MANAGERIAL

ECONOMICS
-juan felipe
CHAPTER 1: INTRODUCTION
TO MANAGERIAL
ECONOMICS
 LEARNING OBJECTIVES
AT THE END OF THIS CHAPTER, THE STUDENTS
SHOULD BE ABLE TO:

1. Differentiate between economics as a social science and as

an applied science;
2. Apply the concept of opportunity cost when evaluating
options and making economic decisions;
3. Make decisions based on how man can satisfy most of his
wants given limited resources;
4. Differentiate macroeconomics and microeconomics;
5. Describe and state the importance of economic resources;
6. Differentiate positive and normative economics;
7. Differentiate gross national product and gross domestic product;
8. Identify the basic problems of the Philippine economy;
9. Analyze basic economic problems and propose solutions to the
problem using the principles of applied economics; and
10. Describe the various economic systems.
 INTRODUCTION TO ECONOMICS
People always complain about not having enough---not
enough food on table, not enough money to pay one’s
debts, or not enough income to meet all the family’s
needs.
Scarcity is the condition where there are insufficient
resources to satisfy all the needs and wants of a
population.
Scarcity is the reason why people have to practice economics.

Economics as a study, is the social science that involves

the use of scarce resources to satisfy unlimited wants.
 SCARCITY: RELATIVE OR ABSOLUTE

Relative scarcity
• Is when a good is scarce compared to its demand.
• Occurs because of the circumstances that surround
the availability of the good.

Absolute scarcity
• is when a supply is limited.
 CHOICE AND DECISION-MAKING
Opportunity cost refers to the value of the best forgone
alternative.
Example:
- The opportunity cost of watching a movie in cinema is
the value of other things that you could have bought
with that money such as a pint of ice cream , a combo
meal in a fast food o a simple t-shirt to be used in a PE
class.
- A manager who quits his job in order to take up master’s
degree, gives up his salary as a manager. That salary is
his opportunity cost.
 ECONOMIC RESOURCES, ALSO KNOWN AS FACTORS OF
PRODUCTION, ARE THE RESOURCES USED TO PRODUCE
GOODS AND SERVICES.
1. Land – soil and natural resources that are found in
nature and are not man-made.
2. Labor – physical and human effort exerted in
production.
3. Capital - man-made resources used in the production
of goods and services, which include machineries an
equipment.
4. Entrepreneurship – Is a person who combine the other
factors of production.
 ECONOMICS AS A SOCIAL SCIENCE

• It studies human behaviour just like psychology and

sociology.
• The study of society and how people behave and
influence the world around them.
• It studies how individuals make choices in allocating
scarce resources to satisfy their unlimited wants.
BRANCHES OF ECONOMICS

• Macroeconomics
• Microeconomics
Macroeconomics is a division of economics that
is concerned with the overall performance of the
entire economy. Macroeconomics is about the
nature of the economic growth, expansion of
productive capacity and growth of national
income.
Microeconomics is concerned with the
behaviour of the individual entities such as
consumer, the producer, and the resource owner.
It is more concerned on how goods flow and
move from the business firm to the consumer.
Microeconomics is also concerned with the
process of setting prices of goods that is also
known as Price Theory.
 BASIC ECONOMIC
PROBLEMS OF SOCIETY
1. What to produce and how much
2. How to produce
3. For whom to produce
 ECONOMIC SYSTEMS
Economic system is the means through which
society determines the answers to the basic
economic problem mentioned.
 TYPES OF ECONOMIC SYSTEM
• 1. Traditional economy. Decisions are based on tradition and
practices upheld over the years.
• 2. Command economy. Authoritative system wherein
decision-making is centralized in government or a planning
committee.
• 3. Market economy. Most democratic form of economic
system. Decisions are based on the workings of demand and
supply, and on what goods and services to produce.
• 4. Mixed Economy. A combination of different types of economic
systems. This economic system is a cross between a market
economy and command economy.
WHY ECONOMICS IS IMPORTANT?
• Understand why there is a need for everybody,
including the government, to budget and properly
allocate the use of whatever resources are available.
• Understand how to make more rational decisions in
spending money, saving part of it, and even investing
some of it.
• Enable us to take a look on how economy operates and
decide for ourselves if the government officials and
leaders are effective in shaping up the economy.
 POSITIVE ECONOMICS VS. NORMATIVE
ECONOMICS
• Positive economics
• deals with what is – things that are actually
happening that is possibly far from what is ideal
Example: current inflation rate, number of employed
labor, level of gross national product
• Normative
• Refers to what should be – that which embodies the
ideal and focuses on policy formulation that will
help attain the ideal situation.
Example: Ideal rate of the population or effective tax
system
 GROSS NATIONAL
PRODUCT (GNP)
• Is the market value of final products, both sold
and unsold, produced by the resources of the
economy in a given period.
GROSS DOMESTIC PRODUCT
(GDP)
• Is the market value of final products produced within the country.

Net Inflow = Inflow – Outflow

To
–Net Inflow = -Inflow + Outflow
 GNP/GDP: INCOME APPROACH

• Another way to account GNP and classify its components is by

resource uses and contributions that make up the production
stages.
• In conclusion, all products and their values are the
contributions of these essential factors of production.
ECONOMICS AS AN APPLIED
SCIENCE
Applied economics is the application of economic
theory and econometrics in specific settings with the
goal of analyzing potential outcomes.
Applying economic theory in our lives means trying to
address actual economic issues and be able to do
something about it.
 APPLIED ECONOMICS IN RELATION
TO PHILIPPINE ECONOMIC PROBLEMS

• A solid understanding of economic principles and how they are

applied in real life situation can serve as significant tools to help
address the country’s economic problem.

Example: Understanding the existence of scarcity can help

everyone analyze how to maximize the use of available resources in
order to overcome scarcity.
 BASIC ECONOMIC PROBLEMS OF
THE PHILIPPINES

• Unemployment
• Poverty
• Booming Population growth
BOOMING POPULATION

Source: Philippine Statistics Office

CHAPTER 2: APPLICATION
OF DEMAND AND SUPPLY
 LEARNING OBJECTIVES
AT THE END OF THIS CHAPTER, THE STUDENTS
SHOULD BE ABLE TO:
• 1. Explain the law of supply and demand and illustrate how
equilibrium price and quantity are determined;
• 2. Discuss and explain the factors that affect demand and
supply;
• 3. Reason effectively how a change in demand or supply or in
both can affect equilibrium price and equilibrium quantity;
• 4. Apply the principles of demand and supply to illustrate how
prices o commodities are determined;
• 5. Distinguish between elastic and inelastic demand and
supply.
• 6. Describe the characteristics and distinguish the features of the
market structures (perfect competition, monopoly, monopolistic
competition, and oligopoly);
• 7. Relate population growth with the country’s labor supply and
apply the law of demand and supply in the determination of wages
of labor;
• 8. Deduce how the excess supply of labor has led to the
phenomenon of the Overseas Filipino Worker;
• 9. Analyze how demand and supply forces can affect the value of
the Philippine peso in relation to foreign currencies;
• 10. Apply the law of demand and supply to Philippine housing
shortage and show how this has led to the real estate boom in the
country;
• 11. Understand how savings channeled into investments can affect
economy;
BASIC PRINCIPLES OF
DEMAND AND SUPPLY
• Marketing is an interaction between buyers and sellers
of trading or exchange.
• Good market
• Most common type of market
• Where we buy consumer goods
• Labor market
• Where workers offer services and look for jobs
• Where employers look for workers to hire
• Financial market
• Includes stock market where securities of
corporations are traded.
 SIGNIFICANCE

• The tools of demand and supply can be applied to

a range of important topics such as:
• evaluating how global weather conditions will affect
agricultural production and market prices of agricultural
commodities;
• assessing the impact of government rent control on
dormitory space;
• understanding how taxes, subsidies, and other government
policies affect both consumers and producers.
 THE CONCEPT OF DEMAND

• Demand - refers to the various quantities of a good

or service that consumers are willing to purchase at
alternative prices, ceteris paribus.

• Conveys both the elements of desire for the commodity

and capacity to pay (must be willing and able).
• Emphasizes the relationship between quantity bought and
its price, although there may be other factors that
determine how much a consumer wants to purchase.
 THE LAW OF DEMAND

• Asserts that the quantity demanded of a good or service is

negatively or inversely related to its own price.
• When the price increases, less of the good or service will be
bought
• When the price decreases, more of the commodity will be
purchased.

WHY SO?
 TWO REASONS FOR THE
INVERSE RELATIONSHIP
• Substitution effect
• Is felt when a price of a good changes demand due to alternative
consumption of substitute goods.
• When price of a demand decreases, the consumer substitutes good
increases.

• Income effect
• When price decreases, the consumer’s real income (or purchasing
power) increases, so he tends to buy more.

P Q
 3 WAYS OF PRESENTING
THE DEMAND RELATIONSHIP
The relationship between quantity purchased and alternative
prices may be presented in 3 ways:
• Demand schedule –in tabular form.
• Demand curve – in graphical form
• Demand function – in equation form
 DEMAND SCHEDULE
TABLE 3.1. Demand Schedule for Denim Pants

Price of Denim Pants Quantity Demanded per month

(in pesos) (No. of pairs)
0 8
50 7
100 6
150 5
200 4
250 3
300 2
350 1
400 0
 DEMAND CURVE
P

400
Price (in pesos)

300

200

100
D

0 2 4 6 8
Q

Quantity

Figure 3.1. Demand Curve. The negative slope of the

demand curve depicts the inverse relationship between
price and quantity demanded.
 DEMAND FUNCTION

• Quantity demanded (Q) is expressed as a mathematical

function of price (P). The demand function may thus be
written as:

Qd = a - bP
where
• a is the horizontal intercept of the equation or the quantity
demanded when price is zero
• (-b) is the slope of the function.
• Example: Qd = 8 – 0.02P
 FACTORS AFFECTING DEMAND

1. Price of the commodity

2. Prices of related commodities (substitutes and
complements)
3. Consumer incomes
4. Tastes and preferences
5. Number of consumers
6. Price expectations
 CHANGE IN QUANTITY
DEMANDED VS.
CHANGE IN DEMAND
• Change in quantity demanded – is a movement along the same
demand curve, due solely to a change in price, i.e., all other
factors held constant.
• Change in demand – is a shift in the entire demand curve
(either to the left or to the right) as a result of changes in other
factors affecting demand.
CHANGE IN QUANTITY DEMANDED

Price
•A decrease in price from
p3 p1 to p2 brings about an
p1 increase in quantity
demanded from q1 to q2
•It is shown as a movement
along the same demand
p2 curve

Quantity
q3 q1 q2
 CHANGE IN DEMAND
•An increase in demand
Price means that at the same
price such as p1 more will
be brought, due to other
factors such as increased
p1 incomes, increase in
number of consumers, etc.
•It is shown as a shift in the
entire demand curve

This is a
decrease in
demand D1

D0
D2
Quantity
q1 q2
 CHANGE IN DEMAND
P P

D’ D
D’
D

Q Q

Increase in Demand Decrease in

Demand
 OTHER FACTORS AFFECTING
DEMAND
• Income: as income changes, demand a commodity usually
changes
• Normal goods – are goods whose demand respond positively to
changes in income.
• Most goods are normal goods. As income increases, more of shoes,
TVs, clothes, are bought.
• Inferior goods – are goods whose demand respond negatively to
change in income
• Few but existent. Examples are firewood, “tuyo”, “adidas or chicken
feet”, bicycles, etc.
 OTHER FACTORS AFFECTING
DEMAND
• Prices of related commodities in
consumption:
• Substitutes – are goods that are substitutable with
each other (not necessarily perfect).
• Examples are coffee and tea, Coke and Pepsi, beer and
ginebra.
• When the price of a good increases, the demand for that
good will decrease while the demand for its substitute will
increase. --- Py Qx (inverse relationship)
• Complements – are goods that are used or consumed
together.
• Examples are coffee and sugar, bread and butter, tennis
rackets and tennis balls.
• When the price of a complement increases, quantity
bought of a good decreases. --- Py Qx  (direct
relationship)
 OTHER FACTORS AFFECTING
DEMAND
• Consumer tastes and preferences:
• When consumer tastes shift towards a particular good,
greater amounts of a good are demanded at each price.
• Example: consumers preference for drinking mineral water
increases so its demand curve will shift rightward.
• If consumer preferences change away from a good, its
demand will decrease; at every possible price, less of the
good is demanded than before.
• Example: the demand for VCDs and VHS tapes decreases due to
preference for DVDs.
 OTHER FACTORS AFFECTING
DEMAND
• Consumer expectations: Expectations about future
prices and income affect our current demand for
many goods and services.
• If we expect prices of dried fish to increase with coming of
the rainy season, we might stock up on the good to avoid
the expected price increase. Thus, current demand for
dried fish might increase
• those who expect to lose their jobs due to bad economic
conditions, will reduce their demand for a variety of goods
in the current period.
 OTHER FACTORS AFFECTING
DEMAND
• Number of Consumers: affects the total
demand for a good.
• Total demand is also known as market demand. It is
the summation of the individual demand of all
consumers
• An increase in the number of consumers shifts
the market demand curve to the right
• Example: demand for housing and transportation
increases with an increase in population.
• On the other hand, less consumers will cause
the market demand to decrease, resulting in a
shift to the left of the entire demand curve.
 THE CONCEPT OF SUPPLY

• Supply - refers to the various quantities of a good or

service that producers are willing to sell at alternative
prices, ceteris paribus.

• Obviously, firms are motivated to produce and sell more at

higher prices.

• Emphasizes the relationship between quantity sold of a

commodity and its price. However, there are other factors that
determine how much a producer would like to produce and
sell.
 THE LAW OF SUPPLY

• States that the quantity sold of a good or service is positively or

directly related to its own price.
• When the price increases, more of the good or service will be
sold
• When the price decreases, less of the commodity will be
purchased.
 3 WAYS OF PRESENTING
THE SUPPLY RELATIONSHIP
The relationship between quantity supplied and alternative
prices may be presented in 3 ways:
• Supply schedule –in tabular form.
• Supply curve – in graphical form
• Supply function – in equation form
 SUPPLY SCHEDULE
TABLE 3.2. Supply Schedule for Denim Pants

Price of Denim Pants Quantity Supplied per month

(in pesos) (No. of pairs)
0 0
50 1
100 2
150 3
200 4
250 5
300 6
350 7
400 8
 SUPPLY CURVE
P

400
S
Price (in pesos)

300

200

100

0 2 4 6 8
Q

Quantity

Figure 3.2. Supply Curve. The positive slope of the

supply curve depicts the direct relationship between
price and quantity supplied.
 SUPPLY FUNCTION

• Quantity supplied (Qs) is expressed as a mathematical

function of price (P). The supply function may thus be
written as:

Qs = c + dP
where
• c is the horizontal intercept of the equation or the quantity
supplied when price is zero
• d is the slope of the function.
• Example: Qs = 0 + 0.02P
 CHANGE IN QUANTITY
SUPPLIED VS.
CHANGE IN SUPPLY
• Change in quantity supplied – is a movement along the same
supply curve, due solely to a change in price, i.e., all other
factors held constant.
• Change in supply – is a shift in the entire supply curve (either
to the left or to the right) as a result of changes in other factors
affecting supply.
CHANGE IN QUANTITY SUPPLIED
S
Price
•An increase in price from
p1 to p2 results in an
increase in quantity
p2
supplied from q1 to q2
•It is shown as a movement
along the same supply
p1 curve

Quantity
q1 q2
 CHANGE
S 2
IN SSUPPLY
0

S1
Price

•An increase in supply

p1 means that at the same
price such as p1 more will
be sold, due to other factors
such as improvement in
technology, increase in
number of producers, etc.
This is a
decrease in •It is shown as a shift in the
supply entire supply curve

Quantity
q1 q2
 CHANGE IN SUPPLY
S’
P S P
S
S’

D’ D

Q Q

Increase in Supply Decrease in Supply

 OTHER FACTORS AFFECTING
SUPPLY
• There are other factors aside from price that affect the
supply schedule. These are
1. resource prices
2. prices of related goods in production
3. technology
4. expectations
5. number of sellers.
 OTHER FACTORS AFFECTING
SUPPLY
• Resource prices:
• When prices of inputs to production increase, the supply of the
firm's product decreases.
• Decreases in resource prices, however, translate to an increase
in supply. The entire supply curve shifts to the right.
 OTHER FACTORS AFFECTING
SUPPLY
• Prices of related goods in production:
• Resources can be employed to produce several
alternative goods and services.
• Examples from agriculture:
• a piece of farmland can be used to grow rice, corn, or
sugarcane. An increase in price of sugarcane may result
in decreased supply of rice and corn.
• farmers can use their land and labor to produce
ornamental flowers instead of vegetables. If vegetable
prices decrease, the supply of ornamental flowers may
increase.
 OTHER FACTORS AFFECTING
SUPPLY
• Technology: A
change in production
techniques can lower or raise production
costs and affect supply.
• Improvements in technology shift the
supply curve to the right.
• A cost-saving invention will enable firms to
produce and sell more goods than before at
any given price.
• New high yielding crop varieties will increase
production on the same amount of land.
 OTHER FACTORS AFFECTING
SUPPLY
• Producer expectations:
• When producers expect the price of their product
to increase in the future, they may hoard their
output for later sale, thus reducing supply in the
present period. Thus the supply curve shifts to the
left.
• If firms expect that the price of their product will
fall in the near future, supply may increase in the
current period as firms try to increase production
as well as to dispose of their inventory.
 OTHER FACTORS AFFECTING
SUPPLY
• Number of sellers: As the number of sellers increases, so will
total supply.
• The market supply is the horizontal summation of
the supply schedules of individual producers.
• As more firms enter the market, more will offered
for sale at each possible price, thus shifting the
supply curve to the right.
• Similarly, the supply curve shifts to the left when
firms exit the market.
 MARKET EQUILIBRIUM

• Market equilibrium is that state in which the quantity

that firms want to supply equals the quantity that
consumers want to buy.
• The price that clears the market is called the equilibrium
price and the quantity (sold and bought) is called the
equilibrium quantity.
• The market is said to be "at rest" since the equilibrium
price and equilibrium quantity will stay at those levels until
either demand or supply changes.
 MARKET EQUILIBRIUM
TABLE 3.3. Market for Denim Pants
Quantity Demanded Quantity Supplied
Price of Denim Pants per month per month
(in pesos) (No. of pairs) (No. of pairs)
0 8 0
Equilibrium 50 7 1
Price=200 100 6 2
150 5 3
200 4 4
250 3 5
300 2 6
350 1 7
400 0 8

Equilibrium
Quantity=4
 MARKET EQUILIBRIUM

• At prices above the equilibrium price, quantity supplied

is greater than quantity demanded, resulting in a
temporary surplus.
• In a surplus situation, producers will try to reduce price to
entice consumers to buy more denim pants. Actions by both
producers and the public will wipe out the temporary surplus
• At prices below the equilibrium price, consumers desire
to buy more denim pants than are available, creating a
temporary shortage.
• Consumers will try to outbid each other, thus pushing up the
price. As price rises, firms increase their production while
some consumers reduce their purchases.
 MARKET EQUILIBRIUM
P

400
S

Surplus
Price (in pesos)

300

200

100
Shortage

0 2 4 6 8
Q

Quantity
 MARKET EQUILIBRIUM

• Algebraic solution: equate the demand and supply equations

(Qd=Qs).
Qd = 8 - 0.02P
Qs = 0 + 0.02 P
• Step by step solution:
• 8 - 0.02P = 0 + 0.02 P
• 0.04P = 8
• P* = 8/0.04 = 200
• Qd = 8 – 0.02(200) = 8 – 4 = 4

• P* =200 per unit, Q* = 4 per month

DEMAND AND SUPPLY IN RELATION
TO THE PRICES OF BASIC
COMMODITIES
 Quantity Demanded and Supply of Fish (in kilos)Market
14
12
10
8
Supply
6 Demand
4
2
0
1 2 3 4 5 6

Demand and Supply Curves for Fish in the Quinta Market for One
Week
DETERMINATION OF MARKET
EQUILIBRIUM
 EXAMPLE OF DETERMINATION OF
MARKET EQUILIBRIUM
• P = 50 - 2Qd (Demand)
• P = 20 + 4Qs (Supply)

P
S

40

5 Q
DEMAND-SUPPLY SCHEDULE
D S P
48 24 1
46 28 2
44 32 3
42 36 4
40 40 5
38 44 6
36 48 7
34 52 8
32 56 9
30 60 10

State the demand

function
ELASTICITIES OF DEMAND AND
SUPPLY
 ELASTICITY

• Elasticity is a measure of how much buyers and sellers respond to

changes in market condition.
 DEGREES OF ELASTICITY

1. Elastic

a change in determinant will lead to a proportionately greater change in

demand or supply.

Example: If the price of LPG increases by 10% and as a result the quantity
demanded goes down by 12%, then we say that the demand for LPG is
elastic.
 2. INELASTIC
– a change in determinant will lead to a proportionately lesser
change in demand or supply.

Example: Suppose the price of cellphone load goes up by 5% and

the quantity demanded goes down by 3%, then we can say that the
demand for cellphone load is inelastic
 3. UNITARY ELASTIC

a change in determinant will lead to a proportionately equal

change in demand or supply.

Example: The price of squash in the market goes down by 6%

and as a result the quantity demanded goes up by 6% also.
Thus the demand for squash is unitary elastic.
ELASTICITY OF DEMAND
 ELASTICITY OF DEMAND

There are three types of elasticity of demand that deal with the
responses to a change in the price of the good itself, in income and
in the price of the related good (Substitute or Complement).

1. Price Elasticity of Demand

2. Income Elasticity of Demand
3. Cross Price Elasticity of Demand
PRICE ELASTICITY OF DEMAND

Measures the responsiveness of demand to a change in the price of

the good.
The concept of elasticity is measured in percentage change.

2 ways in measuring the value of price elasticity.

1. Arc Elasticity
2. Point elasticity
• Arc Elasticity – the value of elasticity is by
choosing two points on the demand curve and
comparing the percentage changes in the
quantity and the price on those two points.

Ep = {(Q2-Q1)/(Q2+Q1/2)}
{(P2-P1)/(P2+P1/2)}
Where:
Q2 = new quantity demanded
Q1 = original quantity demanded
P2 = new price of the good
P1 = original price of the good
 Arc Elasticity

P
Q2  Q1 P2  P1
  
Q2  Q1 P2  P1
Diff Q Diff P
  
Sum Q Sum P
Price

P1 A

B
P2

0 Q1 Q2 Q

Quantity
 Arc Elasticity: Example

P
200-100 30-20
  
200+100 30+20

100 10 1 5
      5 / 3  1.66
Price

A
300 50 3 1
30

B
20

0 100 200 Q

Quantity
• 2. Point Elasticity - measures the degree of elasticity on a single
point on the demand curve .Changes on a single point are
infinitesimally small.

Ep = {(Q2-Q1)/Q1}
{(P2-P1)/P1}
 POINT ELASTICITY

P
%Qd Qd / Q Qd P
   
%P P / P P Q
  slope  P/Q
Price

P1 A

0 Q1 Q

Quantity
 INCOME ELASTICITY OF DEMAND
Measures how the quantity demanded changes as consumer income
changes. Income Elasticity of demand is equal to (% change in
quantity demanded)/((% change in income).

Formula ℓ= %∆Q
% ∆Y

• Sign: + for normal goods

- for inferior goods
Cross Price Elasticity of Demand

• Definition: responsiveness of quantity demand

of a good to changes in price of other goods.
• Formula:
%Qdx
exy 
• Sign: + for substitutes, %Py
- for complements