Managerial Economics

A. Managerial economics -is a branch of economics which deals with the

application of the economic concepts, theories, tools, and methodologies to
solve practical problems in a business. These business decisions not only affect
daily decisions, also affects the economic power of long-term planning
decisions, its theory is mainly around the demand, production, cost, market and
so on several factors.
-Managerial economics is a combination of economics theory and managerial
theory. It helps the manager in decision-making and acts as a link between
practice and theory.
-It is sometimes referred to as business economics and is a branch of economics
that applies microeconomic analysis to decision methods of businesses or other
management units.
Managerial Economics- It draws on Economic analysis for such concepts as cost,
demand, profit, competition, pricing, entry strategy and market protection
strategy.
-It offers powerful tools and approaches for managerial policy making like game
theory, sophisticated pricing policies such as bundling and two part tariffs.
Case StudY on Managerial Economics
1. How “BOEING” struggled to retain market leadership against “AIRBUS.”
B. Relationship of Managerial Economics and Related Sciences
Figure 1. Problems faced by
decision makers in
management
Economic Theory Decision Sciences

Managerial Economics w/c applies and

extends economics and the decision
sciences to solve management problems

Solutions to decision
problems faced by
managers
-As shown on Figure 1, managerial economics draws heavily on the decision sciences
as well as traditional economics. The decision sciences provide ways to analyze
the impact of alternative course of action. It uses optimization techniques such as
differential calculus and mathematical programming to determine optimal courses
of action for decision makers.
-Managerial Economics plays two important roles in the study of business
administration;
First, the course in managerial economics like Accounting quantitative methods
and management information system, Marketing, Finance and Production.
Second, the course in managerial Economics like Business Policy.

C. The Basic Processes of Decision Making

Step 1 Establish or identify the Objectives
Step 2 Define the Problem
Step 3 Identify the Possible solutions.
Step 4 Select the best possible solutions
Step 5. Implement the Decision
D. The theory of the Firm
Firms- Are complex organizations generally for profit such as a corporation, limited
liability company or partnership that provides professional services/vary enormously.
- To apply managerial economics to business management,
we need a theory of the firm; a theory indicating how firms behave and what
their goals are.
-this theory assumes that the firm tries to maximize its profits or it tries to
maximize its wealth or value.
-This theory which is also known as Dominant Theory tries to seeks the value
of the firm.
Value of the Firm- Defined as the present value of its expected future cash flows.
-It is basically the sum of claims of its creditors and shareholders.
-Measuring the value of the firm is by adding the market value of its debt and equity
and minority interest. Cash and cash equivalents would be then deducted to arrive at
the net value.
Present value of firms total in minus total cost in a
expected future profit = a revenue year year
E. The role of constraint
Impediments /Constraints on economic managers
1. Managers might unable to obtain more than a particular amount of specialized
equipment, skilled labors, essential materials, or other inputs.
2. Legal or contractual in nature.
3. Political and social
F. The concept of Profit
Profit is meant by economists after taking account of the capital and labor provided
by the owners. It is concerned primarily with decision making and rational choice
among prospective alternatives.
Profit is meant by accountant as a concern on controlling the firms day to day
operation, detecting fraud or embezzlement, satisfying tax and other laws and producing
records for various interested groups.
Note: If a firm intends to make money as much as possible, the answer lies on the hands
of the economists and not the accountant.
Three important reasons on the existence of profit
1. Innovations- Profits are earned by successful innovators. Innovators are not
necessarily the inventors of new techniques or products although in some
cases innovators ang inventor are the same. Often, the innovators takes
another’s invention, adapts it, and introduces it to the market.
2. Risks – Profit is a reward for risk bearing. Economic managers carefully study
business issued to get rid of business risks.
3. Monopoly power- Monopoly profits are fundamentally the result of contrived
scarcities.
F. The demand and supply side of the market
Market- can be defined as a group of firms and individuals that are in touch with
each other in order to buy or sell some goods,
-Demand side can be represented by a market demand curve which shows the
amount of the commodity buyers would like to purchase at various prices.
-Any demand curve is based on the assumption that the tastes, income and
number of consumers, as well as the prices of other commodities, are held constant.
-the Supply side of a market can be represented by Market supply curve that
shows the amount of the commodity that sellers would offer at various prices
G. The Equilibrium Price
-A price that can be maintained.
-Any price that is not equilibrium price cannot be maintained for long , since
there are fundamental factors at work to cause a change in price.
Actual Price- The price that consumers are really interested in-the price that
really prevails, not the equilibrium price.
-In general, economists simply assume that the actual price will approximate
the equilibrium price, which seems reasonable enough.
H. The demand and supply curve shifts
The shift in the demand curve is when, the price of the commodity remains
constant, but there is a change in quantity demanded due to some other
factors, causing the curve to shift to a particular side. Demand curves are
estimated by a variety of techniques.
I Shift in Supply Curve –
The shift in the supply curve is when, the price of the commodity
remains constant, but there is a change in quantity supply due to some
other factors, causing the curve to shift to a particular side.
Figure 2.
Figure 3. Demand curve shift