Managerial Economics – refers to the application of economics theory.

( refers to
microeconomics and macroeconomics).
1. Microeconomics – is the study of the economic behavior of individual
decision making units such as :
An individual costumers
Resource owner
Business firms
2. Macroeconomics – is the study of total or aggregate level of :
Output
Income & employment
Consumption
Investment
Prices
For the economy received as a whole.
ME DEFINITION – the tools of analysis of decision science models which use the
tool:
1. Mathematical Economics – used to formalize the economic models
postulated by economic theory ( equation and form )
2. Econometrics – which applies statistical tools to real-world data to estimate
the models postulated by economic theory and for forecasting ( regression
analysis)
- To examine how an organization can achieve its aims in objectives efficiently
such as profit maximation or when it seeks to achieve some goal or objective
subject to some constraints.
 The meaning of this definition can be best summarized with the
aid of figure 1.
The nature of managerial economics
Management of managerial economics
- Arrives in any organization may it be a firm a non-profit ong or a government
agency
- Economics theory
• MANAGERIAL ECONOMICS – Application of economic theory and decision
science tools to solve managerial decision problem.
Microeconomics
Macroeconomics
Decision science
• MANAGERIAL ECONOMICS – Application of economic theory and decision
science tools to solve managerial decision problem.
Mathematical economics
Econometrics

MANAGERIAL SOLUTION TO MANAGERIAL PROBLEMS – the organization can

solve its management problem by the above which defines the function of
managerial economics.

Relationship to the functional areas of business administration states:

- Having define ME& its function we can now summarize the relationship
between ME& The functional areas of business administration studies that
include:
1. Accounting
2. Finance
3. Marketing
4. Personal / a human resource management
5. Production
These discipline study the business environment in which the firm operates
and as much will provide the background for managerial decision-making.

Thus, ME can be regarded as 1. An overview

1. Economic theory
2. Decision sciences
3. Functional areas of business and administration studies

And examines how can they interact with one another as the
firm attempts to achieve its goal most efficiently.
THEORY OF THE FIRM
1. Reasons for the existence of firms and their functions.
- A firm is an organization that combines and organizes resources functions for
the purpose of producing goods and resources.
2. For sale
- Firm produces more than the right percent of all goods and services and
reminder id provided by.
1. The quest
- not for profit organizations such as.
a. Private college 80%
b. Hospitals 20%
c. Museum
d. Foundation
- function 1 is to purchase resources or input:
a. labor services
b. capital
c. raw material
- in order to transform them into goods and services for sale
RESOURCE OWNER
workers owners of capital land and raw materials
then use the income generated from the sale of their services or other resources
to firms to purchase the goods and services produced by firms which also is the
circular flow of the income activity.
2. Firms provide employment to workers in supplying the goods and
services that society demands.
3. Pay taxes that government uses to provide services such as:
National defense
Education
Fire protection and others
- That firms could not provide at all as efficiently.

OBJECTIVE AND VALUE OF THE FIRM

In the theory of the firm, the primary goal or objective is to maximize the
wealth or value of the firm given as the present value of all expected future
profits of the firm.
Future profit must be discounted to present because a peso of profit in the
future is worth less than a profit today.

CONSTRAINTS ON THE OPERATION OF THE FIRM

- Some of the constraints arise from LIMITATIONS on the AVAILABILITY on the
ESSENTIAL INPUTS.
1. May not be able to hire skilled workers as is wants especially in the short
term.
2. May not be able to achieve all the materials it demands
3. May also face limitations on factory and warehouse space
4. Quantity of capital funds available for a given project or purpose
- So important and persuasive that the constraints facing firms affect the
primary goal or objective of the firm which is to maximize wealth on the value
of the firms.

LIMITATIONS ON THE THEORY OF THE FIRMS

- The goal or objective of the firm has been criticized as being too narrow &
unrealistic.
 - In its place broader theories have been proposed the most prominent among
these models are:
1. Maximation of sales
2. Maximation of management utility
3. Satisfactory behavior
NATURE AND FUNCTION OF PROFITS
- Business versus economic profits
PROFIT VS. BUSINESS PROFIT
- Refers to the revenue of the firm minus the explicit or accounting cost of the
firm.
EXPLICIT COSTS – are the actual out-of-pocket expenditures of the firm to
purchase or hire the inputs it requires in production.
EXAMPLE :
1. Wages to hire labor
2. Interest on borrowed capital
3. Out
4. Expenditures on raw materials

ECONOMIC PROFIT – equals the revenue of the firm minus explicit cost and
implicit costs.
IMPLICIT COST – refers to the value of the inputs owned and used by the firm in
its production process.

THEORIES OF PROFIT
- Profit rates usually differ among firms in a given industry and even more
widely among firms in different industries.
 FIRMS IN SUCH INDUSTRIES:
1. Steel
2. Textiles
3. Railroads
Gradually easy very low profits
1. Pharmaceutical
2. Office equipment
3. Other high-technology industries are high in profits

SEVERAL PROOF OF THEORIES TO EXPLAIN THESE DIFFERENCES

1. RISK BEARING theories of profit – above normal returns ( economic profits)
are required by firms to enter and remain in such field
2. FRICTIONAL theory of profit – arises as a result of function or distribution
from long-run equilibrium.
3. MONOPOLY theory of profit – some firms with monopoly power can restrict
output and change higher prices thereby earning a profit.
- Monopoly power may arise from:
1. Firms owning and controlling the entire supply of a raw material required
by the production of a commodity.
2. From the economics of large-scale production
3. Ownership of patents
4. From foout restrictions that prohibit competitions
4. INNOVATION Theory of profit – profit on the rewards for the introduction of
successful innovation.
5. MANAGERIAL EFFICIENCY theory of profit - firms that are more efficient would
earn above normal returns and (economic) profits.
FUNCTION OF PROFIT
- PROFIT Represents the reward for greater efficiency
 - PROFITS Provide the incentive for firms to increase their efficiency and or
produce less of the commodity and for some firms to leave the industry for
more profitable ones.
- Profits provide crucial signals for the reallocation of society’s resources to
reflect changes in consumers’ tastes and demand one’s time.
- High profits – are the signal that consumers want more of the output of the
industry.
Provide incentives for firms to expand output and firms to enter
the industry in the long run.
- Lower profits or losses – are the signal that consumers want less of the
commodity and/or that production methods are not efficient.

BUSINESS ETHICS
- Seeks to prescribe behavior that
1. Business
2. Firm managers
3. Workers
Should not engage in.

ETHICS – Is a source of guidance beyond enforceable law. It is clear and

uncontroversial that firms and their workers should not engage in the unlawful
act such as:
1. Selling harmful or defective products
2. Ignorance of the law cannot be used as a justification for unlawful actions.

Business and managerial ethics goes beyond the law to provide guidelines as to
what is acceptable behavior in business transactions. Being based on values
however it is often not class what ethical behavior is and what it is not, since
different people may have different values.
THE INTERNAL FRAMEWORK OF MANAGERIAL ECONOMICS
- Many of the commodities we consume today are imported and American
firms purchases many inputs abroad and sell and increasing share of their
products overseas.
- Even more important domestic firms face increasing competition from
foreign firms in the US market around the world.
1. The international flow of capital
2. The international flow of technology
3. Skilled labor
13.
The international Framework of Managerial Economics
- Many of the commodities we consume today are imported and American
firms purchase many inputs abroad and sell an increasing share of their
products overseas.
- Even more important domestic firms face increasing competition from
foreign firms in the US market and around the world.

1. The International flow of the Has reached unprecedented dimensions,

capital there is a rapid movement toward;
2. The international flow of
technology 1. The globalization of product
3. Skilled labor 2. Consumption
3. Competition

Thus, it is essential to introduce a global dimension in the study of

Managerial economics to reflect these realties.
14.
Managerial economics and Internet
- The internet or simply “ THE NET’’ is a collection of more than 100 000
computers throughout the World Linked together in a service called THE
WORLDWIDE WEBB ( WWW) millions of people throughout the world was
connected through the WWW w/ hundreds of thousands of individuals
joining each week.
- In short, the entire globe is rapidly becoming a unified -------- super highway
through the internet.
- This means that industrial, database, marketing information have at their
fingertips a vast amount of information as never before.
- In the mid – 1990’s the internet have given rise to electronic commerce or
electronic business and this is usuallynizing traditional business
relationships.
E-commerce – refers to the production, advertising, sale, and distribution of
products and services from business to business (B2B) and from business to the
consumer through the internet.

14 A
The advantages of the use of Internet
1. Sharply reduce time and distance between buyers and sellers
2. No traveling to a traditional store
3. No salesperson
4. No order work
5. No cash register
6. Offers tremendous advantages to buyers and sellers interact in the
marketplace
7. The convenience of having the round-the-clock access the virtual store
8. Being able to engage in comparative shopping at minimal cost or effort.
15
The basics of demand, supply and equilibrium
A simple model of the firm
We will investigate the following:
1. A firm produces a single good or services for a single market w/ the
objective of maximizing profit.
2. Its task is to determine the quality of the goods to produce and sell and to
set a sales price.
3. The firm can predict the revenue and cost consequences of its price and
output decisions with certainly.
Before turning to this task, examining products one at a time has significant
decision advantages.
It constitutes an efficient managerial decision of labor.
Multiproduct firms such as proctor and gamble assign product managers to
specific consumer products.
Product manager – is responsible or obtaining the future of the brand ( pricing,
advertising, promotion and production policies)
15 A
Demand
- Is an economic principle referring to a consumer’s desire to purchase goods
and willingness to pay a price for a specific goods and service.
- Is the quality of consumers who are willing and able to buy products at
various prices during a given period of time.
- For a commodity implies the consumer desires to acquire the good, the
willingness and ability to pay for it.
15 B
The demand and side of the market
- The demand side can be represented by a market demand curve which
shows the amount of commodity buyers would like to purchase at different
prices.
Note that a particular product would be demanded annually at a lower prices
that is the demand curve for the product slopes downward to the right
particularly all commodity and is to referred as the law of demand
- Demand curve are drawn on the assumption that buyers
1. Tastes
2. Incomes
3. No. of consumers in the market
4. Pride of related commodities ( substitutes and compliments )
Are unchanged.
- Changes in any of these factors will cause a demand curve to shift
16.
As a motivating example, lets consider a firm that produces and sells highly
sophisticated microchip.
The main problem?
- To determine the quality of chips to produce and sell ( now and in the
minimalist future) and the price.
To tackle this problem, we begin by examining the manager’s basic objective –
profit
- A simple accounting identity states that
Profit – is the difference between revenue and cost.
- In algebraic terms, we have TC= R-C, where the Greek letter pi ( ) stands
for profit.
- To see how a profit depends on the firm’s price and output decisions, lets
examine the revenue and cost component in term.
 - The analysis of revenue rests on the most basic empirical relationship in
economies: The law of demand.
- The law states that ‘’ all other factors held consonant, the higher the unit
price of a goods, the fewer the number of units demanded by consumers
and consequently sold by firms.
17
Law of demand
The law of demand operates at several levels.
- Consider the microchip industry as a whole consisting of
1. The manufacturer in question
2. A half dozen major competitors
- Suppose the leading firms raise their chip prices due to the increased cost
of silicon – what may happen?
- According to the law applies equally to a single manufacturer and industrial
firm that compete directly or indirect w/ the other leading suppliers selling
similar chips
- Consider what would happen if one of the firms in the industry unilaterally
instituted a significant reduction in the price of chips
- The law of demand predicts that its microchips sales would increase
The sources of the income are three-fold
1. Increased sales to the firms current costumers
2. Sales gained from competing suppliers
3. Sales of new buyers
- Of course such of these factors might be input to a greater or lesser degree.
18
Figure 2.2 – graphically illustrates the law of demand by depicting the individual
firms downward- sloping demand curve.
- The horizontal axis list the quantity of microchips demanded by the
customers and sold by the firms each week. ( each quantity consists of 100
chips)
- The vertical axis list the price charged by the firm.
- Three particular points along downward – sloping demand curve are noted.
 Point A corresponds to quantity of 2 lots and price of 1300,000 or 200 chips
Point B of the firm cut its prices to 1000,000 it sales would increase to a 3.5
lots
C-A dramatic reduction to a price of 50000 would increase sale to a 6 lots
- Thus the demand curve shows the predicted sales over range of possible
prices.
- The downward slope of the curve embodies the law of demand :

19
Variety of uses of demand curves and demand equilibrium in economics
1. Predicting the profit consequences of selective fare discounts-----
2. Impact of higher oil prices
3. Effect of government subsidiaries
4. Estimating demand equation
5. Bases for predicting the revenue consequence of alternative output and
pricing policies

- The law of demand means that there is a fundamental trade off between P
and Q in generating revenue.
- An increase in Q requires a cut in P or raising revenue but the --- lowering it
- Operating at either extreme – selling a small quantity at high prices in large
quantity at very low prices – will raise little revenue.
20.
The supply side of the market
- Can be represented by the market supply curve that shows the amount of a
commodity that sellers would offer for the sale at various prices.
- When would seller sell more?
- Note that a higher price will induce seller to sell more
( the supply curve slopes upward to the right) it usually true for most
products.
Supply curves are drawn of the following assumption:
1. Constant technology
2. Input or resources ( labor, capital, land) prices.

1. An improvement in technology- would make it possible to produce a

commodity at a lower cost or cause the supply curve to shift to the right
indicating that seller would be willing to sell more annually at such price.
On the other hand, an increase in resource prices would cause the supply
curve to shift to the left.

21
The equilibrium price
- Of a commodity is determined at the intersection of the market demand
curve and the market supply curve of the commodity

Shift in the demand curve and equilibrium

- If the demand curve for commodity increases or shifts to the right as a
result. For example the growth of the economy the equilibrium price will
rise.
Shift in the supply curve and equilibrium
- If the supply curve for commodity increases or shifts to the right as a result,
for example, if an improvement in technology or reduction in resource
prices, the equilibrium price will fall.
NOTE: there is an inverse relationship between the quantity demand of a
commodity or its price That is when the price rises the quantity purchased
declines and when the price falls, the quantity sold increases.
21 A
The consumer constant: the budget line
The budget line – shows the various combination of commodities that a consumer
can purchase, given one’s money, income, and the prices of the commodities.

The consumer’s equilibrium

- Is when given his or her income and commodity prices, the consumer
maximizes the utility or from one’s expenditure.

21 B
Useful method in estimating demand
1. Regression Analysis – for most method more objective provide more
complete information and is generally less expensive.
2. Consumer Surveys- involves a sample of consumer about how they would
respond to a particular change in the price of the commodity income and
price of related commodities, advertising, expenditure, credit incentives
and other determinants of demand.
3. Consumer clinics – are laboratory experiments in which the participants
have an incentive to purchase the commodities they want most in a
simulated store are usually allowed to keep the goods purchased.
4. Market Experiment – are conducted in the actual marketplace on a large
scale to ensure the validity of the result of that consumer are not aware
that they are part of an experiment.
5. Marketing Research –
21 C
Forecasting demand
1. Survey
2. Opinion Polling
- Are often used to make short-term forecast when quantitative data are not
available.
- The firm can poll its top management regarding their personal insight to a
large extent subjective by averaging the opinion of the experts who are
most knowledgeable about the firm etc. to arrive at a better forecast.
3. Soliciting a foreign perspective – get international perspective/ regarding
forecast changes in markets and products abroad for firm’s exports and
competitiveness at------
4. Firms sales in each region – are the people closest to the market and their
opinion of the future sales provide valuable information to the firm’s top
management.
5. Poll a sample of potential buyers – based on their onl intentions of durable
goods that can forecast its national sales for different levels of consumers
future disposable income.

22
Optimization Analysis – can be best explained by examing the process by which a
firms determine the output level at which it maximizer total profit.
New Management Tools for Optimization
1. Bench marking – refers to finding out how other firms may be doing
something better ( cheaper) so that your firm can copy and possibly
improve on its own technique.
- Is usually accomplished by field topics to other firms.
The technique has now become a standard tool for improving productivity and
gravity example: IMB, AT&T, FUD and other large no. of American firms.
REQUIRES:
1. Picking a specific process that your firms seeks to improve and identifying
how firms that do a better job.
2. Rending on the benchmarking mission the people also will actually have to
make the change

EFFECT:
- Benchmarking can result in dramatic cost reduction

NOW MANAGEMENT TOOLS FOR OPTIMIZATION

2.TQM – one improvement in the 1980’s which involved maximizing quality of
maximizing cost.
- refers to constantly improving the quality of products of the firms processes so
as to consistently deliver incoming value to customers.
In its broader firm applies quality improvement methods to all firm improving
quality of reducing cost in all these areas processes from:
1. Production to customer service
2. Sales of marketing
3. Finance

Constantly asks: how can we do this cheaper , faster and better?

3.Reengineering
– areas the hottest turn in management mid’s 1990’s
Involves the radical redesign of all the firms process to achieve :
1. More given’s
2. In speed
 3. Quality
4. Service
5. Profitability

23
COMPARISON: TQM seeks how to do something faster, cheaper and better while
reengineering ask first whether something should be done at all and so it more
tikcly than tqm to come up w/ hard solutions.

2 MAIN REASONS TO REENGINEER

1. Fear that competitions may come up with new products arrices in way of
doing business that inflict destroy your firms.
2. Greed of your believe that reengineering, your company can obliterate the
competition.
Question ask: if this were an enfirels new firm how would you managed or if you
were able to start all ires again how would you do it?
Then it requires restructuring the firms to conform to that vision.

OTHER MANAGEMENT TOOLS

3. BROADBANDING – The elimination of multiple salary grades (1) to foster
movement among jobs w/ in the firm (2) invading labor flexibility of (3)
lowering costs.
4. Direct business model – the situation in w/c a firm deals directly w/ the
consumer eliminating the time and cost of third party distribution.
5. Networking – the farming of temporary strategic alliances to allow such
firm to contribute its best competency as in the case of the virtual
corporation.
6. Pricing power – the ability of a firm to raise the ideas of theory that a
corporate against can be made to operate like a small firm
- U 2a based on the research by linking well connected individuals from each
level suggesting that we are of the organization to one another so as to
improve all connected to one the flow of infraction and the operational
efficiency of the another by a small firm.
7. Virtual integration – the blurring of the traditional boundaries &roles bet
the infractor * its supplies * customers * treatcny them bring part of the
company.
- Greatly reduces or eliminates the need for inventories and satisfies
consumer demand expeditroisly
8. Virtual management – the ability of a manager to stimulate consumer
behavior using computer models based on the encouraging
………………………………..theory of complexity.