Chapter 1: Introduction to Managerial 2 main players:
Economics 1. BUYER: Maximizes satisfaction
ECONOMICS
 Science that deals with the management of
scarce resources in demand.
 Simply scarcity and choice (Slavin, 2005)
 It is a scientific study on how individuals and
society generally make choices. (Fajardo,
1977)
 It studies problem on using available
economic resources as efficiently as possible
to attain maximum fulfillment of unlimited
demand for goods and services.
EFFICIENCY
 Refers to productivity and proper allocation
of economic resources.
EFFECTIVENESS
 Attainment of goals and objectives.
OPPORTUNITY COST
 Refers to the forgone value of the next best
alternative.
 The value of what is given up when one
makes a choice.
PRODUCTION
 Economic activity that combines its factors
from land, labor, and capital to entrepreneurs.
FACTORS OF PRODUCTION:
1. Land
 Refers to all natural resources, which are
given by, and found in nature.
 Not man-made.
2. Labor
 Any forms of human effort exerted in the
production of goods and services
3. Capital
 Refers to man-made goods used in the
production of other goods and services.
4. Entrepreneurship
 Pertains to the skills, talents, and risk-taking
behavior needed in building, operating, and
expanding a business.
 Entrepreneurs- decide what combinations
of land, labor, and capital are to be used in the
production process.
 Is an economic resource that is remunerated
in the form of business.
2 MAJOR BRANCHES OF ECONOMICS:
1. MACROECONOMICS
 Understanding the behavior as a whole.
2. MICROECONOMICS
 Concerned with individual decision-making.
Microeconomics- deals with the individual
decisions of units of the company- firms and
households, and how their choices determine relative
prices of goods and factors of production.
2. SELLER: Maximizes profit
CETERIS PARIBUS
 Which means “all other things held
constant or all else equal”
 Managerial economics analyzes the
relationship between two variables while the
other factors are held unchanged.
 Allow economists to isolate the relationship
between two variables.
4 basic economic questions:
(1) What to produce?
(2) How to produce?
(3) How much to produce?
(4) For whom to produce?
DEFINING MANAGERIAL ECONOMICS
- The utilization of managerial skills in the business
by applying economic theories and concepts to
maintain efficiency in costing and production and its
effectiveness on every decision making by the firms
to fully maximize their profits.
 Utilization of Managerial Skills depicts
applying the necessary function of
management.
 Economic theories and concepts - are
microeconomic and macroeconomic
elements that will help the entrepreneurs
come up with productive decisions.
 Efficiency in Costing and Production - an
essential means to minimize expenses.
 Effectiveness in decision making - the
output of this managerial economics process.
McGuigan, Moyer & Harris (2008)
Managerial economics is described as, "As the pull
out component from microeconomic theory,
concepts and techniques that helps every manager
select strategic direction, to allocate efficiently the
resources available and respond effectively to
tactical issues."
Baye (2010)
"The study of how to direct scarce resources in the
way that most efficiently achieves a managerial
goal.”
McCormick (1993)
Defined managerial economics as a discipline that
helps decision makers deal with the nature of the
firm, how and why it is organized the way it is, in
order to make a better, more efficient, and more
highly rewarded executive.
Salvatore (2004)
Described managerial economics as "the application
of economic theory and the tools of analysis of
decision science to examine how an organization can
achieve its aims or objectives most efficiently.”
Villegas (1999)
"Branch of economics which deals with the
application of the theories, tools, and findings of
economic analysis to managerial decision making in
all types of organizations, including government
agencies, educational centers, not-for-profit
foundations, and business enterprises."
RELATIONSHIP OF MATHEMATICAL
ECONOMICS AND ECONOMETRICS TO
MANAGERIAL ECONOMICS
MATHEMATICAL ECONOMICS
 The utilization of mathematical economics to
managerial economics is essential as it is
used to formalize (express in equation form)
the economic models postulated by economic
theory to firmly identify the proper solution
to a managerial decision problem.
ECONOMETRICS
 Also used in a statistical tool (particularly
regression analysis) managerial economics as
to estimate real world data and analyze the
models postulated by economic theory;
which is also used in forecasting.
MANAGERIAL ECONOMICS AND OTHER
BUSINESS DISCIPLINE
Principles of managerial economics is intertwined
with other business disciplines like marketing,
finance, management science/operational research,
strategic management and managerial accounting.
NOTE: It relates to marketing in such a way that it
determines the demand and price elasticity of the
market; to finance because of the need to understand
the time-value of money, capital, budgeting, break-
even analysis, opportunity cost, and economic-value
added; to management science/operational
research for it elaborates linear programming,
regression analysis, and forecasting which are
needed for decision making; to strategic
management for it covers competition types and
structure-conduct-performance analysis; and to
managerial accounting because of relevant costing,
opportunity cost, break-even analysis, and the
consideration of incremental cost analysis.
THE THEORY OF FIRM
 Profit is defined as the difference that arises
when a firm's total revenue is greater than its
total cost. It is the difference between the
income an entrepreneur receives from the
sale of his goods and services, and the
expenses he incurs to produce them; (income
expenses).
NOTE: Profit is also a prime motivator in a capital
system. With large profits, entrepreneurs invest more
funds to expand their business and produces new
commodities to satisfy consumer’s wants, needs, and
demands.
 Theory of Firm is written by Dan Spulber.
 “Firms exist and make decision to maximize
profit.”
2 takeaways:
Short term/ Short run Motivation: Profit
Maximization
Long term/ Long run Motivation: Sustainability
 The firm should maximize wealth or value
the firm which is their general goal or
objective.
NOTE: Basically, the current/short term profit
should maximize according to the theory, but then
again, firms must give up its short term profit for the
sake of increasing future/long term profit.
 Funds are invested in a business to earn
sufficient return on investment; it can be done
through getting bonds or selling ownership
through stock.
NOTE: In finance, the value of the firm is driven
upward if the value of the stock rises. This makes
units of ownership of the business an attractive
investment.
Therefore, the long term profit could only be
maximize if there is a balance between the short term
profits and investing in the future.

THEORY OF FIRM
 Goods and services are made available to the
public and are billed to customers/clients
with sufficient markup to cover operating
expenses, financing charges, income taxes,
and desired net income.
Increasing its own Value as an Economic Activity
Growth and Stability: Firms aim for growth and
stability, which is vital for success in the economy.
Firms aim to expand their operations (growth) while
maintaining consistency and resilience (stability) in
the face of market fluctuations.
Measurement of Growth: Growth can be measured
through various indicators such as increased assets,
production capacity, sales volume, and owners'
equity.
Owners' Equity: Owners' equity represents the
portion of the firm's assets that belong to its owners
after deducting liabilities. It reflects the firm's
financial health and value to shareholders.
Improving the Quality of Life in the Community
Job Creation: Firms provide employment
opportunities, thereby enhancing the quality of life
for individuals.
Corporate Social Responsibility (CSR): Beyond
job creation, firms engage in CSR activities,
including providing medical services, livelihood
training, and financial aid for community projects.
The Decision Making Models
Importance of Decision Making: Decision making
is the cornerstone of managerial success, involving
resource utilization and problem-solving. Effective
decision making is crucial for allocating resources
efficiently, solving problems, and achieving
organizational objectives.
McGuigan, Moyer, and Harris Model: The
decision-making process involves establishing
objectives, identifying problems, exploring
solutions, and implementing the best course of
action.
THE ROLE OF PROFIT
1. Economic Profit: It's the difference between
total revenue and economic cost, considering
opportunity costs.
2. Risk-Bearing Theory: Owners are
compensated for investment risks through
economic profits. This theory suggests that
firms should be compensated for the risks
they undertake, with profits exceeding a
competitive rate of return.
3. Temporary Disequilibrium Theory: Firms
earn long-run normal profits adjusted for risk.
Firms may experience temporary fluctuations
in profits due to market imbalances, which
should eventually stabilize over time.
4. Monopoly Theory: Dominant firms can
sustain above-normal profits due to lack of
competition. In industries with limited
competition, monopolistic firms can sustain
above normal profits due to their dominant
market position.
5. Innovation Theory: Innovation leads to
above normal profits, rewarding
entrepreneurial creativity. Successful
innovation can lead to above-normal profits
as firms capitalize on new products or
technologies.
6. Managerial Efficiency Theory: Exceptional
managerial skills lead to higher-than-normal
profits, reflecting greater efficiency. Efficient
management practices contribute to higher-
than-normal profits as firms optimize
resource utilization and minimize costs.
Profit Maximization
 It is when a business achieves its highest
revenue or profit.
Why is Profit Necessary?
 This is a sign of success-success in decision
making, efficiency in utilizing resources, and
effective execution or implementation of all
the activities in the organization.
The Shareholder Wealth Maximization Model of
the Firm
 The firm should focus in maximizing its
value and the managers should increase the
wealth of the shareholders. As the stock
prices of the firm increase, the owners of
these stocks will benefit from the manager's
actions which will increase their wealth.
Goals in Public Sector and Non-Profitable
Enterprises
 The objective of the private sectors regarding
its value maximization is completely
different from the objectives of the public
sector and non-profitable enterprise.
Non-profit Enterprise
The characteristics of a non-profitable enterprise:
1. No one possesses a right to receive profit,
surpluses, or dividends in the organization
2. All non-profitable enterprises are exempted from
corporate taxes
3. All non-profitable enterprises are getting benefits
by accepting donations that are tax deductible.

When it comes to support and sources of fund, non-

profitable organizations are extremely different from
private and public sector organizations while public
sector (government) agencies tend to focus on
providing services that have significant
characteristics of public-good.

Non-Profit Organization Objectives

1. Maximizing the quantity and quality of output
subject to a break-even budget constraint.
2. Maximizing the utility of the non- profitable
enterprise administrators.
3. Maximizing cash flows.
4. Maximizing the utility or satisfaction of
contributors.

UNDERSTANDING THE MARKETS

In analyzing the concepts and theories of
microeconomics, it centers on the main idea that in
transactions of the market, if there is a consumer of a
commodity, there is also producer of goods and
services.

Consumer-Producer Rivalry
 This rivalry deals with price changes and
stocks of the commodities (demand and
supply).
Consumer-Consumer Rivalry
 The power of the consumer in dominating the
market is proven and tested in years, but
when it comes to the basic economic problem
which is scarcity, the consumers’ battle for
survival. It deals with price changes and
stocks of the commodities (demand and
supply).
Producer-Producer Rivalry
 The marketplace is also a battlefield for all
the producers. The presence of competition
on commodities/services offered to the
consumers will be rough and intense.

Government and the Market

 Government has a big role on determining the
market structure in the economy. Some
enterprises in the economy are also
characterized according to their types from
perfect competition, monopolistic
competition, oligopoly, and duopoly.