Managerial Economics Module

Module for
Managerial
Economics
Contents
Lesson 1: Introduction to Managerial Economics ................................................................................ 3
Lesson 2: Demand and Supply Analysis ............................................................................................... 7
Lesson 3: Quantitative Demand Analysis ........................................................................................... 20
Lesson 4: Demand Estimation ............................................................................................................ 28
Lesson 5: Production Analysis ............................................................................................................ 32
Lesson 6: Cost Analysis ....................................................................................................................... 41
Lesson 7: Other Factors Affecting Managerial Decisions ................................................................... 47
Lesson 8: Market Structure ................................................................................................................ 51
Lesson 9: Industry Analysis ................................................................................................................ 59
Lesson 10: Roles of Government ....................................................................................................... 65
Glossary .............................................................................................................................................. 73
COURSE SYLLABUS MANAGERIAL ECONOMICS ................................................................................. 79
LEARNING EPISODES: ......................................................................................................................... 82
Online Resources:............................................................................................................................... 85
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BULACAN STATE UNIVERSITY
College of Business Administration
City of Malolos, Bulacan
Course Title : Managerial Economics

Course Code : Econ 40163
Course Credit : 3 Units
LEARNING MODULE FOR THE

SUBJECT MANAGERIAL ECONOMICS
Within this module will be discussed the study of the application of economic principles and
methodologies in making managerial decisions within organizations. Managerial Economics makes
use of economic theories as tools on how managers deal with issues and decisions in an
organization.
Learning Objectives:
After students have successfully completed this module, the student should be able to:
1. Discuss the various theories and methods on Managerial Economics
2. Develop a greater knowledge of the types of problems faced by a manager in an organization
3. Discuss how managers make their decisions using economic principles and methods
4. Discuss the various business strategies and government policies founded on economic principles
Learning Output:
The student is expected to be able to have concrete and substantial knowledge on how to
apply economic theories and methodologies for efficiently making managerial decisions. The
students are expected to discern how various techniques in economics would fit in performing
different managerial functions.
Units for Discussion are:

1. Application of Microeconomic Concepts in Management
2. Analysis of Production and Cost
3. External factors Affecting Managerial Decisions
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UNIT 1: APPLICATION OF MICROECONOMIC CONCEPTS IN MANAGEMENT
After students have successfully completed this module, the student should be able to:
1. Develop a greater knowledge of demand and supply analysis
2. Discuss the relevance of elasticities in making managerial decisions.
3. Develop models that define the relationship between buyers and sellers in a particular market.
Learning Output:
The student is expected to be able to have concrete and substantial knowledge on how to
apply microeconomic theories to situations faced by managers when making decisions.
Lesson 1: Introduction to Managerial Economics
Faithful to its discipline, Managerial Economics indoctrinates efficiency to make ends meet when
dealing with scarcity. While scarcity may be perceived in a lot of ways, in this subject, we will focus
on limitations manager face when making decisions and how economics presents myriad of
methods on how can managers analyze and walk through constraints to reach individual and
organizational goals.
Topics:
• What is Economics?
• What is Managerial Economics?
• Managerial Economics in Deciciosn Making
• Net Present Value
Duration: 3 hours
Pre-Test
Multiple Choice:
1. The study of how societies use scarce resources to produce valuable

goods and services and distribute them among different individuals
for consumption.
A) Management C) Entrepreneurship
B) Economics D) Marketing
2. The study of individual behavior of household, firms and market:

A) Economics B) Microeconomics
C) Macroeconomics D) Entrepreneurship
3
What is Managerial Economics?
• Managerial economics refers to the application of economic theory and the tools of
analysis of decision science to examine how an organisation can achieve its objectives
most effectively (Salvatore)
• Managerial economics is the study of the allocation of scarce resources available to a
firm or other unit of management among the activities of that unit (Haynes, et. al.)
Having knowledge in managerial economics can help managers make decisions on pricing,
production process, and decisions on the volume of output. The person who manage a whole
organization or a single unit has power to decide on how resources, such as labor, tasks, raw
materials, etc., may be used for investments. Economic concepts geared towards efficient use of
resources are required competencies for managers to achieve goals of the organization.
How does economics actually fit in the managerial decision-making?
Since economics teaches us to efficiently manage resources to overcome constraints.

Decision-making starts from identifying goals, and in the lens of an economist, identifying goals also
entails identifying the constraints and the incentives an organization may gain given its limitations.
Economic
Theories and Business
Goals methodologies + Decisions
Decision Sciences
Understanding incentives may affect the decision-making abilities of managers. In

economics, the concept of incentives is a very crucial topic. Since the management strives to
maximize the firm’s profits it is inclined to take into consideration the economic profit which is
derived by including the opportunity cost as the basis of decision-making.
Every investment decision made means there are alternatives forgone. The cost of forgone
alternatives is what we call the opportunity cost. In reality, firms, just like any individual have limited
resources and have multitude opportunities for them to allot their investments in to. For example a
firm is planning to buy a new machine to improve the performance of its current machine. The
machine would cost the firm Php. 500,000.00 and would earn them revenues for the next five years.
But, if the money was used to invest in other ventures, it would 5% interest rate. Should the firm
spend Php. 500,000.00 or just use the money in another investment? The table below shows the
amount that will be earned by the firm using the new machine for the next five years:
4
Year Amount
in Php
1 150,000
2 100,000
3 95,000
4 95,000
5 75,000
This is just an example of opportunity cost. You two options to spent a particular amount of
resource and you have to make sure that the option the firm have chosen will give them better
earnings than the option forgone. To solve this problem, we would have to use the net present value
(NPV).
Below is the formula for the NPV:
𝐶𝐹
𝑁𝑃𝑣 = ∑
( 1 + 𝑟 )𝑡
CF = Cash Flow
R = Interest rate
t = Time
Since the NPV is negative, it only means that the firm would earn more if it just used Php. 500,000.00
to engage in another investment instead of buying a new machine.
Amount Present
Year
in Php Value
0 -500,000
1 150,000 142,857.14
2 100,000 90,702.95
3 95,000 82,064.57
4 95,000 78,156.74
5 75,000 58,764.46
NPV = -47,454
This is just a glimpse of how economic concepts can be used to reinforce managerial
functions. In the next lessons to come we will learn to utilize economic tools in more ways than just
simple investment decisions.
References:
1. Wilkinson (2005). Managerial Economics: A Problem Solving Approach, Cambridge

University Press
2. Baye (2010). Managerial Economics: A Problem Solving Approach, McGraw-Hill
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Post Test 1
Problem Solving:
Firm X plans to engage in an investment A that will cost the firm Php. 300,000.00 and would earn them
revenues for the next five years. But, if the money was used to invest in other ventures, it would 5% interest
rate. Should the firm spend Php. 300,000.00 or just leave the money in the bank? The table below shows the
amount that will be earned by the firm using the new machine for the next five years:
Year Amount
in Php
1 60,000
2 70,000
3 80,000
4 90,000
5 90,000
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Lesson 2: Demand and Supply Analysis
Perceived as rudimentary economic concepts, the realm of demand and supply analysis represent how the
interest of consumers and producers interact in the market, in a fashion that emphasize the importance of
price to keep both market players in check. This topic requires its learners to understand that the concepts
of demand and supply are nothing but mere representation of our behavior towards satisfaction of our needs
or wants, and how it relates to the conditions surrounding institutions or agents who took action to achieve
their agenda, whether earning profit or public service, by bringing commodities and services available at
certain price levels, to satisfy needs and wants.
Topics:
Law of Demand
Demand Shifters
Demand Analysis
Law of Supply
Supply Shifters
Supply Analysis
Market
Market Price Analysis
Duration: 9 hours
Pre-Test 2:
Determine what will happen to quantity demanded in the following situations:
1. Decrease in Price
a) Demand will increase
b) Demand will decrease
2. Increase in Price
a) Demand will increase
b) Demand will decrease
3. Which of the following is Surplus?

a) Demand < Supply
b) Demand > Supply
c) Demand = Supply
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What is Demand?
The relationship between price and the quantity consumers are willing and able to buy, all
things held constant. The law of demand defines the relationship between quantity demand and
price.
Law of Demand
• States that, assuming all things are equal, the quantity demanded has an inverse relationship
with price
• As price increases, quantity demanded decreases and vice versa.
The law of demand reflects how consumers behave to changes in price. This concept is evident in
our everyday lives. Whenever we purchase commodities to satisfy our needs or wants, we tend to
choose products with lower prices.
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 because their
current income will not allow them to spend more money from their saving or money allotted for
buying other goods. People have the opposite reaction when price of a good drops. The purchasing
power of their current income increases so they can buy more without having to spend more than
what they are already spending for buying the good.
This theory is evident whenever prices of goods with no substitute changes. For example, when
price of electricity increases, resulting to an decrease in the quantity demand of electricity. people
tend to lessen their electricity consumption and when the price of electricity decreases, they tend
to use electricity more often resulting to an increase in the quantity demand of electricity.
Substitute Effect
This theory explains the negative relationship of quantity demanded and price for goods with
substitutes. Whenever the price of a good increases, there are some of its consumers who would
shift their consumption to substitute goods, but if the price of a good decreases even consumers of
substitutes might shift their consumption towards the good that dropped its price.
Consumers of substitute goods such as pork, beef and poultry display the behavior stated by this
theory. When the price of pork increases, its consumers might shift their consumption towards, beef
or poultry resulting to a decrease in the quantity demand of pork. However, if the price of pork
decreases, consumer of beef and poultry might shift their consumption to pork resulting to an
increase in the quantity demand of pork.
To provide further understanding, let us make use of demand curve and demand schedule to aid us
in illustrating the law of demand.
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The table below showing the corresponding quantity demand per price level is called demand
schedule.
P Qd
1 50
2 40
3 30
4 20
5 10
To illustrate the relationship between the price and quantity demand shown by the demand
schedule, we will also show below the graphical relationship between price and quantity demand,
known as the demand curve.
Qd
The demand curve is downward sloping due to the negative relationship between price and
quantity demand. As shown by the graph, the quantity demand gets higher as price level drops.
When price drops from Php 4.00 to Php. 2.00, the quantity demand changed from 20 to 40.
Qd
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Most of the time, demand curve is depicted in a linear fashion, which is why the demand function,
an equation showing the price and quantity demand relationship, is also expressed in negative linear
equation. Demand functions are necessary tools especially for decision making. It can provide an
estimate amount of quantity demanded at a given price level.
Below is an example of a demand function:
Qd = 8 – 2P
Let us imagine demand equation above is the function for the quantity demand of Product X. Using
the demand function above we can estimate the quantity demand for Product X if the price is Php
2.00.
Qd = 8 – 2 (2)
Qd = 8 – 4
Qd = 4
With the use of the demand function, we have estimated that the quantity demand is 4 when the
price of Product X is Php. 2.00.
Although the law of demand pertains to the relationship of price and quantity demanded, it does
not mean that quantity demand will only change in response to price changes. When quantity
demand changes in response to changes in price, we call this change in quantity demand. However,
there are other factors that may cause demand to change. When demand changes due to factors
other than price, we call this a change or shift in demand.
What are the factors that may cause Shift in Demand?
Consumer Income
Changes in consumer income will definitely change the capacity of consumers to buy more or less.
The way how changes in consumer income affects the demand of a particular good depends on the
kind of good. In relation to income, we have to kinds of goods, to wit Inferior and Normal goods.
• Normal Goods
Typical goods bought by consumers that have a positive relationship with income. If income
of consumers increases, demand of normal good will also increase and vice versa. A good
example of this good are IPhones. When people have high income, a lot of people can afford
to buy IPhones so the demand of IPhones will definitely increase. If people have low income
people will opt to buy other phone which cost less.
• Inferior Goods
Goods bought by consumers when they are low on income. These goods have negative
relationship with income. If income of consumers increases, demand of normal good will
also decrease and vice versa. Imitation products are the best example for these types of
goods. People only buy imitation products because they have low purchasing power, but if
their income gets higher, less people will buy these imitation products.
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Price of Related Goods
There are two kinds of related goods that may affect the demand of a product.
• Complementary Goods
These are goods that are usually consumed together. If the price of the product increases,
its demand will decrease along with the demand of the complementary goods. Therefore,
the price of the complementary goods has a negative relation with a product. A good
example of this is the price of coffee creamers affecting the consumption of coffee. If price
of creamers increases the demand for creamers will decrease along with the consumption
of coffee because some people might not like to drink coffee without creamers.
• Substitute Goods
As the name itself entails, substitute goods are consumed in exchange of another good. If
the price of a substitute good increases, its demand will decrease because its consumers will
shift their consumption to other products. The demand of a product has a positive
relationship with price of its substitute goods. A good example for this is the relationship of
the price of coffee to the demand of tea. Since coffee is a substitute product of tea, whenever
the price of coffee increases the demand for coffee will decrease and its consumer might
shift their consumption to tea, thus increasing the demand for tea.
Taste or Preference
Taste or preference of consumers dictates the amount of demand a product has. While preference
of people in a particular area may be hard to predict, it can be easily be influenced through various
advertising activities. The amount of advertising efforts exerted by a firm defines the volume of
consumers it might attract. The advertising cost for products usually has a positive relationship with
the demand.
Population
Another factor that affects demand is the population. If population rises, there would be more
potential consumers. The relationship of population and demand is positive.
Other factors
Aside from the factors discussed above, there are also other factors that affect demand of products,
such as consumer expectations, political events, weather, and other special cases.
What happens to demand curve when there is a shift in demand?

When factors that causes shift in demand enters the scene, demand will definitely change but price
will remain the same. To understand this, let us make use of the example demand function given
above. Let us say that we take into account the price of a substitute good.
Let the price of the original good be Px and the price of the substitute good be Py. What would be
the demand if Px remains at PhP 2.00 and Py is Php 3.00?
Qd = 8 – 2Px + 3Py
Qd = 8 – 2 (2) + 3(3)
Qd = 8 – 4 + 9
Qd = 17 - 4
Qd = 13
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If you would notice Py is positive. If you wonder why, then the explanation is simple. Price of
substitute goods and demand have positive relationship. If Py is negative, then Py would pertain to
price of a complementary good. How would the increase in demand while price remains the same
reflect in the demand curve?
Qd1 Qd2
The graph below shows a shift in demand when demand decreases while its price remains the same.
The demand curve shifted leftward.
Qd2 Qd1
What is Supply?
The relationship between price and the quantity firms / producers are willing and able to sell, all things
held constant
Law of Quantity Supply

• States that, assuming all things are equal, the quantity demanded has a positive relationship
with price
• As price increases, quantity supplied also increases and vice versa.
Quantity supply reflects the behavior of firms or producers of goods and services used to satisfy
needs and wants. Firms themselves engage into producing goods and services in order to gain
something. Most firms strive to earn profit as an incentive to making goods and services available
for consumers, which is why when a good or service can be sold at a high price, more producers
would like to invest into producing such good or service and offer it to consumers.
The supply schedule and supply curve below illustrate the positive relationship between price and
quantity supply.
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P Qd
1 10
2 30
3 40
4 50
5 60
The supply curve is an upward sloping curve indicating that whenever the price increases the
quantity supply would increase as well and vice versa.
Supply Function
Supply function is an equation defining the relationship between price and quantity supply.
Given the supply function, Qs = 2 + 2P, what would be the quantity supply if the price is PhP 3.00?
Qs = 2 + 2 (3)
Qs = 2 + 6
Qs = 8
Same with the demand function, supply function can be used to estimate the quantity supply given
a certain price level. The main difference between demand and supply function is that the supply
function is positive because of its direct relationship of supply with price.
Same as demand, there are factors that may cause shifts in supply.
Prices of Inputs
A change in the prices of inputs can determine the willingness of producers to produce more. Price
of inputs is inversely related to supply because prices of inputs affects production cost. If price of
inputs increases, producers will produce less because of higher cost of production and vice versa.
Production Technology
An improvement in production technology results in to a much more efficient production, which
means more products may be produced using less amount of inputs. Production technology has a
positive relationship with supply.
Number of Firms
As the number of firms producing the same good increase, the more products will be available in
the market. So obviously, the number of firms is directly related with supply.
Substitutes in Production
Government Regulation
Government regulations such as incentives and taxes can affect supply. Incentives can help ease the
cost of production which is why it has a positive relationship with supply. Taxes, however, have
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negative relationship in supply because as increase in tax imposed, can increase the price of inputs,
thus increasing the cost of production.
Shifts in Supply Curve
An increase in supply will shift the supply curve to the right as shown in the graph below:
Qs1 Qs2
A decrease in supply will shift the supply curve to the left as shown in the graph below:
Qs1 Qs2
Markets
Market is a mechanism. It caters to the interaction between the consumers and producers. Through
markets, the products wherein producers are supposed to allocate their resources into are
determined by its interaction with consumers through markets, leading to efficient use of scarce
resources.
Aside from efficiency on the allocation of resources, the forces of supply and demand may also be
controlled by markets, through price.
To discuss further the interaction of buyers and sellers in the market, let us refer to the graph below:
Let us say that Product X is being sold in the market at the price of Php. 4.00. At this price, there are
lot of interest for producers to invest their resources to produce this product, which is why the
supply of the product is at 40,000. However, consumers think that the price is so high that it only
generated a demand of 20,000 units.
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Product X
(expressed in 000)
Surplus
Qd Qs
Since the current price has generated more supply of Product X than its demand, a lot of Products
will not be bought and the resources used to produce the unsold goods are wasted. This situation
in the market wherein demand is less than supply is called surplus.
Now that there are unsold Product X, the firm decided to lower its price to Php. 2.00 in order to
attract customers to buy more Product X. Since the price is now lower, there are lots of consumers
who wants to buy Product X. Due to this development, lower price attracted buyers, but has less
suppliers are inclined to sell Product X. This resulted in a situation in the market called shortage,
wherein quantity demand is greater than the quantity supplied. Again there is no efficiency in this
situation because there are needs and wants that are left unsatisfied because less resources are
used to produce Product X.
,
Shortage
Qs Qd
To Lessen the number of demand and entice more production of Product X, the price was increased
to Php. 3.00. Using this price, efficiency in the allocation of resources was achieved. Php. 3.00 in this
situation is called the Market Price (Market Equilibrium), the price agreed upon by both buyers and
sellers, wherein all supplies are bought by consumers and all needs and wants are satisfied.
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Market Price /
Market
Equilibrium
Using demand and supply function, we can also determine the market price. Since market price is a
price where demand is equals the supply, then equilibrium is Qd = Qs. With the demand function
Qd = 12 – 2P, and supply function at Qs = 2 + 3P, we solve for the market price as shown below:
Qd = Qs
12 – 2P = 2 + 3P
3P + 2P = 12 – 2
5P = 10
P=2
To check if we got the correct market price, just substitute the derived P in the given demand and
supply functions.
For demand function:

Qd = 12 – 2 (2)
Qd = 12 – 4
Qd = 8
For supply function:

Qs = 2 + 3P
Qs = 2 + 3(2)
Qs = 2 + 6
Qs = 8
Since we derived 8 quantity demand and supply, by substituting the derived P in both demand and
supply function, then Php. 2.00 is the market price.
Changes in Market Price

Demand and Supply shifters might affect the current market price. Since market price is the
equilibrium between demand and supply, then if any of the demand or supply changes, then it
would create an imbalance between the market forces and a new market equilibrium shall emerge.
For example. Let us say that the due to the entry of foreign competitors, supply shifted to the right.
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Because of this new development in the market, using the same price, wherein Qd and Qs are
previously equal, there is now surplus because of the additional supply. In order to lessen the
supply and encourage more consumers to buy, price will be lowered to derive the new market
price.
The movement in the market price reflects the all the things we have learned in this lesson. We have
learned the relationship between price and demand, as well as the relationship between price and
supply. In addition, we also learned the interaction between demand and supply in the market. In
the next lessons to come, there would be more topics to discuss how behavior of consumers and
firms are analyzed.
References:

University Press
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Post Test 2
Name: _________________________ Section: ______ Date: ______
I. Write the CAPITAL LETTER of the correct answer on the space provided.
Dor number 1- 7 refer to the graph below:
1. The price of substitute goods increased.
2. The price of the product increase.
3. The income of consumers of inrerior goods increased.
4. Which among the graph shows shifters increasing the demand?
5. The population increased.
6. The income of consumers of normal goods decreased.
7. The price of complementary goods decreased.
8. Which of the following would cause the demand curve for automobiles to shift to the left?
A. Decrease in income level
B. Increase in price of automobiles
C. Decrease in price of automobiles
D. Increase in population
9.-10. Choose among the following scenario for demand:

A. Increase
B. Shift to the left
C. Shift to the right
D. Decrease
9. The price of mobile phone increased, what will happen to the demand for mobile phones?
10. Ariel who sells rice in Banga, Malolos retained the price of his product even after a new batch families
are relocated to Banga. What will happen to the demand of his product?
11-15.Choose among the following:

A. Shortage
B. Surplus
C. Market price will increase
D. Market price will decrease
11. Which among the following situations in the market will describe an increase of income for inferior
good
12. Which among the following situations in the market will describe an increase of price of raw materials
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13. Which among the following situations in the market will describe an increase in the price of the
complementary good
14. A situation where demand is less than supply.
15. Which among the following situations in the market will describe an decrease of income for normal
good
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Lesson 3: Quantitative Demand Analysis
Topics:
Price Elasticity of Demand
Point Elasticity
Cross-Price Elasticity
Income Elasticity
Advertising Elasticity
Duration: 3 hours
The previous lesson taught students what would happen to demand or supply whenever price
changes. But what students did not learn was the quantity at which the demand has changed in
response to changes in prices or changes in shifters.
Pre-Test 3:
Put > or < on the blank to indicate the good that is will be more affected in terms of changes in
quantity demand.
Price Increase on the following:

1. Rice ____ Shirt
2. Electric Consumption ___ Digital watch
3. Gasoline ___ Playstation 4
The previous lesson taught students what would happen to demand or supply whenever
price changes. But what students did not learn was the quantity at which the demand has changed
in response to changes in prices or changes in shifters.
This lesson focuses on the concept of demand elasticity. Elasticity is a measure for the
responsiveness of one variable to another. In the case of price elasticity of demand, it measures
how much demand has changed in response to changes in price.
Below shows the mathematical expression of price elasticity of demand:

0⁄ 𝛥𝑄𝑑
𝑃𝐸𝐷 = 0
0⁄ 𝛥
0 𝑃
𝑄 𝑑2 − 𝑄 𝑑1 𝑃2 − 𝑃1
𝑃𝐸𝐷 = ∕
𝑄𝑑1 𝑃1 ⋅
Factors that Affects Elasticity:
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Availability of Substitutes
Demand of products with substitutes are usually elastic, which means that its consumers are
responsive to price changes. If the price of a product increased even by the slightest, since
substitutes are available, consumers have more product to shift their consumption to. However, if
a product has little to none substitute, then consumers will be forced to be more tolerant to changes
on price because they have no other product to consume that can provide them with the same
satisfaction. This is the case with electricity, there are almost no alternative to electricity. When
price of electricity increases, consumers tend to retain its level of consumption.
Necessity
Demand of products that are deemed necessary, tend to be more inelastic. Its consumers are not
much responsive to price changes. The best example for this is rice. Since rice is a staple food in this
country, consumers are less likely to react to changes in the price of rice.
Time Horizon
The longer the time period between price changes, the more time the customers have to adjust its
consumption and look for substitutes. It simply means that the longer the gap between changes in
price, the more elastic the demand would be.
The range values derived from the price elasticity of demand may range from Elastic, Inelastic and
Unit Elastic.
Elastic Demand
When the absolute value of price elasticity of demand is greater than one, then the demand is
elastic. It simply means that the consumers of a product are responsive to price changes. A slight
change in price can lead to huge change in demand. Products with substitutes and luxury products
have elastic demands. For example, when the price of a product increased from Php. 2.00 to Php.
3.00, its demand changed from 15 to 5. Using the PED formula above we derived an elasticity of -
1.33. Means that a slight increase in price will result to a huge decrease in demand and vice versa.
When making price decisions, it is better to lower prices for elastic demands, since a lot can be
gained from a slight decrease in price and a huge decrease in demand will result from a slight
increase in price.
The demand curve for elastic demand looks spread to illustrate a slight change in price can lead to
a big change in demand.
There are cases when the demand is perfectly elastic. Even a slight change in price leads to zero
demand. There is usually a perfectly elastic demand in a situation wherein there are numerous
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sellers of a homogenous good. Whenever sellers of homogenous goods compete, they compete
through price. If one seller decides to increase its price even by just a tiny bit, consumers will buy
the said product from other sellers selling lower prices since there are many competitors and they
are selling the same product.
The demand curve for perfectly elastic demand is a horizontal line since a change in price can lead
to zero demand.
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. For example, when the price of a product increased
from Php. 5.00 to Php. 9.00, its demand decreased from 20 to 18. Using the PED formula above we
derived an elasticity of -0.13. Means that even if there is a huge increase in price it will result to only
a slight decrease in demand and vice versa. It is better to increase prices for inelastic demands, since
not much can be gained even from a huge decrease in price while not much decrease in demand
will result even from a huge price hike.
The demand curve for elastic demand looks steep to illustrate a slight responsiveness of demand to
changes in price.
There are cases when the demand is perfectly inelastic. The demand is unresponsive to any changes
in price. The perfect example for this type of demand are maintenance drugs for hypertension. Since
the drug is should be consumed necessarily at controlled amounts, even if the price goes very high,
consumers still needs to consume the amount prescribed by their doctors and they cannot consume
more, so even if its for free, the consumption will remain the same.
The demand curve for perfectly elastic demand is a vertical line because consumers are totally
unresponsive to changes in price.
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Unit Elastic
A unit elastic or unitary demand is when the percentage change in price is equal to the percentage
change in demand. If the derived value of demand is 1, then it is a unit elastic demand. For example,
when the price of a product increased from Php. 2.00 to Php. 3.00, its demand decreased from 40
to 20. Using the PED formula above we derived an elasticity of -1. It simply means that the increase
in price will result in the same amount of decrease in demand.
Point Elasticity
Point Elasticity is a method used to determine the elasticity of a given price level based on the
demand curve.
𝑄 𝑑2 − 𝑄 𝑑1 𝑃2 − 𝑃1
𝑃𝐸𝐷 = ∕
𝑄𝑑1 𝑃1 ⋅
𝑄2 −𝑄1 𝑃
The PED formula above can be written as: 𝑃𝐸𝐷 = ⋅𝑄
𝑃2 −𝑃1
𝑄2 −𝑄1 𝑦2 −𝑦1 𝑄2 −𝑄1

And since resembles the formula for slope: , then can be used to substitute
𝑃2 −𝑃1 𝑥2 −𝑥1 𝑃2 −𝑃1
for slope, so our new PED formula becomes PED = b(P/Qd)
b = slope of the demand function
P = Price
Qd = Quantity demand
A typical demand curve is a linear equation with an intercept and slope. The slope of a demand
function can be used to solve for elasticity of a particular price level.
Example: What would be the elasticity of a product at the price of Php. 2.00 with the demand curve
𝑄 −𝑄 𝑃 𝑄2 −𝑄1
of Qd = 15 – 4Px. Using 𝑃𝐸𝐷 = 𝑃2−𝑃1 ⋅ 𝑄 , we can substitute the -4 to since -4 is the slope
2 1 𝑃2 −𝑃1
of the given demand curve.
So now our price elasticity of demand equation becomes -4 (P/Q). The P was given in the example
as Php. 2.00 and all we have to derive Q by substituting Php. 2.00 to Qd = 15 – 4Px.
b = -4
P=2
23
Qd = 7
PED = -4 (2/7)
PED = -1.14
Since the PED is greater than one, the demand is elastic when the price is Php. 2.00.
Cross – Price Elasticity

Since there are demand shifters, there are elasticities intended for shifters, and one of which is
cross-price elasticity. Cross-price elasticity measures the responsiveness of consumers to changes
𝑄 ⅆ2 −𝑄 ⅆ 𝑃𝑦
in the price of related goods. The formula for cross-price elasticity is ⋅
𝑃𝑦 2 −𝑃𝑦1 𝑄ⅆ
Income Elasticity
This elasticity measures the responsiveness of consumers to changes in income. The formula for
𝑄 ⅆ2 −𝑄 ⅆ 𝑚
income elasticity is ⋅
𝑚2 −𝑚1 𝑄ⅆ
Measures the responsiveness of the quantity demand of a specific good to the changes in the
advertising efforts of the firm or the cost of advertising. The formula for advertising elasticity is
𝑄 ⅆ2 −𝑄 ⅆ 𝐴
⋅
𝐴2 −𝐴1 𝑄𝑑
Given the demand equation Qd = 100 – 2Px + 3Py – 1M + 4A, determine the price, cross-price,
income and advertising elasticity given the following: Px = 5, Py = 2, M = 80, and A = 10.
Through substitution given values, Qd is derived as 56.
Price elasticity = -2(5/56) = -2(0.09) = -0.18

Consumers are slightly responsive to changes in price.
Cross-Price elasticity = 3(2/56) = 3(0.04) = 0.11

Consumers are slightly responsive to changes in price of substitute goods.
Income elasticity = -1(80/56) = -1(1.43) = -1.43

Consumers inferior goods are very responsive to changes in income.
Advertising elasticity = 4(10/56) = 4(0.18) = 0.71

Consumers are slightly responsive to changes in advertising efforts of firms.
These concepts quantitively estimate the amount of change in demand due to changes in price and
its shifters. Again, the importance of demand function as a tool to analyze demand is emphazied in
this topic. In the next lesson, there will shed light on how demand functions are derived.
24
References:

University Press
25
Post Test 3
Name: Date: Section:
I. Multiple Choice. Write your answer at the space before the number.
A B C D
1. The consumers of Product X is slightly responsive to price changes. Which among the graph
above illustrates the elasticity of Product X?
2. Firm X lowers the price of its product. Which among the following would make Firm X earn
more revenue?
3. The consumers of Product X do not respond to any price change. Which among the graph
4. The consumers of Product X will accept no price change. Which is why the Product X will have
no consumers if the price changes. Which among the graph above illustrates the elasticity of
Product X?
5. The consumers of Product X is very responsive to price changes. Which among the graph
6. Firm X raised its price for its product. Which among the following elasticity would make Firm X
earn more revenues?
7. The demand curve for an individual seller of paint thinner, which is sold homogenously by
numerous sellers? As the price is raised by one seller, no one will buy their product. The
producers would not sell at a lower price because they would not earn profit so the consumers
will not be able to buy thinners at a lower price.
8. Which elasticity fits the consumption of Downy, a fabric conditioner, which is sold with
multiple variants by numerous sellers? If the price is raised, a lot of consumers can switch to
other brands of fabric conditioner. If the price is lowered a lot of consumers from other brands
can switch to Downy.
9. Which elasticity fits the consumption of insulin, a maintenance drug for diabetes? Even as the
price is raised or lowered, the consumption will not change because consumers will only buy
the amount that is prescribed by their doctors.
10. Which of the following graphs illustrates the consumption of LPG, which is necessary for
cooking meals in household and restaurants? The even as the price is raised, the consumers
will not be able to reduce their consumption. When the price lowers, the consumers will not
be able to increase their consumption exponentially more than what is necessary.
11. Which among the following price decision that would increase the revenue of Firm X its
demand changed from 35 to 30 when its price changed from Php. 5.00 to Php 15.00:
a) Increase
b) Decrease
c) No Price Change
d) None of the above
12. Which among the following price decision that would increase the revenue of Firm Y its demand
changed from 30 to 15 when its price changed from Php. 4.00 to Php 5.00:
a) Increase
b) Decrease
26
c) No Price Change
d) None of the above
13. Which of the following would be the simple demand elasticity of a product whose demand
changed from 69 to 58 when its price changed from Php 2.00 to Php 8.00:
a) -0.14
b) -1.05
c) -1.14
d) -0.05
27
Lesson 4: Demand Estimation
Topics:
Linear Equiation
Ordinary Least Square Regression
Demand Curve
Duration: 3 Hours
Demand estimation can be done in various ways. It is important that investments and production
are aligned with the estimated amount of demand. Even demand functions do not magically appear
as equations with random numbers and coefficients. This lesson will focus on model specification
for demand since it is relative to previous lessons which make use of demand function.
Pre Test 4:
Answer the Following:
y = a + bx
1. Which of the variable is the dependent variable? __

2. Which of the variable is the independent variable? __
3. Which of the variable is the intercept? __
4. Which of the variable is the slope? __
In this lesson, you will learn how demand functions came to be. The demand schedule will be the
basis for deriving the demand function using the Ordinary Least Square (OLS) or simply called, simple
regression analysis. The regression analysis would result to a linear equation which would define
the relationship between price and quantity demand and enable us to estimate quantity demand
per price level and construct a demand curve. Below is a sample demand schedule of a firm.
Qd P
2,815 51
2,215 55
2,915 53
3,110 48
3,241 46
3,290 42
3,311 44
3,310 44
3,320 43
3,370 40
3,382 39
28
The regression analysis examines the type of relationship between variables. Below is a linear
equation:
Y = a + bX
Y = The dependent variable. The variable whose value is derived by the equation. The value of this
variable is dependent on the value of independent variable. In the case of demand equation, this is
the Quantity demand.
X = The dependent variable. The stand-alone variable whose value affects the value of the
dependent variable. In the case of the demand function, it is the Price.
a = The intercept is the value of Y when X is zero.
b = The slope. The rate at which Y would change, every time a unit of X changes.
In order to derive the demand schedule, all that is needed is to compute for the value of the
intercept and slope using the demand schedule above and the formula for intercept and slope
below:
𝑛𝛴𝑥𝑦 − ∑𝑥∑𝑦
𝑏=
𝑛𝛴𝑥 2 − (𝛴𝑥 )2
∑𝑦 ∑𝑥
𝑎= −𝑏
𝑛 𝑛
Let us first solve for slope. In order to lessen the burden of deriving the value of slope, let us first
determine n, ∑xy, ∑x, ∑y and ∑x2. The variable ‘n’ is the number of samples used in the study. In this
case, there are 11 so n = 11. In statistics, we have learned that ∑ simple means summation, so for
∑xy, we just have to multiply each X to its corresponding Y. As mentioned above, X is our
independent variable and, in this situation, X is price and our independent variable Y is dependent
variable. So, we will multiply Each Price to its corresponding demand then we would add them. The
same can be done for ∑x2 . we need to derive the square value of price, then add them all. For ∑x
and ∑y, we simply have to add all demand to get the value for ∑y, and add all price to get the value
for ∑x.
Qd P x2 xy
2,815 51 2,601 143,565
2,215 55 3,025 121,825
2,915 53 2,809 154,495
3,110 48 2,304 149,280
3,241 46 2,116 149,086
3,290 42 1,764 138,180
3,311 44 1,936 145,684
3,310 44 1,936 145,640
3,320 43 1,849 142,760
3,370 40 1,600 134,800
3,382 39 1,521 131,898
∑y = 34,279 ∑x = 505 ∑x2 = 23,461 ∑xy = 1,557,213
29
b = (11*1,557,213) – (505 * 34,279) / (11*23,461) – (505)2 .
b = -59.6
We can now use the slope derived to solve for the intercept.
a = (34,279/11) – (-59.6 *(505/11))

a = 5,852.61
The demand function is: Qd = 5,852.61 - 59.6P
This topic has provided us the answers as to why demand functions are used for demand estimation
and gave us an idea about its role one the market analysis. The next topic will focus more on
concepts that can help in efficient production and will focus more on the side of decision makers in
resource allocation for production.
References:

University Press
30
Post Test 4
Problem Solving
The table below is the demand schedule from Product X. What will be the demand for Product X if
the product was raised to Php. 200.00?
P Qd
127 4215
129 4230
134 4200
139 4180
147 4107
151 4089
160 4000
168 3962
172 3901
180 3815
31
UNIT 2: PRODUCTION AND COST ANALYSIS
After successful completion of this module, the student should be able to:
1. Discuss the difference between long-run and short-run production
2. Determine the relationship between inputs and their associated cost.
3. Discuss other factors that affect production.
Learning Output:
The student is expected to be able to have concrete and substantial the relationship of inputs
and its associated cost, as well as the ability to analyze production during short-run and long-run.
Lesson 5: Production Analysis

Topics:
Short-run Production
Short-run Indicators
Long-run Production
Isoquant
Isocost
Duration: 6 Hours
Production analysis revolves around the discussion on how factors of production may affect the
decision regarding production. The discussion on this topic will be divided into two parts. First is the
short-run production analysis, and the other is the long-run production. The difference between the
two is the existence of having at least one fixed amount of input, being used for production.
Pre-Test 5:
1. Differentiate Long-run and Short-run Production.
2. What are the three stages of short-run production?
To kick-start the discussion, based on what was mentioned above, the line separating short-run and
long-run production is a fixed input, which is why there is a need to shed as to what fixed inputs are.
In every production, there are factors / inputs of production employed. These are, machines,
money, manpower, etc., and the amount of inputs are used for production vary for some inputs,
while some inputs are being used on a fixed amount.
Inputs that needs to be changed depending on the amount of outputs required a certain period of
production. Imagine a baker, who would like to increase the number of breads he would bake for a
day. One of the inputs, he might increase in usage, is flour. Based on the example given, flour is
what we call as a variable input. Using the same example, even though the baker would like to
increase the number of breads it will bake, the number of ovens used to bake the breads, remains
the same. The oven, based on the example given is a fixed input.
32
To summarize, the inputs that are used, depending on the amount of outputs, are called variable
inputs and the inputs that are used on a fixed rate, regardless of the changes in the number of
outputs, are called fixed inputs.
Now that there is a clear idea between fixed and variable inputs, we would be properly guided to
distinguish the difference between short-run and long-run production.
Short-Run Production Analysis

Production involved with at least a single fixed input is short-run production. But what does it really
mean to have a fixed input? Why is it relevant enough to become a distinction between short-run
and long-run production?
Short-run production due to having at least one fixed input, constitute properties that made its
production subject to the Law of Diminishing Marginal Returns. According to this law, whenever
production utilize a fixed input, continuous increase in the amount of variable input used in
production, would lead to a decreasing or even negative marginal returns in the future.
Due to its affiliation with the said law, short-run production is marked by three stages, to wit; the
increasing returns stage, the decreasing returns stage, and the negative returns stage. The analysis
of stages in production in short-run is determined by the indicators, Average Product (AP) and
Marginal Product.
AP is the quantity of output produced for each single amount variable input used for production. For
example, Firm X uses labor and machines to produce its output. The number of machines used per
production is constant and only labor is the variable input. Based on the example given we can
derive AP, by dividing the quantity to the number of labor used. To further illustrate, refer to the
table below:
K L Q AP
(Q/L)
2 1 6 6
2 2 18 9
2 3 30 10
2 4 56 14
2 5 80 16
MP on the other hand is the additional output produced per additional variable input added to
production. It is derived by dividing the change in the output by the changes in variable input. The
table below shows how MP is derived based on the example above.
K L Q ∆Q ∆L MP
(Q2 – Q1) (L2 – L1) (∆Q / ∆L)
2 1 6 0 0 0
2 2 18 12 1 12
2 3 30 12 1 12
2 4 56 26 1 26
2 5 80 24 1 24
33
Through the use of Ap and MP, we can determine the stages of production. The three stages of
short-run production are indicated by the value of AP and MP. Each stage will give decision makers
an ideal amount of variable inputs during short-run production.
The graph below shows the various stages of short run-production along with AP and MP curve.
Q
MP
AP
Negative
Marginal
Returns
L
Increasing Decreasing
Marginal Marginal
Returns Returns
During the Increasing returns stage, both AP and MP are increasing and MP is higher than AP. During
stages every additional variable input has large contribution to production and in the output per
variable is also increasing.
The decreasing stage has two notable phase. One is the period where MP is decreasing and AP still
increasing, but MP is still greater than AP. This means that although the additional output per
additional variable input is still higher than output per variable input, each additional output per
additional variable input is gradually decreasing while the output per variable input is till increasing.
The point where AP = MP, means the AP is at its maximum, after the said point, AP, along with MP
will both be decreasing.
The negative stage is where the MP has negative value and AP continues to decrease. It is Also at
this stage where the output is also decreasing if additional variable inputs are employed in
production. The graph below shows what happen to output or Total Product (TP) during negative
marginal returns stage.
34
TP
Increasing
Marginal
Returns
Negative
Marginal
Returns
Decreasing
Marginal
Returns
The discussion above gave us an idea on how the indicators of short-run production are derived and
how can we use them to determine the stage of short-run production. In order to fully understand
the concept of short-run production, it important to understand that in this type of production, the
relationship between inputs and outputs are defined by the law of diminishing marginal returns,
which is why production functions are expressed mostly by cubic functions. Production functions
are mathematical expression of the relationship between production inputs and outputs.
Below is an example of a production cost expressed in cubic function:
Q = 4LM + 0.3L2M + 0.4LM2 – 0.06L3M – 0.01LM3
Given the production function above, complete the table below:
M L Q AP MP
2 1
2 2
2 3
2 4
2 5
In order to solve for Q, we must substitute the value of L and M. To make the process easier, we can
simplify the production function by substituting the value of the fixed input first, before solving for
Q using the simplified production function.
Q = 4LM + 0.3L2M + 0.4LM2 – 0.06L3M – 0.01LM3
Q = 4L(2) + 0.3L2(2) + 0.4L(2)2 – 0.06L3(2) – 0.01L(2)3
Q = 8L + 0.6L2 + 0.4L(4) – 0.12L3 – 0.01L(8)
Q = 8L + 0.6L2 + 1.6L – 0.12L3 – 0.08L
Q = 9.52L + 0.6L2 – 0.12L3
35
M L Q
2 1 10
2 2 20.48
2 3 30.72
2 4 40
2 5 47.6
2 6 52.8
2 7 54.88
2 8 53.12
2 9 46.8
2 10 35.2
After we have solved for Q, we can now solve for AP and MP.
M L Q AP MP
2 1 10 10
2 2 20.48 10.24 10.48
2 3 30.72 10.24 10.24
2 4 40 10 9.28
2 5 47.6 9.52 7.6
2 6 52.8 8.8 5.2
2 7 54.88 7.84 2.08
2 8 53.12 6.64 -1.76
2 9 46.8 5.2 -6.32
2 10 35.2 3.52 -11.6
The table above shows that the increasing stage of production lasted only until 2 units of labor and
when an additional labor was employed, MP starts to decrease. During this stage, even though AP
did not decrease, we are now at the decreasing stage because of MP decreasing. AP is maxed out at
3 units of labor because at this units of labor, AP = MP and after another unit of labor was added,
the AP starts to decrease. The negative stage started at 8 units of labor because during this stage,
MP is already negative and Q is already decreasing.
Long-Run Production
During Long-Run Production, all inputs are variable inputs. The analysis of Long-Run production
involves two concepts. These concepts are the Isoquant and the Isocost.
Isoquant is a curve of various combination of inputs that yields the same level of output. Within an
isoquant, all inputs are variable and whenever a quantity was decrease in one input, the other input
shall increase.
36
The rate of substitution between two inputs to maintain the same level of output is called the
Marginal Rate of Technical Substitution (MRTS). The isoquant is bound to the law of MRTS, which
states that in order to maintain a certain level of production, a decrease in one inputs should be
matched with an increase of another input. Below is an example of isoquant. Among the six
combination of inputs, only those that are plotted in the same isoquant has the same level of output.
The more outward the isoquant is placed, the higher the level of output it has. The isoquant that
contains combination A and B has the highest level of output since the isoquant is placed at the
most outward area. It is also noticeable that isoquant do not intersect with each other. The reason
is simple. There shall be no combination of inputs that shall have the possibility of producing two
different level of output.
Isocost
Isocost is a line showing the combination of inputs that have the same cost. Same as with the
isoquant each isocost do not intercept with each other and the higher the cost for production, the
more outward the isocost is placed. Compared to the isoquant, isocosts are expressed in linear
equation to define the relationship of the costs of production of either of the inputs being zero.
Below is an example of an isocost:
A
D
B
E
F
Long Run Production Analysis
37
The goal with the analysis of long-run production is to determine the combination of inputs that
produces the amount of output we can produce given the budget constraint represented by the
isocost line. This can be done using the Lagrange method of analysis.
For example, we would like to produce a certain amount of output represented by the isoquant
20L0.6K0.4 and our budget constraint of Php. 200,000.00 when the price of L is Php. 4.00 and the price
of K is Php. 8.00. Using the Lagrange method, we would determine the combination of L and K by
deriving the λ through Lλ = Kλ.
To kickstart our solution, we will first determine the isocost function. We must determine how much
L with the price of Php. 4.00 and how much K with the price of Php. 8.00 we can employ given the
budget constraint of Php. 200,000.00. So our isocost function becomes 4L + 8K = 200,000.
To determine the Lλ we have to attach the price of L to the λ and solve Lλ through the use of our
production function.
Lλ = 4λ = 20L0.6K0.4
We then get the derivative of L.
4λ = 12L-0.4K0.4
The we solve for λ by dividing both sides by 4.
(4λ/4) = (12L-0.4K0.4)/4
We can simplify further by eliminating the negative exponent.
λ = 12K0.4/4 L0.4
We repeat the process for the Kλ.

8λ = 20L0.6K0.4
We then get the derivative of K.
8λ = 8L0.6K-0.6
The we solve for λ by dividing both sides by 8.
(8λ/8) = (8L0.6K-0.6)/8
We can simplify further by eliminating the negative exponent.
λ = 8L0.6/8K-0.6
Then we proceed to Lλ = Kλ.
12K0.4/4 L0.4 = 8L0.6/8K-0.6
We cross multiply to derive 96K = 32L
To proceed further, we can derive the partial value of either L or K. We can derive either of the two,
but in this example, we will derive the partial value of either L.
32L/32 = 96K/32
L = 3K
Using our isocost function 4L + 8K = 200,000, we can determine the value of K. We will substitute
the partial value of L to the isocost function.
4(3K) + 8K = 200,000
12K + 8K = 200,000
38
20K = 200,000
20K/20 = 200,000 / 20
K = 10,000
Since L = 3K and K = 10,000, then L = 3(10,000).
L = 30,000
4(30,000) + 8(10,000) = 200,000
120,000 + 80,000 = 200,000
200,000 = 200,000
Based on the example, in order to produce the number of inputs represented by the isoquant while
the budget is limited at Php. 200,000.00, there must be 30,000 units of L and 10,000 units of K.
The discussion in this lesson teaches students the tools helpful for making decisions about
production that focuses on the number of inputs to be used during short-run and long-run
production. In the next lesson, we will learn analysis that will take into consideration costs
associated with the inputs for production during short-run and long-run production.
References:

University Press
39
Post Test 5
1. Complete the table below using the given production function 30LK+0.9L2K+0.2LK2-0.01L3K-0.05LK3.
L K Q AP MP
15 10
35 10
50 10
65 10
90 10
2. Firm X would like to produce a certain amount of output represented by the isoquant
50L0.6K0.4 and our budget constraint of Php. 800,000.00 when the price of L is Php. 10.00 and
the price of K is Php. 20.00. What will be the most optimal combination of input?
40
Lesson 6: Cost Analysis
Topics:
Short-run Indicators
Long-run Production
Economies of Scale
Diseconomies of Scale
Duration: 3 Hours
This lesson will support the discussion from the previous lesson about production. The layout of this
lesson resembles the flow of discussion from production analysis. While this lesson also delves into
analysis of production, this lesson will shed more light on the relationship of inputs and cost
associated with during short-run, and the discussion of long-run cost analysis.
Pre-Test 6:
1. Differentiate Economies and Diseconomies of Scale.
2. What are the cost indicators that are inversely related to AP and MP?
Short-Run Cost Analysis

The inputs for production incur cost and while the short-run production analysis provide us the
status of short-run indicators during every stage of short-run production, this time we will also
discuss short-run cost indicators and their status during each stages of short-run production.
The indicators for short run cost analysis are Fixed Cost (FC) which are costs associated with fixed
inputs, Variable Cost (VC) which are costs associated with fixed inputs, Total Cost (TC) which is the
total of fixed cost and variable cost, Average Variable Cost (AVC) which is VC per quantity output
and is inversely proportional to AP, Average Fixed Cost (AFC) which is FC per quantity output,
Average Total Cost (TC) which is TC per quantity output and Marginal Cost (MC) additional costs
attributed to the additional quantity of output per quantity output and is inversely proportional to
MP.
Below is a table which shows how Cost indictors are derived:
Indicators Formula
FC Price of fixed inputs X quantity of fixed inputs
VC Price of variable inputs X quantity variable inputs
TC FC + VC
AVC VC / Q
AFC FC / Q
ATC TC / Q or AFC + AVC
MC ∆TC / ∆Q
41
To provide further understanding, we will use the production function and the given inputs from
the example in production analysis:
M L Q
2 1 10
2 2 20.48
2 3 30.72
2 4 40
2 5 47.6
2 6 52.8
2 7 54.88
2 8 53.12
2 9 46.8
2 10 35.2
Given the inputs and quantity outputs above, let us complete the table below by deriving the cost
functions if the price of L is Php. 200.00 and the price of M is Php. 500.00.
M L Q FC VC TC AFC AVC ATC MC

2 1 10 1000 200 1200 100.00 20.00 120.00
2 2 20.48 1000 400 1400 48.83 19.53 68.36 19.08
2 3 30.72 1000 600 1600 32.55 19.53 52.08 19.53
2 4 40 1000 800 1800 25.00 20.00 45.00 21.55
2 5 47.6 1000 1000 2000 21.01 21.01 42.02 26.32
2 6 52.8 1000 1200 2200 18.94 22.73 41.67 38.46
2 7 54.88 1000 1400 2400 18.22 25.51 43.73 96.15
2 8 53.12 1000 1600 2600 18.83 30.12 48.95 -113.64
2 9 46.8 1000 1800 2800 21.37 38.46 59.83 -31.65
2 10 35.2 1000 2000 3000 28.41 56.82 85.23 -17.24
42
Using the table above we can now graphically represent the cost indicators. If you will notice by the
value above, aside from the fact that AVC and MC is inversely related to AP and MP, The AFC
continues to decline while the value for ATC gets closer to the value of AVC as near the end of the
table. AFC continues to all because the more quantity output produced, the more spread the FC
becomes. While the ATC is equals to the sum of AFC and AVC, so as AFC keeps decreasing, the closer
the difference between ATC and AVC.
The graph below illustrates how the indicators look like during short-run production.
ATC
Negative
AV Marginal
MC Returns
AFC
Marginal Marginal
Returns Returns
43
To gain a better appreciation of the relevance of cost indicators, we will only show the inverse
relationship of production and cost indicators.
MP
AP
Negative
AV Margina
MC l
Returns
Marginal Marginal
Returns Returns
As evident in the graph, during the increasing stage, as AP and MP increases, and MP is higher than
AP, the AVC and MC continues to fall by a steep curve, and it is also noticeable how MC is lower
than AVC.
In the decreasing stage, before AP is at its maximum, while MP starts to decline while stile being
higher than AP, MC starts to increase while still being lower than AVC. During the time when AP is
at its maximum, AVC is at its lowest and beyond that point, when additional inputs are increased,
AP also starts to fall while being higher than MP and AVC start to increase while being lower than
MC.
44
Long-Run Cost Analysis
Long run cost analysis is simpler as compared to production. Although same as with long-run
production, there are only two important concepts to remember in long-run cost analysis. These
concepts are Economies of Scale and Diseconomies of Scale. However, the graphical analysis in long-
run cost analysis is simple. Long-run average cost envelopes all short-run average costs.
SRAC 1 SRAC 3
LRAC
SRAC 2
Economies of Diseconomies
Scale of Scale
As seen from the graph the long-run average cost (LRAC) curve envelopes all short-run average cost
(SRAC) curves. The lowest point in the LRAC is the minimum cost possible for all SRAC.
Economies of scale
Economies of scale simply means that increase in the scale of production will lead to lower long-run
cost. One good example of economies of scale is automation. Increase in the investment for
machines can lead to a larger output with less cost.
Diseconomies of scale is the increase in scale of production which leads to increase in long-run cost.
Example of this too much investment in technology may lead to higher fixed cost while gaining
minimal increase in output.
Overall, this lesson reinforces the analysis of production inputs by providing an understanding on
the cost that will be incurred for any additional production inputs. In the next lesson, students will
learn other costs that affects managerial decision that are not directly related to inputs of
production.
References:

University Press
45
Post Test 6
1. Complete the table below using the given production function 30LK+0.9L 2K+0.2LK2-0.01L3K-
0.05LK3. The price for capital (K) is 10 and the price for labor (L) is 20. At what level of L was
AP at maximum?
L K Q FC VC TC AFC AVC ATC MC
15 10
35 10
50 10
65 10
90 10
2. Differentiate Economies and Diseconomies of Scale.
46
Lesson 7: Other Factors Affecting Managerial Decisions
Topics:
Transaction Cost
Specialized Investments
Acquisition of Inputs
Labor Optimization
Duration: 3 Hours
Pre-Test:
1. Why is there a need for contracts to facilitate acquisition of inputs?
2. When is profit-sharing most effective?
In this module, we will discuss the short topics that include Transaction Cost and Labor Optimization.
These topics are also considered when making managerial decisions especially about production.
Transaction Cost
These are cost associated with acquisition of inputs, which includes negotiations and searching for
a supplier of an input.
There are times when firms need a new investment to facilitate the acquisition of inputs. These
investments that are necessary to facilitate exchange between parties are what we call specialized
investments.
There are different types of specialized investments. One of which is what we call the Site-
Specificity. Site-Specificity investments require firms to locate its plant or production in a certain
location. One good example of Site-Specificity is a hydro power plant, which requires production to
be near a water dam.
Another example is the Physical-Asset Specificity. These are specialized investments that requires a
firm to invest more on capital equipment to produce a particular product. For example, to produce
engines of a new client that requires solar powered engines for their new vehicle, the firm bought
new machines to cater to the production of solar engines.
Dedicated Assets are general investments required to facilitate an exchange with a buyer. For
example, a firm that produces 50,000 units of steel a month are required to expand their production
so that they can produce 500,000 units of steel a month in order to cater to the steel requirement
of a shipbuilding client.
Lastly is the Human Capital Assets, which requires additional training or skill set for labor in order to
fulfill the requirement of the client. For example, an IT company was hired to create a new e-learning
program for synchronous learning. Since none of the IT specialist have any expertise of experience
in making an educational app, the manpower of the IT company received training on educational
programming.
47
A firm may or may not experience any specialized investments depending on the its method of
acquiring inputs. There are various methods on how to acquire inputs.
The most basic method of acquiring inputs is through Spot Exchange. Spot Exchange means that
inputs are bought and acquired through the market. They buy their inputs using market price and
the acquisition of inputs through this method does not require parties to adhere to any terms of
exchange. Spot Exchange basically requires no transaction cost.
The other method of acquiring inputs is through Contracts. In this type of acquisition of inputs,
buyers of inputs enter into an agreement to its sellers, protected by a legal document. Firms mostly
subscribe to this method due to the lack of availability of its inputs in the market. The good thing
about this method is that it provides more security in acquiring inputs and the quality is assured as
well. Although contracts provide more protection, there are transaction costs involved in this kind
of method of acquiring inputs. Contact entails cost for lawyers, negotiations and other fees relative
to processing the contract. Also, contracts are mostly expressed in short terms because sellers of
inputs are less likely to agree to long-term contracts.
When contracts are deemed too costly, especially with industries with complex environment and
full of uncertainty, some firms opted to engage into vertical integration. Vertical Integration is a
situation where firms either put up a new firm or acquire a new one to produce its own input. The
problem with this method is that firms would have to add the responsibility of running another firm.
Labor Optimization
Is mainly about addressing two labor optimization problems such as Principal-Agent Problem and
Manager-Worker Problem.
Principal-Agent Problem focuses on the risk of managers fudging and not doing their jobs properly
due to the lack of presence of the owner. This focuses on the tendencies of mid-level managers to
underperform because of lack of control measures.
For these kinds of problems, incentive contracts such as profit sharing may serve as a proper
solution. One example for this kind of solution is giving managers shares of a company to make sure
that they always perform at the highest level.
Other solutions for this kind of problem is making sure that the managers have regards towards
their reputation and to some firms, they instill the fear of takeovers or bankruptcy.
The other labor optimization related problem is the Manager-Worker Problem. This focuses on the
risk of workers underperforming and not doing their jobs properly.
This is actually a more prevalent problem compared to the first one, especially if we compare the
ratio between the top and mid-level managers and the ratio between managers and workers.
While profit sharing may serve as a solution, there are very little to none who subscribe to profit
sharing for this kind of problems. However, revenue sharing schemes such as commissions are more
evident and effective especially in sales related jobs.
48
There are firms like those who rely heavily on production of goods, that makes use of the Piece Rate
schemes, wherein workers are paid depending on the number of outputs they produced in a day.
Lastly, the most basic and prevalent, yet probably less efficient scheme for addressing the manager-
worker problem, the use of Time Clocks and conduct of Spot Checks. This kind of scheme is widely
used due to its applicability to almost every worker setting as compared to other schemes designed
to address the manager-worker problem.
Our topics on factors affecting managerial decisions on production ends at this topic. We were able
to learn methods on how managers deal with production related factors other than inputs
combination and cost analysis. The next topics will focus on the environment surrounding firms and
how firms are affected by their environment.
References:

University Press
49
Post Test 7
Multiple Choice
1-6 Determine the method of acquiring inputs referred to in each item below. Write the letter
of the correct answer on the space provided.
A) Spot Exchange
B) Contract
C) Vertical Integration
1. Company X acquired its inputs for production without any transaction cost
2. Data X entered into a legal agreement with Prog X Inc. to provide Data X with
programmers that specializes in X Programming.
3. Auto Corp. acquired Tire X to produce its own tires for its cars.
4. Merchandise produces Product X by forming an agreement with Company X to produce Part
X of Product X.
5. Furniture X buys all of its raw materials from Lumber X, Inc.
6. Toy, Inc. acquired Plastic Corp to provide raw materials for production.
7-10 Determine which schemes for labor optimization referred to in each item below. Write the
letter of the correct answer on the space provided.
A) Profit-Sharing
B) Revenue-Sharing
C) Time Clocks
D) Piece Rate
7. A scheme which pays labor according to the number pf output he/she has produced.
8. The most common scheme to make sure that workers are present at work.
9. These scheme works best at sales related jobs.
10. Giving managers or workers share in the stocks of the company.
50
UNIT 3: EXTERNAL FACTORS AFFECTING MANAGERIAL DECISIONS
After successful completion of this module, the student should be able to:
4. Differentiate models of market structure.
5. Conduct industry analysis using SCP Model and Five Forces framework.
6. Discuss how Government manages externalities.
Learning Output:
The student is expected to be able to have concrete and substantial the knowledge about
how external elements affects the behavior of firms and dictate performance of firms.
Lesson 8: Market Structure

Topics:
Perfect Competition
Monopoly
Monopolistic Competition
Oligopoly
Duration: 3 Hours
This lesson provides more idea on how the environment surrounding firm affects the decision
making of managers. Market Structure provides the difference between the interaction of firms with
its environment in terms of, number of competitors, firm size, availability of information in a market,
type of products being sold in the market, and the power of firms to enter and exit a particular
market.
Pre-Test 8
Identification. Write on the space before the number.
1. Which of the market structure have differentiated products with numerous
sellers?
2. Which of the market structure earn normal profit during short-run and then
returns to earning supernormal profit in the long-run?
3. Which of the market structure have only one seller?
4. Which of the market structure are dominated by few firms?
5. Which of the market structure earn supernormal profit during short-run and then
returns to earning normal profit in the long-run?
There are four types of market structures, namely; Perfect Competition, Monopoly, Monopolistic
Competition, and Oligopoly. The difference among the structures are characterized by the mixture
of the elements discussed above.
51
Perfect Competition
Perfect competition is a market structure identified simply as a market with numerous firms selling
homogenous products. It is also said that the technology for producing products are very accessible
for potential players in the industry and that the information about production and pricing is
available among consumers and competing firms. Due to the conditions stated in the previous
statements, there is no barriers to entry in this market.
The most evident feature of this market is the presence of price competition. Due to selling
homogenous products, firms do not have room for non-price competition. Competing through price
leads firms to earn normal profits or profits that can give producers minimal amount of profit to
keep the operation of firms going. The demand curve of a single firm in a perfectly competitive
market is perfectly elastic.
MC
AC
P = MR
Looking at the graph, we may notice that we equate the Marginal Revenue with Price. This is
because of the mathematical relationship between P and MR since MR = ∆PQ / ∆Q and P is constant
due to price competition, ∆Q will cancel each other out.
Firms in a perfect competition compete through price, meaning following the law of demand, firms
can only lower price to gain more consumers. If one firm intends to increase its price, it will certainly
lose all of its consumers because there are other firms available with lower prices. Firms will
compete until their price hits rock bottom because further decrease in price will result into having
their average cost, higher than the marginal revenue.
Although firms in a perfectly competitive markets earn normal profit, they also have the opportunity
to earn supernormal profit but only during short run. The graph below is an example when a firm in
a perfect competition earns supernormal profit by charging a price way above the lowest point of
AC. Due to earning supernormal profit, it will attract potential players in the market. Since there is
perfect information in the market and there are no barriers to entry, the technology is accessible
52
for all potential entrants in the market. This will lead to more firms competing in the market. Since
firms can only compete through price, price will decrease until firms can only earn supernormal
profit.
MC
AC
P1
P2
Q
Monopoly 1
Monopoly refers to a situation in the market where there is only one producer of a particular good
or service. In contrast to perfect competition, monopoly has the power to earn supernormal profit
due to the fact that it has no competition. In a monopoly, the availability of information in terms of
production is very low and it enjoys barriers to entry and exit.
Barriers to Entry and Exit

Barriers to entry and exit pertains to power of firms to earn huge profits due to some circumstance
that discourages potential competing firms to become a player in the market.
There are two kinds of barriers to entry and these are structural and strategic barriers.
Structural Barriers are commonly referred to as natural barriers because of factors beyond the
control of firms or due to government protection.
The most common forms of structural barriers are, ownership of resources, economies of scale and
scope, marketing advantage of incumbents, financial requirement for aspiring player in an industry,
cost of research for production technology or market research, and lastly, laws and regulations by
the government granting special permissions and subsidies to firms.
Strategic Barriers are tactics or strategies employed by firms to either discourage entry or encourage
exit in an industry.
Example of strategic barriers are Predatory Pricing, Limit Pricing, Excess Capacity, and Heavy
Advertising.
Predatory pricing is the most heard of, as compared to other strategies. Predatory pricing does not
discourage exit, but it encourages exit. An incumbent firm earning supernormal profit would lower
its price if a competitor enters the market.
53
Limit pricing is the opposite of predatory pricing, because incumbent firms keep their price low to
discourage entry of competitors.
Excess capacity is a strategy when firms is when a market with a low demand is supplied by an
incumbent with the capacity to make its product availability in the market high, driving the prices of
goods down to discourage potential entry.
Heavy advertising is a strategy where an incumbent firm increases advertising efforts whenever
there are new players in the market. This will drive the marketing advantage of incumbents and
prompt newcomers to increase its fixed cost, leading to exit.
Q
1
The demand curve of a firm in a monopoly is inelastic, due to lack of competitors, which leaves
consumers with no substitute for the product produced by the incumbent fir.
Firms in a monopolistic competition competes against many players and sell differentiated
products. This means that there is non-price competition in the market which enables firms to earn
supernormal profit even when competing against numerous firms. The Barriers to entry in this
market is minimal and firms have some power in pricing. There is imperfect knowledge for both
consumers and buyers, but not very limited. Due to the presence of substitutes and differentiation,
the demand curve of firms in a monopolistic competition is mostly elastic.
Q
54 1
During short-run, firms in a monopolistic competition may be able to experience normal profit.
When a variation of a product was copied or reproduced by competing firms, the competition would
turn into price competition, leading firms to lower their prices and eventually earn normal profit.
The profit of firms in a monopolistic competition during short-run is a different story as compared
to its profits during long-run. In the long-run, people earn supernormal profits and this is due to the
product differentiation. Since firms can produce differentiated products, each differentiation of
firms in the market enable them to have control over price. Through differentiation, firms gain the
ability to convince that their product is better than their competitors, thus having the power to
convince buyers that they can offer satisfaction better than their competitors gives them the power
to convince consumers to buy their products at a price set by the firms. The ability to have some
control over prices enable firms to earn supernormal profit. If you notice products that are
frequently replaced by new variation of the same products, then you are witnessing a common
behavior in a monopolistic competition market.
Brand Cannibalism is a common practice of firms that sells differentiated products. It is defined as
the behavior of firms to introduce new differentiation of their product, resulting into the loss of
market share of its other products or old product variation. To reinforce product differentiation,
firms also invest in making sure that their differentiation is properly communicated to its target
consumers.
Differentiation without marketing is a work half-done and consumers will not be led to recognize
your product as a viable choice for consumption. Firms in a monopolistic competition also invest
heavily in marketing. Most firms in this type of market structure engage into comparative
advertising. This is a strategy to advertise products in a way that differentiates itself from the
products of other firms. The success of comparative advertising may even lead consumers to pay
additional premium because of its brand. The additional premium paid by consumers due to the
brand of the product is called brand equity. However, some firms that have had success with their
branding often leads to a brand myopic behavior, which means firms tend to rely more on the
success of the brand rather than focusing on emerging industry trends and or changes in consumer
preference.
There are also cases when firms, that targets a particular need in the market and introduce products
that will address such need. This strategy is called Niche Marketing. One common example of niche
marketing is Green Marketing. Firms that engage in green marketing tailor-fit their products to meet
environment friendly-standards.
Oligopoly
Firms in an Oligopoly face very few competitors. Similar to monopoly, firms in an oligopoly enjoy
the benefits of barriers to entry and monopoly powers. While there are different models of
oligopoly, the focus of this discussion will be focused only on the Sweezy Oligopoly Model. This
model of oligopoly highlights the behavior of incumbent firms to collude with each other, in a way
that there is an existence of cartel price and quantity. The distinct form of collusion featured in this
model is that firms tend to collude when during price decrease, while no firm follows a price
increase. As a result of the said behavior, the demand curve in this model is kinked, as illustrated by
the graphs below.
55
P*
Q*
As mentioned above, firms collude in terms of pricing and quantity. The illustration above shows
that demand tends to be elastic during price increase and becomes inelastic during price decrease.
The graph below shows the kinked demand curve resulting from the elasticity above the cartel price
and the inelasticity of demand below the cartel price.
P*
Q*
The unique demand curve for Sweezy oligopoly reflects the uncooperative behavior when a firm
increase its price, so a lot of its consumers would probably shift to other competitors, thus making
the demand elastic. In terms of price decrease, incumbent firms will definitely follow due to the
possibility of losing a huge chunk of market share, resulting to an inelastic demand.
The discussion in this lesson shows firms behaving in accordance to the elements, which constitutes
the structure of its market. The different market structures vary mostly in terms of, number of
players, products sold, information and the barriers to entry and exit. In the next lesson, there would
56
be a discussion on the analysis of how structure of markets dictates the behavior of the firms, which
affects the performance of firms and other ways on how to analyze the environment surrounding
industries.
To understand more about how firms behave in an oligopoly, let us play one of the basic game of
the Game Theory, the Prisoner’s Dilemma, using Firms in a duopoly as players.
The Prisoner’s Dilemma can be applied in an oligopoly when firms are given a choice to compete or
to cooperate. Let us make duopolic situation as an example. Duopoly is an oligopoly with only two
competing firms. Firm A and Firm B can only collude and form a cartel to earn supernormal profit or
compete but but they will earn much less.
If A and B collude, they will earn 10M profits but if they compete, they will only earn 2M.
Because their products are homogenous, if one of the parties chose to lower their price to compete
with the other, the firm with the lower price will earn 20M while the other will only earn 0.5M.
Firm A
Comp. Price Cartel Price

Pay-off Matrix
Comp. Price 2M 0.5M
2M 20M
Firm B Cartel Price 20M 10M
0.5M 10M
It is common in an oligopoly to search for a dominant strategy. Dominan strategy is a strategy that
leads Nash Equilibrium. A strategy that will help them avoid any loss no matter what strategy, the
other firms will come up with. In this situation, that strategy is to compete.
References:

University Press
57
Post Test 8
Complete the table below. (You may write N/A if necessary)
Market Structure No. of firms Product Barriers Profit Profit

(Y/N) Short-run Long-run
Perfect Competition
Monopoly
Oligopoly
58
Lesson 9: Industry Analysis
Topics:
SCP Model
Five Forces Framework
Duration: 3 Hours
In this lesson, the discussion will revolve around two methods on industry analysis, namely; the SCP
model and the Five Forces model. Industry is a group of firms producing the same product or
providing the same service, while markets are group of people who are existing or potential
consumers or subscribers of a particular product or service, respectively.
Pre-Test 9:
1. Differentiate SCP Model and Five Forces Framework.
2. Discuss industry concentration.
SCP Model
The SCP model is known also as the Structure – Conduct – Performance Model, which analyze how
structure of markets dictates the behavior of the firms, which affects the performance of firms.
Structure pertains to the elements mentioned from the previous lesson, and in addition, it also takes
into consideration implications of such elements, such as technology as a consequence of availability
and cost of information, and firm concentration as a consequence of number of firms and the
difference in firms sizes.
Industry concentration pertains to the distribution of firm size in an industry. If there is an industry
concentration, it only means that there is an imbalance in the distribution of firms and there are
dominant players in the industry. There are two ways to measure the industry concentration.
Four-Firm Concentration Ratio

The four-firm concentration ratio measures the industry concentration using the sum of sales of the
four biggest firms on the industry and dividing it total the total sales of firms in the industry.
C4 = (S1 + S2 + S3 + S4) / St
*S1 – S4 are sales of 4 largest firms and St is the total sales of all firms
Or
C4 = W1 + W2 + W3 + W4
* Where W = S / St
59
W represents market share, which shows how much of the total market is captured by a particular
firm.
4 Firm Value Interpretation

0- 5% Low
51% -80% Moderate
81% - 100% High
Herfindahl-Hirshmann Index (HHI)

HHI is measured by multiplying 10,000 to the summation of the squared value of the market share
of each firm.
HHI = 10, 000 Σw2
HHI Value Interpretation

1 – 1,499 Low
1,500 – 2,499 Moderate
2,500 – 10,000 High
Low concertation usually means that there is monopolistic competition. However, as it approaches
50% means that there is an emerging oligopoly.
Moderately concentrated industries have oligopoly. If there is high concentration, firms in this
industry are regulated by the government.
Below is a sample of Four-Firm ratio and HHI:
Firms Sales in Millions

Company A 51,122
Company B 104,286
Company C 22,572
Company D 46,615
Company E 378,799
Company F 76,476
Company G 44,958
Company H 98,786
Company I 16,594
Company J 182,347
Using the Four-Firm ratio, we must first determine four of the largest firms in the industry.
4 Firms Sales in Millions
Company E 378,799
Company J 182,347
Company B 104,286
Company H 98,786
60
After we determine the largest firms, we now derive their market share then add them.
4 Firms Sales in Millions W Ratio

Company E 378,799 0.37
Company J 182,347 0.18 75%
Company B 104,286 0.10
Company H 98,786 0.10
Using the HHI, we must first determine the squared value of the market share of each firm in the
industry. After which, we get the summation then multiply to 10,000.
Firms Sales in Millions W W2
Company A 51,122 0.05 0.00
Company B 104,286 0.10 0.01
Company C 22,572 0.02 0.00
Company D 46,615 0.05 0.00
Company E 378,799 0.37 0.14
Company F 76,476 0.07 0.01
Company G 44,958 0.04 0.00
Company H 98,786 0.10 0.01
Company I 16,594 0.02 0.00
Company J 182,347 0.18 0.03
∑= 0.20
HHI = 2016.17
In both four-firm ratio and HHI, we determined that there is an oligopoly in the industry since there
is moderate concentration.
Since other factors that constitute the structure was already discussed in the previous lesson, so we
will now proceed with the discussion of conduct, which pertains on the behavior of firms in an
industry. One of the most notable behavior of firms in an industry is the pricing behavior. Pricing
behavior stems from the capability of firms to dictate the price for the product. A perfect example
for this is the pricing behavior of firms in a perfect competition. Firms in a perfect competition
almost have no power over pricing because of the structures of their market that allow them to
compete through pricing.
Another interesting behavior that can be taken note of was born out of the concentration in an
industry. Integration and mergers can either be hostile or friendly. Friendly if the integration of firms
serves the interest of both while hostile if there was a take-over due to competition.
There are three types of mergers and acquisition activities. First, there is what we call Vertical
Integration, which was first discussed in the lesson about acquisition of inputs. If a firm was acquired
by another for the production of the latter’s input, then that is a vertical integration.
Horizontal Integration is the integration of two firms in the same industry. This form of integration
is a form of eliminating competition and may be harmful to an industry because it increases
concertation. A good example of this integration is the merger of Jollibee and Mang Inasal which
lessens the competition of Jollibee in the food servicing industry.
Lastly is the Conglomerate Mergers. This type of integration pertains to firms acquiring new firms
from different industry for diversification and additional support of cash flow. One of the biggest
61
issues for this integration is that it creates a domino effect to other industries if a conglomerate fails
in one industry. Right now, there are huge conglomerates in the country and their investments
extends mostly from retail, housing, banking to real estate development.
Another element of conduct is research and development. This behavior is very essential to firms
competing with differentiated products. Investing in research and development may help to
improve production technology, which lead to better production differentiation. Along with
differentiation of course is advertising, which is another element of conduct.
The last part of the model is performance, which is measured mainly by profits and social welfare.
Like in the discussion above as firms behave according to its structure, their behavior is reflected by
their performance. In the example of perfectly competitive markets, the conduct of firms in terms
of pricing, results into an element of performance which is earning normal profit. This connection
completes the process of SCP model

This model is a powerful method to analyze the competitiveness of a business environment.
According to this model, competitiveness in an industry is made up of five elements, which are the
Entry, Power of Inputs Suppliers, Power of Buyers, Industry Rivalry and Presence of Substitutes and
Complements.
Entry
This element pertains to the performance of the barriers of entry in an industry. The entry of firms
affects the competitiveness in an industry because it dictates the number of players, as well as the
size of the firms. Another factor taken into consideration in terms of entry is the participation of
foreign competitors.
Power of Inputs Suppliers

Another factor which affects the competitiveness is the power of input suppliers to dictate the
prices. If the inputs of firms in an industry is standardized and available in the market, the power of
input suppliers are low. However, for complex production with inputs that lack substitutes or
suppliers in the market, then there will high power for input suppliers. If there is high inputs
suppliers, the production cost may increase.
Power of Buyers
Power of buyers pertain to the power of buyers to haggle over prices. The higher the number of
firms in a market, or the higher the availability of close substitutes to a product, the higher the
power of buyers are.
Industry Rivalry
Industry rivalry refers to how differentiated products are and how firm engage in activities that will
make sure that the production of one firm is better than the other competitors.
Presence of Substitutes and Complements

Products with close substitutes have less profitability. The price and availability of related products
affects the profit of firms in an industry.
62
Compared to the SCP model, Five Forces is more useful for strategizing and conducting feasibility of
an investment in a particular industry. Both models however provides explanation on how the
market structures translate into how firms should interact with consumers to achieve their goals.
The last lesson that will be discussed provides an idea on how government positions itself in the
market and hoe they interact to both buyers and sellers.
References:

University Press
63
Post Test 9
I. Identification. Identify the answer on the following questions below with the help of the
wordbank. Write your answer on the space provided before the number.
Industry Rivalry Presence of Substitute and Complements

Conduct Structure
SCP Model Power of Input Suppliers
Threat of Entry Five Forces Framework
Power of Buyers Performance
______________1. Focuses on the differences on technology, concentration and market

condition of an industry.
______________2. Industry performance is caused by the competitive behaviour of players in the
industry, which is caused by the industry structure.
______________3. A tool for industry analysis, which helps to understand the competitiveness of
business environment, and for identifying potential profitability.
______________4. Focuses on differences on how firms behave in the market.
______________5. Refers to profits and social welfare of an industry.

______________6. Affects the performance of the industry in terms of product differentiation and
consumer switching cost.
______________7. The ability of firms to negotiate terms of prices of inputs to their favor.
______________8. Refers to the price and value of interrelated products and services as factors
which affects the performance in an industry.
______________9. Refers to presence of barriers to entry, which affects performance of an

industry.
______________10. Refers to the ability of consumers to haggle.
64
Lesson 10: Roles of Government
Topics:
Negative Externalities
Positive Externalities
Corrective Taxes
Subsidy
Duration: 3 Hours
The discussion in this lesson will focus more on how the government manages externalities to
prevent market failures. These externalities exist because buyers and sellers have their own interest
in participating in the market and most of the time, the cost of pursuing their interest in the market,
if left unchecked, results to market inefficiencies. There are two types of externalities and both will
be discussed in this lesson.
Pre-Test 10
1. What are externalities?
2. Why are there externalities in the market?
One of the roles of the government in the economy is to manage externalities. We will first discuss
the concept of negative externalities.
Negative externalities are uncompensated effects of market activities that brings harm to its
environment and other markets. There are negative externalities when the quantity demand and
supply are more than the ideal quantity that causes no harm other parties. Meanwhile, positive
externalities are benefits of market activities to its environment and other markets. In the case of
positive externalities, there is less quantity demand or supply than the ideal quantity that will
benefit other parties.
To understand the mechanism used by the government in regulating externalities, let us first
understand how the interest of buyers and sellers are reflected in the market. In the market, the
supply curve, the willingness of firms to produce includes the private cost or cost of sellers incurred
for production. The demand curve shows the private value, or how valuable the products are or
their willingness to pay. Understanding how the demand and supply curve shows the interest of
buyers and sellers will help us understand the regulation of externalities.
Corrective Taxes
Corrective taxes are designed to make market forces take into account the costs that arise from
negative externalities. Corrective taxes serve as payment for external cost brought about by
excessive market activity in a particular market. On good example is the negative externality brought
about by too much usage automobiles in the country, resulting to heavy traffic in almost any time
of the day. In this example, too much automobiles bought and sold, caused harm to its environment.
The role of corrective taxes is to lessen the market activity in order to achieve the socially acceptable
number of automobiles in the country that would less likely to cause negative externality. Using
graphs, we can provide better understanding of how corrective taxes help regulate externalities.
65
The graph below shows the current market price and equilibrium for automobiles. Since the current
market activity is causing negative externalities then the goal is to lessen the market activity and
make the market forces pay for the external cost.
Through the use of corrective taxes, the prices for inputs of production may increase by imposing
taxes on imported equipment and raw materials used to produce automobile. This will cause the
supply curve to shift left. Such event will increase the price of automobiles, decreasing its demand,
thus achieving a socially desirable number of market activities.
P2
P1
Q2 Q1
Subsidies
Subsidies are designed to encourage more market activities in order to maximize social benefits. For
this kind of externalities, let us make use of government spending for public education. Lack of
education can cause problems. Although unemployment may be the most evident problem for lack
of education, other problems such as crime, quality of labor force and national production may also
suffer. Hence, in order to avoid problems and to maximize the benefits brought about by education,
government has subsidized education. Let us say, that in the current situation, there is still lack of
education in our country. The graph below illustrates the market education.
Given the graph below the market activity is less than what is socially desirable so the market activity
below should increase in order to maximize the benefit of education.
66
P
Using subsidies, the cost for education will be shouldered by the government resulting to an
increase in the demand for education, which shifts the demand curve to the right.
Q1 Q2
We have finished the discussion about the role of government to manage externalities, through
corrective taxes and subsidies. the discussion on the external factors that affects managerial
decisions is now complete.
References:

University Press
67
Post Test 10
Given the following situations, identify whether to apply subsidy or corrective taxes. Write on the
space before the number.
1. Government needs more investors in the rice industry to boost the local supply of
rice.
2. The mining industry causing harm to the environment
3. The labor market lacks supply of nurses.
4. The effect of gasoline to carbon emission.
5. The need to boost the amount of foreign direct investment in the country.
68
Answer Key
Pre-Test 1
Multiple Choice:
1. A
2. B
3. C
Post Test 1
Answer:
NPV = Php 34,302.51 (3Points)

Since NPV is positive, the firm would earn more if it invests in Investment A. (2 Points)
Pre-Test 2
1. b
2. a
3. a
Post Test 2
1. D
2. B
3. C
4. D
5. D
6. C
7. D
8. D
9. D
10. D
11. D
12. C
13. D
14. B
15. D
Pre-Test 3:
1. <
2. <
3. <
69
Post Test 3
1. A
2. B
3. C
4. D
5. B
6. A
7. D
8. B
9. C
10. A.
11. B
12. A
13. D
Pre Test 4:
1. Y
2. X
3. A
4. B
Post Test 4
b = -7.62 (3 points)
a = 5,218.63 (3 points)
The Qd when price is at Php. 200 is 3,694.1 (2 points)
Pre-Test 5:
1. Differentiate Long-run production does not have any fixed, while Short-run production has
fixed input and is subject to the law of diminishing marginal returns.
2. The three stages of short-run production are Increasing Marginal Returns Stage, Decreasing
Marginal Returns Stage, and Negative Marginal Returns Stage.
Post Test 5
1.
K Q AP MP
L
15 10 5737.5 382.5
35 10 16187.5 462.5 522.5
50 10 23500 470 487.5
65 10 28112.5 432.5 307.5
90 10 24300 270 -152.5
2. The most optimal combination of input is L = 48,000 (3 points) and K = 16,000 (3 points).
70
Pre-Test 6:
1. Economies of Scale means an increase in the scale of production, leading to lower long-run
cost, while and Diseconomies of Scale implies an increase in the scale of production, leading
to higher long-run cost.
2. AVC and MC are inversely proportional to AP and MP.
Post Test 6
1.
L K Q FC VC TC AFC AVC ATC MC
15 10 5737.5 100 300 400 0.02 0.05 0.07
35 10 16187.5 100 700 800 0.01 0.0432 0.0494 0.0383
50 10 23500 100 1000 1100 0.0043 0.0426 0.0468 0.0410
65 10 28112.5 100 1300 1400 0.0036 0.05 0.05 0.07
90 10 24300 100 1800 1900 0.00 0.07 0.08 -0.13
2. Economies of Scale means an increase in the scale of production, leading to lower long-run
cost, while and Diseconomies of Scale implies an increase in the scale of production, leading
to higher long-run cost
Pre-Test 7:
1. Contract works best when inputs are unavailable in the market.
2. Profit-sharing works best for Principal – Agent problem
Post Test 7
1. A
2. B
3. C
4. B
5. B
6. C
7. D
8. C
9. B
10. A
Pre-Test 8
1. Monopolistic Competition
2. Monopolistic Competition
3. Monopoly
4. Oligopoly
5. Perfect Competition
71
Post Test 8
Complete the table below. (You may write N/A if necessary)
Market Structure No. of Product Barriers Profit Short- Profit Long-run

firms (Y/N) run
Perfect Competition Many Homogenous N Supernormal Normal
Monopoly One N/A Y Supernormal
Monopolistic Competition Many Differentiated N Normal Supernormal
Oligopoly Few Homogenous Y Supernormal
/
Differentiated
Pre-Test 9:
1. Differentiate SCP Model analyzes how the structure of markets dictates the behavior of the
firms, which affects the performance of firms, while Five Forces is more useful for
strategizing and conducting feasibility of an investment in a particular industry.
2. The distribution of firm size in an industry.
Post Test 9
1. Structure
2. SCP Model
3. Five Forces Framework
4. Conduct
5. Performance
6. Industry Rivalry
7. Power of Input Suppliers
8. Presence of Substitute and Complements
9. Threat of Entry
10. Power of Buyers
Pre-Test 10
1. Effects of market activities to its environment or other markets.
2. Unchecked interest of both consumers and producers in the market.
Post Test 10
6. Subsidy
7. Corrective Tax
8. Subsidy
9. Corrective Tax
10. Subsidy
72
Glossary
A
Acquisition by Contracts
Buyers of inputs enter into an agreement to its sellers, protected by a legal document
The measure of the responsiveness of the quantity demand of a specific good to the changes in the
advertising efforts of the firm or the cost of advertising.
Average Fixed Cost
The amount pf Fixed Cost per quantity output.
Average Product
The quantity of output produced for each single amount variable input used for production.
Average Total Cost
The amount of Total Cost per quantity output.
Average Variable Cost
The amount of Variable Cost per quantity output and is inversely proportional to Average Product.
B
Barriers to Entry and Exit
Pertains to power of firms to earn huge profits due to some circumstance that discourages potential
competing firms to become a player in the market.
Brand Cannibalism
The behavior of firms to introduce new differentiation of their product, resulting into the loss of market share
of its other products or old product variation.
Brand Equity
The additional premium paid by consumers due to the brand of the product.
Brand Myopic
Firms tend to rely more on the success of the brand rather than focusing on emerging industry trends and or
changes in consumer preference.
73
C
Change in Quantity Demand
Quantity demand changes in response to changes in price.
Change in Quantity Supply
Quantity supply changes in response to changes in price.
Comparative Advertising
This is a strategy to advertise products in a way that differentiates itself from the products of other firms.
Complementary Good
Goods that are consumed together with another good.
Conduct
Behavior of firms in an industry.
Conglomerate Mergers
Pertains to firms acquiring new firms from different industry for diversification and additional support of cash
flow.
Corrective Taxes
Corrective taxes are designed to make market forces take into account the costs that arise from negative
externalities.
Cross-Price Elasticity
Measures the responsiveness of consumers to changes in the price of related goods.
D
Decreasing Marginal Returns
A stage in short-run production where Marginal Product starts to decrease.
Dedicated Assets Investments
General investments required to facilitate an exchange with a buyer.
Dependent Variable
The variable in the linear equation, whose value depends on the value of other variables.
The increase in scale of production which leads to increase in long-run cost.
E
Economies of Scale
Means that increase in the scale of production will lead to lower long-run cost.
Elastic Demand
Consumers of a product are responsive to price changes.
Entry
This element pertains to the performance of the barriers of entry in an industry.
Excess Capacity
A strategy when firms is when a market with a low demand is supplied by an incumbent with the capacity
to make its product availability in the market high, driving the prices of goods down to discourage potential
entry.
F
This model analyze the competitiveness of a business environment.
Fixed Cost
Cost associated with fixed inputs.
Fixed Inputs
Inputs that remain constant even when there are changes along with the changes in output.
Four-Firm Concentration Ratio
The four-firm concentration ratio measures the industry concentration using the sum of sales of the four
biggest firms on the industry and dividing it total the total sales of firms in the industry.
74
G
Green Marketing
Firms that engage in green marketing tailor-fit their products to meet environment friendly-standards.
H
Heavy Advertising
A strategy where an incumbent firm increases advertising efforts whenever there are new players in the
market.
Herfindahl-Hirshmann Index
Measures industry concentration by multiplying 10,000 to the summation of the squared value of the market
share of each firm.
Horizontal Integration
The integration of two firms in the same industry.
Human Capital Assets Investment
Requires additional training or skill set for labor in order to fulfill the requirement of the client.
I
Income Effect
States that people curb their consumption whenever the price of a good increases because their current
income will not allow them to spend more money from their saving or money allotted for buying other goods.
Income Elasticity
Measures the responsiveness of consumers to changes in income.
Increasing Marginal Returns
A stage in short-run production where Marginal Product is increasing.
Independent Variable
The variable in the linear equation, whose value does not depend on the value of other variables.
Industry Concentration
Pertains to the distribution of firm size in an industry.
Industry Rivalry
Refers to how differentiated products are and how firm engage in activities that will make sure that the
production of one firm is better than the other competitors.
Inelastic Demand
Consumers of a product are slightly responsive to price changes.
Inferior Goods
Goods that are consumed when consumers have low income.
Intercept
The variable in the linear equation, which is the value of the dependent variable when the independent
variable is zero.
Isocost
A line showing the combination of inputs that have the same cost.
Isoquant
A curve of various combination of inputs that yields the same level of output.
L
Law of Demand
States that the quantity demanded has an inverse relationship with price
Law of Diminishing Marginal Returns
Whenever production utilize a fixed input, continuous increase in the amount of variable input used in
production, would lead to a decreasing or even negative marginal returns in the future.
Law of Supply
75
States that the quantity demanded has a positive relationship with price
Limit Pricing
Incumbent firms keep their price low to discourage entry of competitors.
Long-run Production
A stage in production analysis where there are no fixed inputs involved.
Long-run Cost
A stage in cost analysis where there are no fixed costs involved.
M
Manager-Worker Problem
Focuses on the risk of workers underperforming and not doing their jobs properly.
Marginal Cost
The additional costs attributed to the additional quantity of output per quantity output and is inversely
proportional to Marginal Product.
Marginal Product
The additional output produced per additional variable input added to production.
Marginal Rate of Technical Substitution
The rate of substitution between two inputs to maintain the same level of output.
Market
A mechanism through the interaction of buyers and sellers are facilitated.
Market Equilibrium
The point where demand is equals supply.
Market Price
The price level where the equilibrium between demand and supply are achieved
Market Structure
Pertains to number of firms in an market, firm size, availability of information in a market, type of products
being sold in the market, and the power of firms to enter and exit a particular market
Refers to a situation in the market structure where firms compete against many players that sell
differentiated products.
Monopoly
Refers to a situation in the market where there is only one producer of a particular good or service.
N
Negative Externalities
Uncompensated effects of market activities that brings harm to its environment and other markets.
Negative Marginal Returns
A stage in short-run production where Marginal Product is negative.
Niche Marketing
When a firm targets a particular need in the market and introduce products that will address such need.
Normal Profits
Profits that can give producers minimal amount of profit to keep the operation of firms going.
O
Oligopoly
Refers to a situation in the market is dominated by few firms.
P
Perfect Competition
A market structure identified simply as a market with numerous firms selling homogenous products.
Physical-Asset Specificity
76
These are specialized investments that requires a firm to invest more on capital equipment to produce a
particular product.
Piece Rate Scheme
Workers are paid depending on the number of outputs they produced in a day.
Point Elasticity
Point Elasticity is a method used to determine the elasticity of a given price level based on the demand curve.
Positive Externalities
Benefits of market activities to its environment and other markets.
Power of Buyers
Power of buyers pertain to the power of buyers to haggle over prices.
Power of Inputs Suppliers
The power of input suppliers to dictate the prices.
Predatory Pricing
An incumbent firm earning supernormal profit would lower its price if a competitor enters the market.
Price Elasticity of Demand
Measures how much demand has changed in response to changes in price.
Principal-Agent Problem
Focuses on the risk of managers fudging and not doing their jobs properly due to the lack of presence of the
owner.
Profit-Sharing Scheme
Labor optimization scheme which allows managers or workers to share a part of ownership of the firm.
R
Revenue-Sharing Scheme
Labor optimization scheme which allows workers to earn commissions for the sales made.
S
SCP Model
The SCP model is known also as the Structure – Conduct – Performance Model, which analyze how
structure of markets dictates the behavior of the firms, which affects the performance of firms.
Shift in Demand
Changes in demand due to factors other than price.
Shift in Supply
Changes in supply due to factors other than price.
A stage in production analysis where there are fixed inputs involved.
Short-run Cost
A stage in cost analysis where there are fixed costs involved.
Site-Specificity
Investments that require firms to locate its plant or production in a certain location.
Slope
The variable in the linear equation, which is the rate at which the dependent variable changes every time a
unit of the independent variable would change.
Specialized Investments
Investments that are necessary to facilitate exchange between parties are what we call.
Spot Exchange
Inputs are bought and acquired through the market.
Strategic Barriers to Entry
Tactics or strategies employed by firms to either discourage entry or encourage exit in an industry.
Structural Barriers to Entry
Commonly referred to as natural barriers because of factors beyond the control of firms or due to
government protection.
77
Subsidies
Subsidies are designed to encourage more market activities in order to maximize social benefits.
Substitute Effect
States that when price of a good with substitutes changes, consumers shift their consumption towards
substitute goods.
Substitute Good
Goods that are consumed in exchange for another good.
Sweezy Oligopoly Model
This model of oligopoly highlights the behavior of incumbent firms to collude with each other, in a way that
there is an existence of cartel price and quantity.
T
Time Clocks
The most common scheme to make sure that workers are present at work.
Total Cost
The total of fixed cost and variable cost.
Transaction Cost
These are cost associated with acquisition of inputs.
U
Unit Elastic Demand
A unit elastic or unitary demand is when the percentage change in price is equal to the percentage change in
demand.
V
Variable Cost
Cost associated with variable inputs.
Variable Inputs
Inputs that changes along with the changes in output.
Vertical Integration
Firms either put up a new firm or acquire a new one to produce its own input.
78
COURSE SYLLABUS
MANAGERIAL
ECONOMICS
1ST Semester, AY 2020-2021
COLLEGE: COLLEGE OF BUSINESS ADMINISTRATION

DEPARTMENT: BUSINESS MANAGEMENT
COURSE CODE:
COURSE TITLE: MANAGERIAL ECONOMICS
CREDIT UNITS: 3 UNITS
PRE-REQUISITE:
FACULTY: JOHN PIUS MAILES D.C. DONADO
CONSULTATION HOURS:
79
COURSE DESCRIPTION:
The course provides an in-depth study of the application of economic principles and
methodologies in making managerial decisions within organizations. Managerial
Economics makes use economic theories as tools on how managers deal with issues and
decisions in an organization.
University Vision
Bulacan State University is a progressive knowledge-generating institution,

globally-recognized for excellent instruction, pioneering research, and responsive
community engagements.
University Mission
Bulacan State University exists to produce highly competent, ethical and service-
oriented professionals that contribute to the sustainable socio-economic growth and
development of the nation
Core Values: SOAR BulSU!
Service to God and Community

Order and Peace
Assurance of Quality and Accountability
Respect and Responsibility
The BulSU Ideal Graduates Attributes (BIG A) reflect the graduate’s capacity as:
a. highly and globally competent;
b. ethical and service-oriented citizen;
c. analytical and critical thinker; and
d. reflective life-long learner.
Program Educational Objectives (PEO)
Program Educational Objectives (PEO) University Mission
AIG-a AIG-b AIG-c AIG-d
80
Program Outcomes (PO)
The table below shows the expectation for students who have completed this course:
Program Educational Objectives

PROGRAM OUTCOMES
PEO PEO PEO
1 2 3
Utilize techniques necessary for the
quantitative analysis of market
forces.
Identify and analyze stages of
production.
Formulate recommendations and
strategies based on the
environment of firms.
Course Outcomes and Relationship to Program Outcomes
Course Outcomes Program Outcomes
After completing this course, the student must be able to: a b C
LO1. Apply microeconomic theories to situations faced by

managers when making decisions.
LO2. Analyze movements in market forces in the relationship of

buyers and sellers in a various market.
LO3. Develop strategies and formulate recommendations that

will respond to movement in factors causing shifts in market
forces.
LO4. Analyze the relationship of inputs and its associated cost and the
ability to analyze production during short-run and long-run.
LO5. Apply methodologies and techniques for decision-making during

short-run and long-run production.
LO6. Acquire knowledge on how to manage other factors/ that affects

production.
LO7. Understand how external elements affects the behavior of firms

and dictate performance of firms.
Note: (I) Introductory Course to an Outcome (E) Enabling Course to an Outcome (D) Demonstrative Course to an
Outcome
81
LEARNING EPISODES:
Learning
Outcomes TOPIC Week Learning Activities
LO1 Introduction to Managerial

1 Synchronous Discussion
Economics
Online Exercise
Break out Session
Asynchronous Learning
Asynchronous Activities
LO1 Demand and Supply 2-4
LO2 Synchronous Discussion
Analysis
LO3
Online Exercise
Break Out Sessions
Quantitative Demand 5
LO1 Asynchronous Learning
LO2 Analysis
LO3 Asynchronous Activities
LO1 Demand Estimation 6
Break out Session
Midterms
LO1 Production Analysis 7-8

Break out Session
LO1 Cost Analysis 9
LO5
Break out Session
LO6 Other Factors 10
Affecting Managerial Asynchronous Learning
Decision
LO1 Market Structure 11-12
LO3
LO7 Online Exercise
Break out Session
82
LO6 Industry Analysis 13 -14
LO7 Asynchronous Learning
LO1 Role of Government in 15
LO6 the Economy Asynchronous Learning
LO7
Finals
83
FINAL COURSE OUTPUT:RESEARCH PAPER
RUBRIC FOR ASSESSMENT:
OTHER REQUIREMENTS AND ASSESSMENTS:
GRADING SYSTEM:
Term Examinations 30%
Quizzes/Activities 20%
Project 30%
Participation/Recitation 10%
Attendance/ Promptness 10%
TOTAL 100%
Final Grade = Midterm Grade + Tentative Final Grade Period
Range Grad
e
97-100 1.00
94 – 96 1.25
91 – 93 1.50
88 – 90 1.75
85 – 87 2.00
82 – 84 2.25
79 – 81 2.50
76 – 78 2.75
75 3.00
74 and 5.00
below
84
References:

University Press
Online Resources:
https://www.cambridge.org/core/books/managerialeconomics/FF6133FA445BF3848C4CD7EADC3
1CA03
https://www.academia.edu/35152230/Managerial_economics_and_business_strategy_7th_edition
_Baye
Class Policies:
The students’ listed in the master list from the MIS office shall be permitted to attend
the class.
1. Enrolled students must go to the class promptly. Must come to each class prepared.
2. Students are expected to take all examinations on the date scheduled and participate
actively in the discussion as well as the different activities involved on the subject and the
college as well.
3. Cheating is equivalent to lower grade to a failing grade in the subject. (see Student
Handbook pp. 40)
4. Requirements eg. project, term paper, case study etc. which not submitted on or before
the due date will no longer be accepted.
5. The use of electronic gadgets like cell phones, tablets, laptops, mp3, etc. are not allowed
during class hours unless needed.
6. Sit in students may attend the class upon the approval of the subject teacher.
7. Always maintain the cleanliness and orderliness of the room before and after the class.
85
Prepared by:
JOHN PIUS MAILES D.C. DONADO

Teacher
Noted by:
GENEVEVA T. DUNGCA
Head, Economics Department
Approved by:
Dr. EMERLITA S. NAGUIAT

Dean, College of Business Administration
86
Declaration
I have read and understood the above syllabus in full and in participating in this course I agree
to the above rules. I have a clear understanding of the policies and my responsibilities, and I
have discussed everything unclear to me with the instructor.
I will adhere to the academic integrity and policy and I will treat my fellow students and my
teacher with due respect.
I understand that this syllabus can be modified or overruled by announcements of the

instructor in class or on any social media site at any time
Student’s Printed name Signature Date
Parent’s Printed name Signature Date
Student’s Copy
-------------------------------------------------------Cut here----------------------------------------------------------
Declaration
I have read and understood the above syllabus in full and in participating in this course I agree
to the above rules. I have a clear understanding of the policies and my responsibilities, and I
have discussed everything unclear to me with the instructor.
I will adhere to the academic integrity and policy and I will treat my fellow students and my
teacher with due respect.
I understand that this syllabus can be modified or overruled by announcements of the

instructor in class or on any social media site at any time
Student’s Printed name Signature Date
Parent’s Printed name Signature Date

Instructor's Copy
87
88

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Course Title : Managerial Economics

LEARNING MODULE FOR THE

Units for Discussion are:

Lesson 1: Introduction to Managerial Economics

1. The study of how societies use scarce resources to produce valuable

2. The study of individual behavior of household, firms and market:

How does economics actually fit in the managerial decision-making?

Since economics teaches us to efficiently manage resources to overcome constraints.

Understanding incentives may affect the decision-making abilities of managers. In

1. Wilkinson (2005). Managerial Economics: A Problem Solving Approach, Cambridge

2. Baye (2010). Managerial Economics: A Problem Solving Approach, McGraw-Hill

3. Which of the following is Surplus?

Below is an example of a demand function:

What are the factors that may cause Shift in Demand?

What happens to demand curve when there is a shift in demand?

Law of Quantity Supply

Shifts in Supply Curve

For demand function:

For supply function:

Changes in Market Price

1. Wilkinson (2005). Managerial Economics: A Problem Solving Approach, Cambridge

Name: _________________________ Section: ______ Date: ______

Dor number 1- 7 refer to the graph below:

1. The price of substitute goods increased.

2. The price of the product increase.

3. The income of consumers of inrerior goods increased.

4. Which among the graph shows shifters increasing the demand?

5. The population increased.

6. The income of consumers of normal goods decreased.

7. The price of complementary goods decreased.

9.-10. Choose among the following scenario for demand:

11-15.Choose among the following:

14. A situation where demand is less than supply.

Price Increase on the following:

Below shows the mathematical expression of price elasticity of demand:

Factors that Affects Elasticity:

𝑄2 −𝑄1 𝑦2 −𝑦1 𝑄2 −𝑄1

Cross – Price Elasticity

Through substitution given values, Qd is derived as 56.

Price elasticity = -2(5/56) = -2(0.09) = -0.18

Cross-Price elasticity = 3(2/56) = 3(0.04) = 0.11

Income elasticity = -1(80/56) = -1(1.43) = -1.43

Advertising elasticity = 4(10/56) = 4(0.18) = 0.71

1. Wilkinson (2005). Managerial Economics: A Problem Solving Approach, Cambridge

Name: Date: Section:

1. Which of the variable is the dependent variable? __

a = The intercept is the value of Y when X is zero.

a = (34,279/11) – (-59.6 *(505/11))

The demand function is: Qd = 5,852.61 - 59.6P

1. Wilkinson (2005). Managerial Economics: A Problem Solving Approach, Cambridge

Lesson 5: Production Analysis

Short-Run Production Analysis

Below is an example of a production cost expressed in cubic function:

Q = 4LM + 0.3L2M + 0.4LM2 – 0.06L3M – 0.01LM3

Given the production function above, complete the table below:

Long Run Production Analysis

We repeat the process for the Kλ.

1. Wilkinson (2005). Managerial Economics: A Problem Solving Approach, Cambridge

Short-Run Cost Analysis

Below is a table which shows how Cost indictors are derived:

VC Price of variable inputs X quantity variable inputs

M L Q FC VC TC AFC AVC ATC MC

1. Wilkinson (2005). Managerial Economics: A Problem Solving Approach, Cambridge

Name: _________________ Section: Date: