) – total income received by
the most basic factors of production of a
country.
NI = w + r + i + Profits
Disposable Income (DI) – income received by
an individual net of taxes. Take-home pay.
DI = Personal Income + Transfer Payments –
Taxes
Chapter 7 – Unemployment
Employed refers to those who perform any
work that is paid (including those who are
absent from work and on leave).
- To measure the employment rate, we
divide the number of employed to the
number of the labor force.
Unemployed refers to those who are not
performing any paid work but wish to do so.
- To measure the unemployment rate,
we divide the number of unemployed
to the number of the labor force.
LaborForce refers to those working with the age
of 15-60 years old and are either working or
looking for work.
Not in the labor force refers to those who are
capable of working with the age of 15-60 but
opt not to look for work.
These are also the types of unemployment:
a. Frictional Unemployment – unemployment
due to the movement of people between jobs.
For example, I resign from my work without
having a back-up plan or without having a new
company to work at; I am now under the
Frictional Unemployment. But if I resign in my
work today, and I will work in a different
company tomorrow, I will not be tagged as
unemployed.
b. Structural Unemployment – mismatch
between the qualifications of a jobseeker/s and
the job opening. For example, you are an IT
graduate but work as a management trainee in
fast food. That is considered a mismatch. It is
not wrong to have a different job field that does
not match your college degree. However, most
of the reasons why many resign is because of
the mismatch of skills.
c. Cyclical Unemployment – unemployment
due to overall low demand for labor (economic
recession/depression). This unemployment is
due to the movement of the business cycle. In
the business cycle, there is a level of peak,
growth, recession, and depression. Usually, the
cyclical unemployment happens under the
recession and depression period. Those
employees who are affected by this are not
considered an asset to their company.
Nevertheless, we believe that all jobs and all
employees are important and play a vital role in
our society and economy.

Underemployment - It is a situation where the

employed individual wishes to work more either
because of surplus time or need to earn more
income.

Voluntary Unemployment who are considered

discouraged workers. A person who wishes to
have a job but is not satisfied with the current
job offerings, thus unemployed.

Reasons why unemployment exists

Inflexible wages - which is due to labor market

administration. This falls under the company
that does not give the right salary and benefits
to employees. This results in leaving the job.

Voluntary - It may be under personal reasons

why other people chose to be unemployed.