Theory and Principles

1 Managerial Economic
 What is Economics?
• ECONOMICS: Economics is a social science . Its basic function is
to study how people – individual house holds, firms and nations
maximizing their gains from their limited resources and opportunities
• In economic terminology it is called as “maximizing behaviour” or
more approximately “optimizing behavior.”

• Optimization means selecting best out of available resources with

the objective of maximizing gains from given resources.
• Fajardo
• Economics is the proper allocation and efficient use of available resources for
the maximum satisfaction of human wants.
• Samuelson
• Economics is the study of how societies use scare resources to produce
valuable commodities and distribute them among different people.
 Human wants tends to
Not only “Family” be unlimited

Understanding how
Scarcity society allocates its
scarce resources
Country has limited
resources
Scarcity
A situation in which people cannot have
everything that they want because of limited
resources
What is resources?

Resources
the most basic elements that people use to
produce the goods and services that they want.
Every Business has Inputs And Output
• Input: are commodities or services that are used to produce goods and service.
• Another terms of inputs is Factors Of Production.
1. Land : natural resources,
2. Labor
3. Capital
4. Entrepreneurship
• These above inputs are scare resources and use to produce valuable commodities
which is output.
• Output: outputs are various useful goods or services that result from the
production process and are either consumed or employed in further production.

• The manger have to make all the limited factors of production into output
efficiently. That needs decision and therefore economic comes in.
 Since it is Scarce you have to make it worth.
• Efficiency
• -when resources are used in such a way
that people can get as much as they can
get (specific to their wants and needs)

“optimizing behavior.”
selecting best out of available resources with the objective of
maximizing gains from given resources.
Introduction : Basic Concepts & Historical Overview

Sociology

To understand
how people
behave and
how they
interact within
the society
Political
Economics
science
 Economics , as social science, is the study of the relations
between people during the production, distribution and
consumption of wealth in human society.
 In other words, economics is the study of the
relationship established in the production and consumption f
goods and the transfer of wealth to produce and obtain
those goods among people.
 Economics explains how people interact within markets to
get what they want or accomplish certain goals.
• Managerial Economics refers to the application of economic
theory and decision science tools to find the optimal
solution of managerial decision problems.
• How to use economic analysis to make decisions to achieve firm’s
goals of profit maximization. Or minimized the cost.

• Economic Theory helps managers understand real-world business

problems.
• Uses simplifying assumptions to turn complexity into relative simplicity.
Theory, Principles, and Models
• Economic Theory : A statement or set of related statements about cause and
effect, action and reaction.
• Example “ law of demand”

• Economic laws and principles: Widely accepted theories that have been well
tested and widely accepted.

• Economic Model : A formal statement of a theory, usually a mathematical

statement of a presumed relationship between tow or more variables.
 The scope of Economics
• There are two major divisions of economics:

Microeconomics
The branch of economics
Macroeconomics
Self interest that examines the The branch of economics
of functions and the that examines the Concern with
individuals overall
behavior of individual economic behavior of performance
working
through decision-making units- aggregates- income, of the
competitive that is , firms household employment, output, and economy
market and industry. so on- on national scale.
Macroeconomics
• Behavior of the whole economy
or its aggregates as government,
business and households.
• An aggregates is composed of
individual units.
• The operation of the various
aggregates and their
interrelationship is analyzed to
provide a profile of the economy
as a whole
Microeconomics
• Behavior of individual units such
as the consumers, firms, and the
owners of the factors of
production.
• Specific economic units
constitute a very small segment
of the whole economy.
 Characteristics of Managerial Economics ( 4 )

1. Micro- economic in Nature: The problem of a particular firm is

studied in it and not the whole conomy.
2. Theory of Firm or Economics of Firm: All the economic theories,
concepts and economic models known as “Theory of Firm” or
“Economics of Firm” are studied in Managerial economics.
• What is “Theory of Firm” - an approach to economics focusing on the
determination of goods, outputs, and income distributions in markets
through supply and demand—the theory of the firm is a microeconomic
concept that states that a firm exists and make decisions to maximize profits.
 Characteristics of Managerial Economics ( 4 )

3. Importance of Macro Economics too : Macro economics helps to

understand the overall environment in which a firm operates its
activities. The knowledge of Macro economics enables the managers
to co-ordinate and adjust their business in the best possible way with
environmental forces with which they have no control. E.g. Fiscal
policy, industrial policy,
4. Applied Approach: Managerial economist analyses good or bad
effects of various decisions on the firm.
How you will allocate the scare
resources to produce valuable
commodities
Efficiency
You have 1000 P in your hand. You have two types of
entertainment. Going to karaoke with friends and
watch Movie. Going to karaoke will cost 100 P each
time. And movie is 200P each time.
Possibilities Number of Movie Number of Karaoke
time time
A
B
C
D
E
F
You have 1000 P in your hand. You have two types of
entertainment. Going to karaoke with friends and
watch Movie. Going to karaoke will cost 100 P each
time. And movie is 200 P each time.
Possibilities Number of Movie Number of Karaoke
time time
A 5 0
B 4 2
C 3 4
D 2 6
E 1 8
F 0 10
No of
Movie

5
4
3
2
1
1 2 3 4 5 67 8 910
No of karaoke 1
 Production Possibility
No of
Movie Frontier (PPF)

5 When the resources are efficiently

4 produce goods and services and no
resources are wasted on this line.
3
2
1
1 2 3 4 5 67 8 910
No of karaoke 1
 G. Can we go 4 movies 4 karaoke?
No of
Movie H. Can we go 3 movies 4 karaoke?

5 I. Can we go 2 movies 8 karaoke?

4
3 J. Can we go 2 movies 2 karaoke?
2
1 K. Can we go 1movies 5 karaoke?

1 2 3 4 5 67 8 910
No of karaoke
No of
Movie
Currently
5 unreachable
4 economy
3
2
1 Used
Inefficiently
1 2 3 4 5 67 8 910
No of karaoke 1
 J. Can we go 2 movies 2 karaoke?
No of
Movie
Inefficient or unemployed
5 by 2 movies watch
4 Or
By going to 4 karaoke
3
2
1
1 2 3 4 5 67 8 910
No of karaoke 1
 • Points out side of the PPF are
No of unattainable. Points inside it are
Movie inefficient since resources are not
being fully employed, resources are
5 not being used properly , or
4 outdated production techniques are
3 being utilized.
2
1
1 2 3 4 5 67 8 910
No of karaoke 1
This is known as Production Possibilities Model. And the
budget line is also known as Production Possibilities Curve

Quantity Of DVDs
This model assumes that:
1. Full employment
2. Fixed resources
3. Fixed technology
Unattainable Production
4. Two goods: consumer goods A
and capital goods 6 E Possibilities
Curve
3 B C
Attainable D
0 2 6 12
Quantity
of books
 How will you Make
Decision
Mr A has 2 exams tomorrow morning. But he only have 6 hours to study . The
following table gives that the relationship between hours study and the respective
scores.

• Total hours available is 6 HR = Math + Bio

• 6 HR = 1 +?
• 6 HR = 1 +5
• If you plan to study Math 4 hours then ?
• 4 Hr of Math + 2 Hrs of Bio = 6 Hrs
•
Hours of Mathematics test Biology test score
study score • What is your options or paring?
0 37 58 • 0 hrs of Math + 6 hrs of Bio
• 1 hrs of Math + 5 hrs of Bio
1 53 70
• 2 hrs of Math + 4 hrs of Bio
2 67 80 • 3 hrs of Math + 3 hrs of Bio
3 79 88 • 4 hrs of Math + 2 hrs of Bio
4 89 94 • 5 hrs of Math + 1 hrs of Bio
• 6 hrs of Math + 0 hrs of Bio
5 96 98
6 100 100 • What is your options or pairing result ?
• 0 hrs of Math + 6 hrs of Bio
• 37 + 100 = 137
• 1 hrs of Math + 5 hrs of Bio
• 53 + 98 = 151
Hours of Mathemati Marginal benefit of studying math Biology test Marginal benefit of studying biology
study cs test score
score What did you gain?
0 37 xxxxx 58 xxxxx

1 53 70
2 67 53-37 = 16 80 70-58= 12
3 79 67-53 = 14 88 80-10= 10
4 89 79-53 = 12 94 88-80= 8
5 96 89-79 = 10 98 94-88= 6
6 100 96-89= 7 100 98-94= 4
100-96= 4 100-98= 2
Hours Mathematics Marginal benefit Biology test Marginal
of study test score of studying score benefit of
math studying
biology

0 37 Xxx 58 xxx
1 53 16 70 12
2 67 14 80 10
3 79 12 88 8
4 89 10 94 6
5 96 7 98 4
6 100 4 100 2
 Hours of Mathematics test Marginal benefit of Biology test Marginal
study score studying math score benefit of
studying
biology
0 37 Xxx 58 xxx
1 53 16 70 12
2 67 14 80 10
3 79 12 88 8
4 89 10 94 6
5 96 7 98 4
6 100 4 100 2

1. What is the marginal benefits of studying from 3 hr to 4hr in Mathematics 1. 10

2. What is the marginal benefits of studying from 5 hr to 6hr in Mathematics 2. 4
3. What is the marginal benefits of studying from 2 hr to 3 hr in Biology 3. 8
4. What is the marginal benefits of studying from 5 hr to 6 hr in Biology 4. 2
5. What is the marginal benefits of studying from 4 hr to 5 hr in Biology 5. 4
Hours Mathematic Marginal Hours Biology test Marginal
of s test score benefit of of score benefit of
study studying study studying
math biology

0 37 Xxx 0 58 xxx
1 53 16 1 70 12
2 67 14 2 80 10
3 79 12 3 88 8
4 89 10 4 94 6
5 96 7 5 98 4
6 100 4 6 100 2
Hours Mathematic Marginal Hours Biology test Marginal
of s test score benefit of of score benefit of
study studying study studying
math biology

0 37 Xxx 0 58 xxx
1 53 16 1 70 12
2 67 14 2 80 10
3 79 12 3 88 8
4 89 10 4 94 6
5 96 7 5 98 4
6 100 4 6 100 2
Hours Mathematic Marginal Hours Biology test Marginal
of s test score benefit of of score benefit of
study studying study studying
math biology

0 37 Xxx 0 58 xxx
1 53 16 1 70 12
2 67 14 2 80 10
3 79 12 3 88 8
4 89 10 4 94 6
5 96 7 5 98 4
6 100 4 6 100 2
Hours Mathematic Marginal Hours Biology test Marginal
of s test score benefit of of score benefit of
study studying study studying
math biology

0 37 Xxx 0 58 xxx
1 53 16 1 70 12
2 67 14 2 80 10
3 79 12 3 88 8
4 89 10 4 94 6
5 96 7 5 98 4
6 100 4 6 100 2
Hours Mathematic Marginal Hours Biology test Marginal
of s test score benefit of of score benefit of
study studying study studying
math biology

0 37 Xxx 0 58 xxx
1 53 16 1 70 12
2 67 14 2 80 10
3 79 12 3 88 8
4 89 10 4 94 6
5 96 7 5 98 4
6 100 4 6 100 2
Hours Mathematic Marginal Hours Biology test Marginal
of Final Decision
s test is 4 hours
score benefit of of Math
of scoreand 2 hours of of
benefit
study studying
Bio study
is the best options. studying
math biology

0 37 Xxx 0 58 xxx
1 53 16 1 70 12
2 67 14 2 80 10
3 79 12 3 88 8
4 89 10 4 94 6
5 96 7 5 98 4
6 100 4 6 100 2
 • What is your options or pairing result ?
Hours of Mathematics test Biology test score
study score • 0 hrs of Math + 6 hrs of Bio
0 37 58 • 37 + 100 = 137
• 1 hrs of Math + 5 hrs of Bio
1 53 70
• 53 + 98 = 151
2 67 80 • 2 hrs of Math + 4 hrs of Bio
3 79 88 • 67 + 94 = 161
4 89 94 • 3 hrs of Math + 3 hrs of Bio
• 79 + 88 = 167
5 96 98
• 4 hrs of Math + 2 hrs of Bio
6 100 100 • 89 + 80 = 169
• 5 hrs of Math + 1 hrs of Bio
• 96 + 70 = 166
• 6 hrs of Math + 0 hrs of Bio
• 100 + 58 = 158
Assignment Practice
The business man has 6 K. He has two business opportunities to invest. Choice A is
invest in somai and or Choice B is invest in kwek kwek. 1. Where should he invest and
how much each decide with using Marginal Analysis? 2. And how much is the
maximum return the business man can get from the choice.
Investment (K) Somai Return from Investment Investment (k) Kwek Kwek Return from
in a week Investment in a week

0 0 0 0
1 360 1 320
2 680 2 620
3 960 3 900
4 1,160 4 1,150
5 1,300 5 1,340
6 1,400 6 1,500
Investme Somai Return Marginal Return Ivestment Kwek Kwek Return Marginal
nt (K) from Investment form Somai (K) from Investment Return form
in a week in a week Kwek Kwek

0 0 xxxxx 0 0 xxxxx

1 360 1 320
2 680 2 620
3 960 3 900
4 1,160 4 1,150
5 1,300 5 1,340
6 1,400 6 1,500

1. What is the marginal return of Soimai from 2k to 3 k ?

2. What is the marginal return of Soimai from 5k to 6 k ?
3. What is the marginal return of kwek kwek from 4k to 5 k ?
4. What is the marginal return of kwek kwek from 1k to 2 k ?
Investme Somai Return Marginal Return Ivestment Kwek Kwek Return Marginal
nt (K) from Investment form Somai (K) from Investment Return form
in a week in a week Kwek Kwek

0 0 xxxxx 0 0 xxxxx

1 360 1 320
2 680 2 620
3 960 3 900
4 1,160 4 1,150
5 1,300 5 1,340
6 1,400 6 1,500

5. What is the best option or paring which will result the maximum return?
 There are two Variables
• Variables
• Independent variable:(cause) (reason) (x axis) horizontal in graph

• Dependent variable: (effect) (result) (y axis) vertical in graph

• Income (I)
• Consumption (C)
• Which one is independent which one is dependent?
• Economic Model
• C= f (Yd)
Plot the consumer spending on the vertical axis and disposable income on the horizontal axis. ( the dependent
variable normally appears on the vertical axis and the independent variable on the horizontal axis)
What is the economic model of C= f (Yd)

Individual Disposable Consumption (C )  

Income (I) Slope: Changes in Y
A 20,000 20000` divided by changes in X
B 21,000 20,500

C 22,000 21,000 Slope =

D 23,000 21,500

E 24,000 22,000
 The following is the income and consumption table.
1. Find out the economic model of the relationship.
2. What if income become 50,000 how much will be the consumption?
Individual Disposable Consumption (C ) 2
Income (I)
X Y
A 5000
x1 500 Y1
B 10,000 x2 1,000 Y2
C 15,000 1,500

1
 The following is the income and consumption table.
1. Find out the economic model of the relationship.
2. What if income become 50,000 how much will be the consumption?
Individual Disposable Consumption (C ) 2
Income (I)

A 5000 500

B 10,000 1,000

C 15,000 1,500 Y1
x1
50,000 x2 ? Y2
1 Y2 = 3,500+1,500
Y2 = 5,000
If income become 50,000 the
consumptions will be 5,000.
Saving and Income
which one is independent and which one is dependent ?
Income (Yd) Saving (S)
0 0
• 2What is the economic model
1,000 50 of the above table?
2,000 100
3,000 150
4,000 200 • 3What will be the saving when
5,000 250 the income become 10,000

• 1 What is the
relationship of the
two variable ?
Saving and Income  •
Slope economic model =
Income (Yd) Saving (S)
0 X 0 Y • =
1,000 50 Y1
x1
2,000 x2 100 Y2
3,000 150 •
 
=
4,000 200 • =0.05
5,000 250 • Since it is positive result , the relationship is
positive. Which mean the more income the
• 1 What is the relationship more saving
of the two variable ? • The economic model is changes in income
2What is the economic will result 0,05 changes in the saving.
model of the above table?
Saving and Income  •
Slope economic model =
Income (Yd) Saving (S)
0 X 0 Y • 0.05 =
1,000 50
2,000 100
3,000 150 •
 
0.05 =
4,000 200 • 0.05 =
5,000 250
x1 Y1 • 250 = Y2 -250
• 500 = Y2
10,000 x2 ?? Y2
• Y2 = 500
• 3What will be the • When income become 10,000 the saving will
saving when the be 500.
income become
10,000
 Income and 4 Ps allowance

Income 4 Ps • What will be the 4ps allowance

(Yd) allowance
when the income become
6,000 6,000 16,000
8,000 5,500
10,000 5,000
12,000 4,500

• 1 What is the relationship

of the two variable ?
• What is the economic
model of the above table?
Income and 4 Ps allowance  •
Slope economic model =
Income (Yd) 4 Ps
X Y
allowance • =
6,000 x1 6,000 Y1
8,000 x2 5,500 Y2 •
 
=
10,000 5,000 • =
12,000 4,500 • = - 0.25
• Since it is negative result , the relationship is
negative. Which mean the more income the
• 1 What is the relationship lesser the 4 ps allowance
of the two variable ? • The economic model is changes in income
• What is the economic will result – 0.25 changes in the 4 ps
model of the above table? allowance.
Income and 4 Ps allowance • Slope economic model =
Income 4 Ps
(Yd) allowance • - 0.25 =
X Y
6,000 6,000
8,000 5,500 •
 
-0.25 =
10,000 5,000 • - 0.25 =
12,000 x1 4,500 Y 1 • -1,000 = Y2 -4500
16,000 x2 Y2
• -1,000 + 4,500 = Y2
?? • Y2 = 3, 500
• What will be the • When income become 16,000 the 4ps
allowance will be 3 500.
4ps allowance
when the income
become 16,000