Introduction & Micro Review

Chapter 1 & 2

Slide 1

Introduction
Managerial Economics
How to efficiently use scare resources to achieve managerial goal

What resources are scarce?

Land, Labor, Capital, Entrepreneur Ability

What is/are managerial goals?

Slide 2

Introduction
Firms Objective - Max Profit!!
Why? Profit definition? Profit signal?

Slide 3

Introduction
Accounting vs. Economic Profit
Economic Profit
Total revenues - total economic cost Economic costs: explicit + implicit costs
Focus more on this cost becuse think it drives behavior

Slide 4

Introduction
The Profit Signal
Profit > 0, firm happy Others opportunity cost? Result go UP More scarce resources to g/s profit > 0 Can profits last?
Depends of Barriers to Entrant
Five Forces

Slide 5

Introduction
Substitutes
(Already Established Companies) - Current Customers

Potential entrants
Sustainable industry profitability

Intensity of rivalry Supplier power

(Supplier Input)

Buyer power

Slide 6

Introduction
Incentives
Important to consider to understand behavior Owners want max profits; employees?
(PrincipleAgent Problem)

Try to align goals

Slide 7

Introduction
Marginal Analysis
How use M.A. to max profit? Weigh benefits and costs at unit level How much should be produced?
Margin produce 1 more unit?

Slide 8

Introduction
Marginal Analysis and Profit Cont
Definitions
Total Revenue (TR): amount firm receives from sale of units produced Marginal Revenue (MR): in TR from extra unit Total costs (TC): amount firm must pay to create units produced Marginal Costs (MC) = TC from extra unit

Slide 9

P $5 $5 $5 $5 $5

Q 1 2 3 4 5

TR 5 10 15 20 25

MR 5 5 5 5 5

TC 3 5 8 13 21

MC Unit Profit 3 2 2 3 3 2 5 0 8 -3

Slide 10

Introduction
Marginal Analysis and Profit Cont
Ex. Max profits occur at Q = 4
Produce until marginal profits = 0

Marginal Rule of Profit Max:

Produce until MR=MC

Slide 11

Introduction
Present Value
If benefits or costs occur in future $1 now $1 next yr

Discount factor: DFt =[1/(1+i)]t

i is opportunity cost t time periods in future

Slide 12

Introduction
Major Topics
Demand Supply (Costs) Pricing Antitrust

Slide 13

Micro Review of Markets

Chapter 2

Slide 14

Supply and Demand

Supply Side
Willingness to Accept (WTA) minimum price a seller will accept Supply quantity of g/s sellers w/a sell over prices Quantity supplied amnt w/a to sell at given price

Law of Supply P & Qs directly related

Slide 15

Supply and Demand

Demand Side
Willingness to Pay (WTP) maximum price a buyer will pay to buy g/s Demand quantity of g/s consumers w/a able to buy over prices Quantity demanded amnt w/a to buy at given price

Law of Demand P & Qd indirectly related

Slide 16

Supply and Demand

Equilibrium and Surplus
Price/Quantity combo where S=D Consumer Surplus (CS)= WTP - Price Producer Surplus (PS)= Price - WTA Total Surplus = CS + PS, all exchanges

Slide 17

Supply and Demand

Shifting Demand Curve
Demand Changes
Change price change Qd; move along curve Other changes shift curve
1. Prices of Related G/S 2. Income 3. Number of Buyers 4. Change in Tastes and Preferences 5. Change in Expectations of Future Prices

Slide 18

Supply and Demand

Shifting Supply Curve
Supply Changes
Change price change Qs; move along curve Other changes shift curve
1. Resource Prices 2. Price of Substitutes in Production 3. Number of Suppliers 4. Technology 5. Change in Expectations

Slide 19

Supply and Demand

Invisible Hand
Invisible Hand without guidance markets eliminate surpluses or shortages leading to equilibrium When is this true?

Slide 20