MODULE 1

MANAGERIAL ECONOMICS

A.ECONOMICS AS THE SCIENCE OF

SCARCITY

Economics
is a social science that deals with the
efficient allocation of scarce resources to
satisfy human needs and wants. Main Pillars of Robbins’ definition:
1.The human wants or ends are
Social Science
unlimited – human desires become
(scientific methods) human behavior
more plentiful and of greater quality
over time.
Scarce resources
(limited amount) 2.The ends or wants vary in importance
Human ends are ordered from most
important to least important as follows:
SCARCITY A.necessaries
It is the fundamental economic problem where B.comforts
resources are inadequate to meet our C.luxuries
unlimited desires.
These resources are: 3.Scarcity of resources – it occurs as
human desires continually outstrip
1.Land – gift of nature what limited resources may supply.

2.Labor – physical or mental talents, abilities 4.According to Robbins – the economics

and efforts discipline is based on the concept of
unlimited goals and limited resources.
3.Capital - includes the equipment, tools, An economic dilemma exists when
buildings/factories used in production. human desires are countless and the
resources available to satisfy them are
4.Entrepreneurship – the individuals who make few or limited.
commodities by combining the other three
resources. 5.Economic resources have alternative
uses – the limited resources capable of
• We can see how broad the concept of meeting human needs can be put to
economics is; it essentially concerns other purposes. It can only be used for
decision- making. one purpose at a time.
• Every choice we make has
B.KEY CONCEPTS OF ECONOMICS
a cost.
SCARCITY
It is the condition of having greater
wants in comparison to the limited
resources like land, labor, capital, and
 entrepreneurship which are accessible C.CETERIS PARIBUS
to please those desires. CETERIS PARIBUS
(ALL OTHER THINGS BEING EQUAL)
CHOICE HOW CETERIS PARIBUS WORKS?

People have to make choices because of the • Ceteris paribus allows you to focus
problems of scarcity. The resources on how a change in the
available to satisfy people’s wants are independent variable affects the
limited in supply. dependent variable.
• All other things are rarely, if ever,
equal in the real world, but using
GOOD AND BAD
the concept of ceteris paribus
In economics, good can be defined as allows you to understand the
anything which produces or generates theoretical relationship between
utility or satisfaction to a person. On the cause and effect.
other hand, A bad is something which gives
an individual dissatisfaction or disutility.

RESOURCES

Resources is anything that is regarded as a

source of supply that contributes
to producing something. Generally, the
Land, labor, capital, and entrepreneurs. D.PRODUCT POSSIBILITY FRONTIER

BENEFIT AND COSTS • A curve that shows various

combinations of two goods which can
Relationship between benefit and cost also be produced with the given and same
among some major key concepts of limited resources and technology where
economics. No Benefit comes without a the given resources are fully and
cost. efficiently utilized per unit time.
DECISIONS MADE AT MARGIN • It also shows the maximum possible
production level of one commodity.
Economics participants always decide on A point on the curve or frontier
the margin. Taking anything additional or indicates efficiency. (Point A and Point
taking the decision to do or to take B)
anything have cost as well as benefits. • A point beneath the curve indicates
inefficiency. (Point C)
HOW TO MAXIMIZE THE NET BENEFIT • A point beyond the curve indicates
impossibility.
Taking more of the units until the marginal
benefits from such an additional unit will
become equal to the marginal cost to the
units.
 TWO INDICATORS OF PRODUCT F.OVERVIEW OF MANAGERIAL ECONOMICS
POSSIBILITY FRONTIER (PPF)
Definition of Managerial Economics
• Efficiency
Managerial Economics is a body of knowledge
when an economy is operating on
that deals with the
the PPF is said to be efficient,
allocation of scarce resources to efficiently and
meaning that it would be
effectively manage business problems, through
impossible to produce more of one
the lens of theories in micro and
good without decreasing
macroeconomics. Whether a market is situated
production of the other good.
in a local or global context, the same principles
of managerial economics apply thereto.
• OPPORTUNITY COST
Managerial economics establishes and applies
The increasing production of a
models that focus on a particular issue, holding
first goods entails decreasing
other things constant.
production of a second good.
The sacrifice in the production of
the second good is called the Nature of Managerial Economics
opportunity cost.

• Since Managerial Economics is

WHEN INTERPRETING THE PPF. regarded as a body of knowledge,
therefore we can infer that it is a
scholastic field or a science,hence:
• The PPF is graphically depicted as an
• It utilizes methodological
arc, with one commodity represented
observations in order to formulate
on the X-axis and the other represented
decisions and alternatives, keeping
on the Y-axis. Each point on the arc
the scarce resources in mind.
shows the most efficient number of the
• Policies are established after
two commodities that can be produced
consistent testing and trailing
with available resources.
• Policies are universally acceptable;
• Economists use PPFs to shows that
at least partially if not fully
an efficient nation produces what it
is most capable of producing and
trades with other nations for the
rest.

CONCLUSION

The PPF demonstrates that there should be

limits when it comes to production. Each
economy must decide what combination of
goods and services should be produced in order
to attain maximum resource efficiency. Art and Science
Managerial Economics requires an
integration of creative and logical
thinking
 Risk Analysis
Uses Microeconomics Extensive use of statistical probability theories,
In some aspects of Managerial uncertainty model analysis, and decision-
Economics, problems of certain theory analysis provide potential aid for
organizations are scrutinized rather businesses to maximize when making decisions
the whole economy perse. and mitigating risks.
Uses Macroeconomics
Extrinsic factors affect the decisions Investment Analysis
of business organizations; hence Managerial economics ensures that business
macroeconomics can greatly help in firms can maximize their allocated funds and
addressing such perplexities. increase profitability from it.

Multi-disciplinary G.PROBLEM SOLVING PRINCIPLES

Principles in Managerial economics were
synthesized due to the conglomeration of
pertinent concepts extracted from accounting,
mathematics, statistics, finance, etc.

Management Oriented and Pragmatic

Managerial economics is all about finding
appropriate solutions with utmost
consideration for practicality.

APPLICATION OF MANAGERIAL ECONOMICS Does rationality affect to the economic

problems?
(Rational Choice Theory)
Pricing
Business firms can effectively determine pricing
strategies and appropriate pricing levels We define rationality as being sensible or
through price discrimination, value-based reasonable in making choices. For
pricing and cost- plus pricing. Economists, rationality means that you will
choose the thing you like the best among
Elasticity vs. Inelasticity the choices you have.
Economists can determine price sensitivity of
2 components that is required in problem
goods and services by using price elasticity
solving (Managerial Economics by Luke M
analysis, which streamlines marketing and
Froeb- 2nd edition)
pricing decisions.
1.Figure out what is wrong
Operations and Production
• Defining the Problem,
Quantitative methods are used to analyze
When you define the problems
production and operational efficiency through
properly, you make it easier to solve,
schedule optimization, economies of scale,
which means saving time, money, and
resource analysis, marginal cost, marginal
resources.
revenue, operating leverage, etc.
 • Finding the cause of the • Direct labor
problem. • Production Supplies
Figure out what negative events are • Transaction fees/Shipping Cost
occurring. Then, look at the complex • Commissions
systems around those problems, and • Utility costs
identify key points of failure. Finally, • Billable labor (Per hour labor)
determine solutions to address those
key points, or root causes. FORMULA FOR VARIABLE COST

Total Variable Cost = Total Quantity of Output x

2.figure out how to fix it Variable Cost Per Unit of Output

• Finding the solution, WHAT IS FIXED COST?

Finding a solution to a problem involves • refers to a cost that does not change
constructing a course of action. with an increase or decrease in
• Implementation of solution thenumber of goods or services
to a problem. produced or sold.
carrying out the chosen solution. • Fixed cost remain whether there is good
• Monitoring the solution or services being produced ornone and
implemented. a company cannot avoid fixed cost. So
Monitoring is a management tool for regardless of the outputmeaning even
improving performance and control the though there are no output being
risk. produced the companymust still pay
the fixed cost.
MODULE 2: Problem Solving and Decision EXAMPLES OF FIXED COST
Making
• Rental Lease Payments
BENEFIT, COSTS AND DECISIONS • Salaries
VARIABLE,FIXED AND TOTAL COSTS
• Insurance
ACCOUNTING VS. ECONOMIC PROFIT
• Property Taxes
• Interest expense
• Decisions
VARIABLE, FIXED AND TOTAL COSTS
FORMULA FOR FIXED COST
WHAT IS VARIABLE COST?
Fixed Cost = Total Cost of Production – Variable
These are the expenses that depends on the
Cost Per Unit * No. of UnitsProduced
quantity ofgoods or services that a company
produce.The variable expense do not remain WHAT IS TOTAL COST?
persistent when thelevel or number of
• In economics, it is the cost incurred in
production change.
producing something or engaging inan
MOST COMMON VARIABLE COST activity.
• Total cost made up with Variable costs
• Direct materials
and fixed cost.
• Raw Materials
• It is also serve as a fundamental paid all the cost for it and doesn’t
concept for business owners want to have loss
andexecutives because it allows them • In a business view according to
to track the combined costs of Alicia Tuovilla, sunk costs are
theiroperations. typicallynot included in
consideration when making future
FORMULA FOR TOTAL COST
decisions, as they areseen as
Total Cost = Total Fixed Cost + Total irrelevant to current and future
Variable Cost budgetary concerns.

Hidden-CostFallacy

These are the expenses that are not

usually included in the price or cost of
anequipment such as training,
maintenance, supplies, support and
upgrades.

EXTENT (HOW MUCH) DECISIONS AVERAGE

AND MARGINAL COSTS ; MARGINAL ANALYSIS
ACCOUNTING PROFIT VS. ECONOMIC
PROFIT WHAT IS AVERAGE COSTS?

WHAT IS ACCOUNTING PROFIT? • Average cost is the per unit cost that
get from dividing the Total Cost by the
Accounting profit is a company's total
Output.
earnings, calculated according toGenerally
• Average cost is also called Per Unit
Accepted Accounting Principles (GAAP). It
Total Cost.
shows the amount ofmoney left over after
deducting the explicit costs of running the
business.

WHAT IS ECONOMIC PROFIT?

An economic profit or loss is the difference

between the revenue receivedfrom the sale
of an output and the costs of all inputs
used, as well as anyopportunity costs.

Sunk-Cost Fallacy FORMULA FOR AVERAGE COST

• According to Alicia Tuovila, Sunk Also it can be,AC = Average Variable cost
• Cost are those that are (AVC) + Average Fixed cost
alreadysustained and not which (AFC)Where,Average variable cost = Total
are unrecoverable. The Sunk Cost Variable Cost (TVC) / Total output (Q)Average
occur whena person or can be a fixed cost = Total Fixed Cost (TFC) / Total
company chose to stick with output (Q)
their plan becausethey are already
TWO TYPES OF AVERAGE COST: the change in energy output. Under
perfectly competitive markets, the MC
SHORT-RUN AVERAGE COST
curve is the same as the firm's supply
In short run we can say that some of the cost curve.
are fixed cost.
WHAT IS MARGINAL ANALYSIS?
LONG-RUN AVERAGE COST Marginal Analysis compares the
increased benefits of an activity to the
It is where all cost are variable cost and there is higher expenses generated by the same
no fixed cost activity. Marginal analysis is used by
The long-run average cost(LRAC)curves hows businesses as a decision-making
the firm’s lowest cost per unit at each level of technique to assist them optimize their
output, assuming that all factors of production prospective earnings.
are variable Marginal analysis is a general business
WHAT IS MARGINAL COST? and economics term describing a
process of comparing a one unit
• Marginal Cost of production defined as incremental cost increase of an activity
the change in total production cost that with a corresponding increase in
came from producing or selling on benefits. In business, managers use
additional unit of goods or services. marginal analysis to determine the level
• If the marginal cost of producing one at which they should stop incurring
additional unit is lower than the per- more costs in order to generate the
unit price, the producer has the most revenue, it is one of many tools
potential to gain a profit. used to maximize profits.
FORMULA FOR MARGINAL COST • The assessment of the related
Marginal Cost = (Change in Costs) / costs and possible benefits of
(Change in Quantity) certain company operations or
decision-making is known as
FORMULA FOR MARGINAL COST marginal analysis.
• Marginal analysis may also aid
• To determine the change in costs,
in decision-making when there
simply deduct the production costs
are two prospective
incurred during the first output run
investments but only enough
from the production costs in the
accessible funding for one.
next batch when output has
increased INVESTMENT DECISIONS:LOOK
• To determine the changes in AHEAD AND REASON
quantity, the number of goods BACK;COMPOUNDING AND
made in the first production run is DISCOUNTING
deducted from the volume of
COMPOUNDING AND
output made in the following
DISCOUNTING
production run.
All investment decisions involve a
The marginal cost(MC)curve is defined
trade-off between current sacrifice
as the change in total cost divided by
 and future gain. Before investing, temporarily or permanently suspend
you need to know whether the the operations.
future benefits are more or greater
REASONS OF SHUTDOWN
than the current costs.
PRODUCTION
WHAT IS COMPOUNDING?
• Fall in demand
It is the effect of a value growing upon • Financial problem
itself to a higher value, which then • Change in technology
grows upon itself in a continuous • High rate of taxes
process. • Inadequate availability of raw
material
• Recession in market
• Mismanagement
WHAT IS DISCOUNTING? SHUTDOWN POINTS DECISION
Discounting is the process of SHORT-RUN SHUTDOWN DECISION
determining the present value of a
payment or a stream of payments that When it comes to the short-run decision to
is to be received in the future. shutdown they consider the variable costs
wherein if the variable costs is greater than the
BREAK-EVEN ANALYSIS sales then the company needs to shutdown the
Discounting is the process of specific product/services or the company for
determining the present value of a the short-run.
payment or a stream of payments that LONG-RUN SHUTDOWN DECISION
is to be received in the future.
When it comes to the long-run decision to
SHUTDOWN DECISIONS AND BREAK- shutdown they consider the totalcost i.e. fixed
EVEN PRICE costs and variable costs. In this case, the
WHAT IS THE SHUTDOWN DECISION? company’s total costsare affected by the losses
that have occurred and it cannot cover up
A shut-down decision is the company’s becausethe total costs are greater than the
decision to temporarily suspend the sales. In order to avoid greater losses forthe
production. The shut-down decision future the company will decide to shutdown
depends on the shut-down point. and not operate for the long-run.
The shut-down points indicate the exact
concern when the company’s revenue is SHUTDOWN DECISIONS AND BREAK-EVEN
equal to its variable cost. PRICE

WHAT IS SHUTDOWN POINT? WHAT IS BREAK-EVEN PRICES?

A position of operation which the The break-even price is the price of the
company experiences a disadvantage company’s product wherein covers the fixed
forcontinuing operations. Therefore, costs of a specific volume of sales.
the company will decide if they
BREAK-EVEN PRICE FORMULA: This strategy is often used by retailers and
wholesalers selling commodities. Companies
Break Even Sales Price = (Total Fixed
that make simple pricing decisions often try to
Costs/Production Volume ) + Variable Cost per
increase sales by making small, competitive
Unit
adjustments such as purchase discounts,
BREAK-EVEN ANALYSIS volume discounts and purchase allowances
Many businesses seem to focus on Q (quantity)
• Break-even analysis determines how and C (cost) and forget about P (price).
many units of a product must be sold in
order to cover both fixed and variable Profit = (P – C) x Q
production costs.
Where: P – price
• The break-even point is a metric for
determining the margin of safety. : C – cost
• Break-even analysis is applied to a wide
: Q – quantity
range of projects, from stock and
options trading to corporate budgeting. According to Roger Brinner, Chief Economist at
the Parthenon Group, MOST COMPANIES
THE FOLLOWING ARE THE FORMULAS OF
BREAK-EVEN POINT AND CONTRIBUTION CAN MAKE MONEY SIMPLY BY RAISING PRICE.
PER UNITIN EQUATION FORM.
“Simple pricing” is the case of a single firm,
CONTRIBUTION PER UNIT = SELLING PRICE selling a single product, at a single price.
PER UNIT – VARIABLE COST PER UNITAND
WHAT IS PRICE ELASTICITY?
THE BREAK-EVEN POINT CAN BE
CALCULATED USING THE FOLLOWING Price elasticity of demand is a measurement of
FORMULA.BREAK-EVEN POINT = FIXED COST the change in consumption of a product in
/ CONTRIBUTION PER UNITBREAK-EVEN
POINT = FIXED COST/ (SELLING PRICE PER relation to a change in its price.
UNIT – VARIABLE COST PERUNIT) Economists use price elasticity to understand
MODULE 3 how supply and demand for a product change
when its price changes.
SIMPLE PRICING, PRICE ELASTICITY AND
MARGINAL REVENUE Formula: PRICE ELASTICITY OF DEMAND = %
𝑪𝒉𝒂𝒏𝒈𝒆𝒊𝒏𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅
WHAT IS PRICING?
% 𝑪𝒉𝒂𝒏𝒈𝒆𝒊𝒏𝑷𝒓𝒊𝒄𝒆
Pricing is considered as part of a company’s
WHAT IS REVENUE?
marketing strategy because it influences its
Revenue is the money flowing into a business
relationship with customers.
over a given time period from selling
WHAT IS SIMPLE PRICING?
goods and services - it is also known as a
Simple pricing involves charging what turnover.
competitors charge for similar goods and
To get the total revenue, we can use the
services.
formula…
FORMULA: TOTAL REVENUE = PRICE PER UNIT ×
QUANTITY

EXAMPLE & SOLUTIONS:

(PRICE × QUANTITY)

PRICE (PER UNIT) DEMAND (UNITS) TOTAL

REVENUE

20 200 20 × 200 = 4,000

18 250 18 × 250 = 4, 500

16 300 16 × 300 = 4, 800

14 350 14 × 350 = 4, 900

12 400 12 × 400 = 4, 800

10 450 10 × 450 = 4, 500

[Note: As you can see on the table, as price goes

down, demand is increasing by 50 units it's a

linear demand curve. This is also because of the

law of demand, when price goes down, demand

goes up and vice versa.

So, for every two pesos reduction in price from

20 to 18 demand increases by 50 units. you can

probably calculate the revenues multiplying the

price to demand or quantity.]

WHAT IS MARGINAL REVENUE?

Marginal Revenue (MR) is the increase in

revenue that results from the sale of one
additional

unit of output.

Formula: MARGINAL REVENUE = 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛

𝑅𝑒𝑣𝑒𝑛𝑢𝑒

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑸𝒖𝒂𝒏𝒕𝒊𝒕y