Watch this with a 10-15 minute audiotrack at http://vimeo.com/novusprogram/lesson7 This lesson gives students an overview of Managerial Economics and how it can be applied to a small business. It focused on examining two managerial economic principles: demand analysis and the production decision. It describes ways that a business can affect its demand curve and how competitive analysis can help a manager make one of the most important decisions: pricing of goods and services. It then moves to the production decision, focusing on the different types of expenses, total cost vs. average total cost vs. marginal cost, and how to find the break-even point for a good or service. The Novus project is a combination of video tutorials designed to be used in conjunction with a free business simulation software program. The Novus Business and IT Program contains 36 business and IT training videos, covering basic finance, accounting, marketing, economics, business strategy, Word, Excel, and PowerPoint. Users will have an opportunity to apply the lessons in the Novus Business Simulator. Over six rounds, the user or teams will have to make decisions on capital purchases, financing, production, financing, and human resources for a microbrewery. This channel has arranged the 36 video lessons into the order in which they are meant to be used with the simulator. To watch this slideshow as a video, please go to our Vimeo page at: https://vimeo.com/novusprogram. To download our free business simulation software, please go to our SourceForge page at: http://sourceforge.net/projects/novus/.

1. Managerial Economics
Lesson 7
To learn the basic concepts of managerial economics including analyzing
demand, deciding how much to produce, pricing and cost.
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2. Managerial Economics
• Economic Theory for a Business
• Focuses on Micro-economics
– Individual Consumers
– Individual Businesses
– Individual Industries
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3. Primary Focus of Managerial
Economics
• Demand Analysis – How Much do Customers
Want?
• Production Decision
– What to Produce?
– How to Produce?
– How Much to Produce?
– For Whom?
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4. Demand Curve
• Different for a business than for its market
• Considerations
– Price
– Competitor Behavior
– Time of Year
– Business Hours
– Location
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5. Price
• Internal Factors
– Things you can control
• External Factors
– Things you cannot control
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6. Price Elasticity
• How a change in one variable affects others
– If prices are lowered, will you sell more?
– If prices are raised, can you still sell as much?
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7. Competitor Pricing
• Understanding your competitors’ prices is very
important
• Same item + your higher price = lower sales for
you
• Understand what customers think
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8. Other Factors
• Competitor Behavior
– Customer service
• Convenience
• Promotion
• Time of Year
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9. Demand Analysis Summary
• Thorough Market Review
• Give Customers a Reason to Come to You
• Consider Seasonality
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10. Production Decision
• Can you buy or produce enough to meet
demand?
• “Production” includes
– Goods and services
– Made or bought for resale
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11. Price versus Cost
• Pricing affect Production Decision
• Cost categories:
– Fixed
– Variable
– Mixed
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12. Total Cost
• Fixed + Variable + Mixed = Total
• Prices must be high enough to cover total cost
Quantity 1
Fixed Costs $50
Variable Costs 2
Total Cost 52
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13. Average Total Cost
• Average Total Cost = Total Cost / Quantity
Quantity 10 100
Fixed Costs $50 $50
Variable Costs 20 200
Total Cost 70 250
Average Total Cost $7 $2.50
• Economies of Scale
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14. Marginal Cost
• Cost to buy / produce / sell one more item
• Usually amount of variable cost (including
variable-mixed)
• Sale price should be higher than marginal cost
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15. Break-Even
• When total cost and sales are equal
• Calculation of break-even
Fixed Costs $50
Sales Price $3
Marginal Cost $2
Difference $1
Break even units 50 units
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16. Summary
Market Production
Competitors Price
Demand
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