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Unit 1. Fundamentals of Managerial Economics (Chapter 1)
Unit 1. Fundamentals of Managerial Economics (Chapter 1)
Fundamentals of Managerial
Economics (Chapter 1)
“Hindsight is 20-20”
“It’s easy to identify successful
strategies (and the reasons for their
success) or failed strategies (and the
reasons for their failures) in retrospect.
It’s much more difficult to identify
successful or failed strategies before
they succeed or fail.”
Luke Frueb and Brian McCann
Managerial Economics (2008)
Lucky or Good?
While there is no doubt that luck, both good
and bad, plays a role in determining the
success of firms, we believe that success is
often no accident. We believe that we can
better understand why firms succeed or fail
when we analyze decision making in terms of
consistent principles of market economics and
strategic action.
Besanko, et. Al
Economics of Strategy (2nd)
Common Causes of Failed
Strategies
1. Relevant information
a. Not enough
b. Enough BUT either ignored or
used/analyzed incorrectly
Tabular P Q
$7 0
6 100
5 200
4 300
3 400
2 500
1 600
0 700
Variable Relationships
Example of Alternative Ways of Depicting
Graphical
Variable Relationships
Example of Alternative Ways of Depicting
Mathematical
Q = 700 – 100P
P = 7 – 0.01Q
Common Math Terms Used in
Economic Analysis
Term Definition
Variable Something whose value or magnitude (often Q or $
in Econ) may change (or vary); usually denoted by
letter ‘labels’ such as Y, X, TR, TC
Parameter or Something whose value does NOT change
Constant
Solution procedure:
1. Solve for b = Y/X = (Y2-Y1)/(X2-X1)
2. Given values at one pt for Y, X, and b, solve for a
(e.g. a = Y1 – bX1)
Graphical Concepts (Variable Relationships)
Y axis: a vertical line in a graph along which the
units of measurement represent different
values of, normally, the Y or dependent
variable.
Y axis intercept:
the value of Y when the value of X = 0, or
the value of Y where a line or curve
intersects the Y axis; = ‘a’ in Y = a + bX
Graphical Concepts (Variable Relationships)
X axis: a horizontal line in a graph along which
the units of measurement represent
different values of, normally, the X or
independent variable
X axis intercept:
the value of X when the value of Y = 0, or
the value of X where a line or curve
intersects the X axis
Graphical Concepts (Variable Relationships)
Slope:
= the steepness of a line or curve; a +(-) slope =>
the line or curve slopes upward (downward) to the
right
= the change in the value of Y divided by the
change in the value of X (between 2 pts on a line
or a curve)
= Y/X = 1st derivative (in calculus)
= Y/ X using algebraic notation
= the ‘marginal’ effect, or the change in Y brought
about by a 1 unit change in X
= b if Y = a + bX
‘Slope’ Graphically
y rise y2 y1
x run x2 x1
Slope Calculation Rules
(slope = Y/ X = dy / dx)
Rule Example
0 t1 t2 t3
Assume x = $900, y = $1000, r = 6%, t1 = 3, t2 = 5
Time Value of Money
(Basic Concept)
A dollar is worth more (or less) the sooner (later) it is
received or paid due to the ability of money to earn
interest.
present value
+ interest earned
= future value
Or
future value
- interest lost
= present value
Time Value of Money
(Applications/Uses)
1. To evaluate business decisions where
at least some of the cash flows occur
in the future
2. To project future dollar amounts such
as cash flows, incomes, prices
3. To estimate equivalent current-period
values based on projected future
values
Time Value of Money Concepts
PV = present value
= the number of $ you will be able to
borrow [or have to save] presently in
order to payback [or collect] a given
number of $ in the future
FV = future value
= the number of $ you will have to pay back
[or be able to collect] in the future as a
result of having borrowed [or saved] a
given number of $ presently
Time Value Equation
FV1 = PV + PV(r)
= PV(1+r)
FV2 = FV1+FV1(r)
= FV1(1+r)
= PV(1+r)(1+r)
= PV(1+r)2
•
•
•
•
FVn = PV(1+r)n
Time Value Problems
FVn = PV(1+r)n
Given Solve For
NCF C
i 1
i
Firm Valuation
The value of a firm equals the present value of all its
future profits
PV t / (1 i ) t