Managerial Economics

1. MANAGERIAL ECONOMICS
Presented by
Raghuram

2. Course Structure
(Economics or Managerial Economics, Part I)
• Topic 1. Basics of economic analysis
• Topic 2. Demand and supply
• Topic 2.1. Individual consumer demand
• Topic 2.2. Market demand and supply
• Topic 3. Production analysis and cost analysis
• Topic 3.1. Production policy
• Topic 3.2. Theory of cost
• Topic 4. Market structure analysis
• Topic 4.1. Perfect competition and monopoly
• Topic 4.2. Monopolistic competition and oligopoly

3. Grading Policy
MIB (Economics)
• 70% - mid-term (or final) exam
• 30% - individual in-class assignments
MITIM (Managerial Economics) 2 grades
1st :
• 70% - mid-term (final for MIB) exam
• 30% - individual in-class assignments
2nd :
• 70% - final exam (Winter session, Managerial Economics,
Part II)
• 30% - individual in-class assignments (Managerial
Economics, Part II)
Final grade = 1st *1/3 + 2nd * 2/3

4. Economics (Managerial Economics, Part
I),
Final Evaluation (Mid-term or final exam)
35 points
• for written mid-term exam (for MITIM
students)
or
• final exam (for MIB students)

5. Economics (Managerial Economics,
Part I), Current Evaluation
• 15 points for 3 in-class assignments (5
points each)
• after the end of the corresponding group of topics
• each assignment includes 5 multiple choice questions
• The student can receive 5 points for each group of topics and
these points will be considered in final mark
• respectively the individual assignment can give 15 points

6. Economics (Managerial Economics, Part
I), Individual In-class Assignments
• Three individual assignments (after the end of
the corresponding group of topics)
• Each assignment includes 3 tasks
• The student can receive 3 points for each group of
topics and these points will be considered in final
mark
• Respectively the individual assignments give
12 points for final mark

7. In-class Group Work
• In-class group work will take place at
seminars
• Discussion of cases and answering
given questions
• Doesn’t give any points for final mark

8. Literature
• Microeconomics: Optimization, Experiments,
and Behaviour. Burkett, John P. 2006. Oxford
Univ. Press., Source: http://site.ebrary.com/
• Microeconomics Demystified. Depken,
Craig. 2005. The McGraw-Hill Companies.,
Source: http://site.ebrary.com/
• Baye M. Managerial Economics and Business
Strategy [Text] / M. Baye. – McGraw-Hill, 2006.
– 620 p.

9. Topic 1.
Basics of economic analysis
• Economics – the science of making
decisions in the presence of scarce
resources

10. Managerial Economics vs.
Microeconomics: Common and Different
Microeconomics Managerial Economics
How should the prices
be set?
In which way
were the prices
set?
Computer Manufacturer (e.g.: IBM)
Similar concepts

11. Opportunity Cost
• Def #1: the cost of the explicit and implicit resources
that are forgone when a decision is made
• Def #2: the value of the other products that the
resources used in its production could have
produced instead
• The opportunity cost of using a resource includes
both the explicit (or accounting) cost of the
resource and the implicit cost of giving up the next-
best alternative use of the resource

12. Economic vs. Accounting Profits
• Def : Accounting profit – the total amount of
money taken in from sales (total revenue, or
prices times quantity sold) minus the money
cost of producing goods or services
• Def : Economic profit – the difference between
total revenue (TR) and total opportunity cost
(TC)

13. Reasons for the Existence of
Profit
• Innovation
• Risk
• Monopoly power

14. The Five Forces Framework and
Industry Profitability
• Entry
• Power of input suppliers
• Industry (market) rivalry
• Substitutes and complements.
• Power of buyers

15. Incentives
• Def: Incentives – affect how resources
are used and how hard employees work
• E.g.: “A manager should be doing a good
job” – mistake
• But!: the effect of a per hour salary for workers
to increase output

16. Markets
• Consumer-producer rivalry
• Consumer-consumer rivalry
• Producer-producer rivalry
• Government and the market

17. Managerial Interests and Sales
Maximization
• Separation of ownership from control in large
corporations
• Sales represent a measure of management’s
success, especially since many observers focus
attention on a firm’s share of the market as an
indicator of its performance

18. Economic Optimization Process

19. Economic Optimization Process
• Choices involve benefits and costs
• Optimal decision – choice alternative that
produces a result most consistent with
managerial objectives

20. Profit Maximization
• Maximizing profit means maximizing the value
of the firm, which is the present value of
current and future profits

21. The Role of Constraints
Value of firm
Input, legal, and
other constraints
Limited by
 

 

n
t
t
t
t
i
TC
TR
1 1
equals
The value of i
depends on:
Values of TRt
depend on:
Values of TCt
depend on:
1. Riskiness of firm
2. Conditions in
capital market
1. Demand and forecasting
2. Pricing
3. New product developing
1. Production techniques
2. Cost functions
3. Process development

22. Expressing Economic Relations
• spreadsheet – table of electronically stored data
• graph – visual representation of data
• equation – analytical expression of functional
relationship
• dependent variable – Y variable determined by X
values
• independent variable – X variable determined
separately from the Y variable

23. Total, Average, and Marginal
Relations (1)
• Marginal – change in the dependent variable
caused by a 1-unit change in an independent
variable
• Marginal revenue
• Marginal cost
• Marginal profit

24. Total, Average, and Marginal
Relations (2)
Units of output,
Q
Total profits,  Marginal profits,

Average
profits,
0 0 0 -
1 19 19 19
2 52 33 26
3 93 41 31
4 136 43 34
5 175 39 35
6 210 35 35
7 217 7 31
8 208 -9 26


25. Graphing Total, Marginal, and
Average Relations
• Marginal profit is the slope of the total profit
curve
• Total profit is maximized when the marginal
profit equals zero
• Average profit rises (falls) when marginal profit
is greater (less) than average profit

26. Marginal Analysis in Decision
Making
• Finding maximums or minimums
• Distinguishing maximums from minimums
• Maximizing the difference between two
functions

27. Multivariate Optimization
• The marginal effect of each independent
variable on the dependent variable
• holding constant the effect of all other independent
variables
• Partial derivatives
• The unchanged variables are treated as constants
in the differentiation process

28. Incremental Concept in
Economic Analysis
• Marginal relations measure only the effect associated
with unitary changes in variables
• The incremental concept is often used as the practical
equivalent of marginal analysis
• Def: Incremental change is the total change resulting
from a decision
• E.g.: Incremental profit is the profit gain or loss associated
with a given decision