Managerial economics is the application 1) Establish the Objectives motivate teams is widely acknowle of microeconomics to decision problems 2) Identify the Problem the single most critical trait of e faced in the private and public sectors. 3) Examinations of Potential Solutions managers.
4) Analysis of the Relative Costs & Benefits
5) Sensitivity Analysis 6) Implementation of the Decision Economic profit difference betwe Managerial economics assists managers in revenue and total economic c efficiently allocating scarce resources, Economic cost includes a “normal planning organizational strategy, and return on the capital contribution executing effective tactics. Managers are responsible for proactively firm’s partners. solving problems in the current business model before they become crises and for selecting strategies to assure the more likely success of the next business model. economic cost of any activity m Managerial economics extracts from thought of as the highest valu microeconomic theory those concepts and alternative opportunity that is fo techniques that enable managers to select strategic direction, to allocate efficiently the resources available to the managers create organizational structure organization, and to respond effectively to and culture based on the organization’s tactical issues. mission. opportunity costs—the costs of at a resource such as investment c from its next best alternative u Senior management especially is managers undertake the critical responsible for establishing a vision of responsibility of motivating and new business directions and setting monitoring teamwork. stretch goals to get there. work skills and the ability to Shareholder wealth- A measure of the eams is widely acknowledged as Temporary Disequilibrium Theory of value of a firm. e most critical trait of effective Profit- firms may find themselves earning managers. a rate of return above or below this long- run normal return level. Principal-agent problems arise from the inherent unobservability of managerial effort combined with the presence of c profit difference between total random disturbances in team production. nue and total economic cost. Monopoly Theory of Profit- effectively cost includes a “normal” rate of able to dominate the market and the capital contributions of the persistently earn above-normal rates of firm’s partners. return. agency costs- Costs associated with resolving conflicts of interest among shareholders, managers, and lenders.
mic cost of any activity may be Innovation Theory of Profit- suggests
ght of as the highest valued that above-normal profits are the reward ve opportunity that is forgone. for successful innovations. public goods- Goods that may be consumed by more than one person at the same time with little or no extra cost, and for which it is expensive or impossible to Managerial Efficiency Theory of Profit- exclude those who do not pay. ity costs—the costs of attracting Above-normal profits can arise because of rce such as investment capital the exceptional managerial skills of well- its next best alternative use. managed firms.
Cost-benefit analysis- A resource
allocation model that can be used by public and not-for-profit sector organizations to evaluate programs or investments on the basis of the magnitude of the discounted benefits and costs. FACTORS AFFECTING DEMAND (DEMAND FUNCTION) EXPECTED EFFECT DEMAND FACTOR Increase (decrease) Increase (decrease) in price of substitute goods (P s) Decrease (increase) Increase (decrease) in price of complementary goods (P c) Increase (decrease) Increase (decrease) in consumer income levels (Y) Increase (decrease) Increase (decrease) in the amount of advertising and marketing expenditure (A) Decrease (increase) Increase (decrease) in level of advertising & marketing by competitors (A c) Increase (decrease) Increase (decrease) in population (N) Increase (decrease) Increase (decrease) in consumer preferences for the good/service (C p) Increase (decrease) Expected future price increases (decreases) for the good (P E) Increase (decrease) Time period of adjustment increases (decreases) (T A) Decrease (increase) Taxes (subsidiaries) on the good Increase (decrease) (T/S)
FACTORS AFFECTING SUPPLY (SUPPLY FUNCTION)
EXPECTED EFFECT SUPPLY FACTOR Decrease (increase) Increase (decrease) in the price of inputs (P I) Decrease (increase) Increase (decrease) in the price of unused substitute inputs (P UI) Increase (decrease) Technological Improvements (T) Increase (decrease) Entry (Exit) of other Sellers (EE) Decrease (increase) Supply disruptions (F) Decrease (increase) Increase (decrease) in regulatory costs (RC) Decrease (increase) Expected future price increases (decreases) (P E) Increase (decrease) Time period of adjustment lengthens (shortens) (T A) Decrease (increase) Taxes (Subsidies) (T/S) SHAREHOLDER WEALTH TOTAL, MARGINAL, stock price V0 2 £ of employee from period 1 to infinity piet 2 0 required rate of return ke 3 1 REAL OPTION VALUE ROV 2 t 3 4 5
PRESENT VALUE INTEREST FACTOR 0.9708737864 COMPUTATIONS OF EXPECTED RETURNS
i/ percentage 0.03 rj pj PRESENT VALUE 1165048.543689 200 0.2 Future Value ₱ 1,200,000.00 300 0.6 NET PRESENT VALUE ₱ 165,048.54 400 0.2 Initial Outlay ₱ 1,000,000.00 Expected value: TOTAL, MARGINAL, & AVERAGE PROFIT RELATIONSHIPS Total Cost Marginal Cost Average Cost 0- #DIV/0! 3 3 3 7 4 3.5 12 5 4 20 8 5 32 12 6.4
NS OF EXPECTED RETURNS COMPUTATION OF STDEV
rj*pj rj-rbar (rj-rbar)^2 [(rj-rbar)^2]*pj 40 -100 10000 2000 180 0 0 0 80 100 10000 2000 300 4000 STDEV 63.2455532034 COEFFICIENT OF VARIATION 0.2108185107 MARGINAL ANALYSIS & CAPITAL BUDGETING PROJECT INVESTMENT REQUIRED EXECTED RATE OF RETURN A 25 0.27 B 15 0.24 C 40 0.21 D 35 0.18 E 12 0.15 F 20 0.14 G 18 0.13 H 13 0.11 I 7 0.08
93.34% that the investment will have a
INTERPRETATION 1.5 stdev below the mean cash flow geater than 205
NORM PROB DIST -1.5019762846 0.0665516168
r 205 0.9334483832 rbar 300 stdev 63.25 DGETING CUMULATIVE INVESTMENT 25 40 80 115 127 147 165 178 185 PRICE ELASTICITY OF DEMAND #DIV/0! ELASTICITY AND MARGINAL REVENUE change in quantity demanded #DIV/0! Price Quantity Elasticity Total Revenue SINGIT LANG TO USE 0 10 1 0 10 Q1 9 2 -6.3333 18 Q2 8 3 -3.4000 24 change in price #DIV/0! 7 4 -2.1429 28 SINGIT LANG TO USE 0 6 5 -1.4444 30 P1 5 6 -1.0000 30 P2 4 7 -0.6923 28 3 8 -0.4667 24 perfectly inelastic 0 2 9 -0.2941 18 inelastic 0 to .99 1 10 -0.1579 10 unit elastic 1 elastic 1 to infinity perfectly elastic infinity INCOME ELASTICITY #DIV/0! Marginal Revenue MR also change in quantity demanded #DIV/0! 0 SINGIT LANG TO USE 0 8 8 Q1 6 6 Q2 4 4 change in income #DIV/0! 2 2 SINGIT LANG TO USE 0 0 0 Y1 -2 -2 Y2 -4 -4 -6 -6 income superior goods + -8 -8 inferior goods - CROSS ELASTICITY OF DEMAND #DIV/0! change in quantity demanded of PRODUCT A #DIV/0! SINGIT LANG TO USE 0 Q1 Q2 change in price of PRODUCT B #DIV/0! SINGIT LANG TO USE 0 P1 P2