MANAGERIAL ECONOMICS

1. Main content
- Managerial economics is the use of economic analysis to make business decisions involving
the best use (allocation) of an organization’s scarce resources.
- The fundamental decision problem of the firm is to determine the profit-maximizing price
and output for the good or service it sells.
- The firm’s profit from any decision is the difference between predicted revenues and costs.
Increasing output and sales will increase profit, so long as the extra revenue gained exceeds
the extra cost incurred. Conversely, the firm will profit by cutting output if the cost saved
exceeds the revenue given up.
- If economic conditions change, the firm’s optimal price and output will change according to
the impact on its marginal revenues and marginal costs. Profit-maximization quantity: MR =
MC
- The firm’s optimal price is determined by the markup rule. Profit-maximization price:
(P – MC)/P = 1/-Ep
- Price discrimination occurs when a firm sells the same goods or services to different buyers
at different price. Ex: airlines charge full fares to business travellers, while offering discount
fares to vacationers
- Accurate demand forecasts are crucial for sound managerial decision making. The quantity
demanded is the amount of goods and services that the consumers plan to buy during a
particular time period, at a particular price. Factors that affect demand:
+ Price of related good
+ Expected future price
+ Income
+ Population
+ Preferences
- Demand forecast methods:
+ Consumer interviews or surveys
 to estimate the demand for new products
 to test customers reactions to changes in the price or advertising
 to test commitment for established products
+ Market studies and experiments: to test new or improved products in controlled settings
+ Regression analysis: uses historical data to estimate demand functions
- Production is the process of turning inputs into outputs. To minimize the cost of producing a
particular amount of output, the firm should choose an input mix such that the ratio of the
marginal product to the input’s cost is the same across all inputs.
- The law of diminishing marginal returns: as units of one input are added (with all other
inputs held constant), resulting additions to output will eventually begin to decrease; that is,
marginal product will decline.
- Accounting cost considers only explicit cost, the out of pocket cost for such items as wages,
salaries, materials, and property rentals
- Opportunity cost is the cost associated with opportunities that are foregone by not putting
resources in their highest valued use
- Economic cost = all opportunity costs
- Costs in the Short Run:
The total cost of production equals the fixed cost (the cost of the fixed inputs) plus the
variable cost (the cost of the variable inputs)
+ Fixed costs: costs that do not vary with output levels
+ Variable costs: costs that do vary with output levels
+ TC = FC + VC
- The long-run total cost curve describes the minimum cost of producing each output level
when the firm is free to vary all input levels.
- When a company is experiencing economies of scale its LRAC declines as output is
increasing
- Diseconomies of scale: LRAC increasing as output increasing