Principles of Managerial Economics

1 Principles of ManagerialEconomicsThis work is licensed under a Creative Commons-NonCommercial-ShareAlike International LicenseOriginal source:The Saylor 1 Introduction to Managerial What Is Managerial Economics ?.. Why Managerial Economics Is Relevant for Managerial Economics Is Applicable to Different Types of The Focus of This How to Read This 2 Key Measures and A Simple Business Revenue, Cost, and economic Versus Accounting Measures of Cost and Revenue, Cost, and Profit Breakeven The Impact of Price Marginal The Conclusion for Our The Shutdown A Final Word on Business 3 Demand and Theory of the Is the Theory of the Consumer Realistic?.. Determinants of Modeling Consumer Forecasting Elasticity of Consumption Decisions in the Short Run and the Long Price 4 Cost and Average Cost Long-Run Average Cost and Economies of Scope and Joint Cost Approach Versus Resource Approach to Production Marginal Revenue Product and Derived Marginal Cost of Inputs and economic Productivity and the Learning 5 Economics of Reasons to Expand an Classifying Business Expansion in Terms of Value Horizontal Vertical Alternatives to Vertical Transaction Costs and Boundaries of the Cost Centers Versus Profit Transfer Employee Manager Motivation and Executive 6 Market Equilibrium and the Perfect Competition Assumptions of the Perfect Competition Operation of a Perfectly Competitive Market in the Short Perfect Competition in the Long Firm Supply Curves and Market Supply Market Shifts in

2 Supply and Demand Why Perfect Competition Is Monopolistic Contestable Market Firm Strategies in Highly Competitive 7 Firm Competition and Market Why Perfect Competition Usually Does Not Oligopoly and Production Decisions in Noncartel Seller Competing in Tight Oligopolies: Pricing Competing in Tight Oligopolies: Nonpricing Buyer 8 Market Free Market Economies Versus Collectivist Efficiency and Circumstances in Which Market Regulation May Be Regulation to Offset Market Power of Sellers or Natural Externality Regulation of Externalities Through Property High Cost to Initial Entrant and the Risk of Free Rider Public Goods and the Risk of Free Rider Market Failure Caused by Imperfect Limitations of Market 1 Introduction to What Is Managerial Economics ?Available underCreative Commons-NonCommercial-ShareAlike International License( ).One standard definition for Economics is the study of the production, distribution, andconsumption of goods and services.

3 A second definition is the study of choice relatedto the allocation of scarce resources. The first definition indicates that economicsincludes any business, nonprofit organization, or administrative unit . The seconddefinition establishes that Economics is at the core of what managers of theseorganizations do. This book presents economic concepts and Principles from theperspective of Managerial Economics , which is a subfield of Economics that placesspecial emphasis on the choice aspect in the second definition. The purpose ofmanagerial Economics is to provide economic terminology and reasoning for theimprovement of Managerial decisions. Most readers will be familiar with two differentconceptual approaches to the study of Economics : microeconomics andmacroeconomics. Microeconomics studies phenomena related to goods and servicesfrom the perspective of individual decision-making entities that is, households andbusinesses.

4 Macroeconomics approaches the same phenomena at an aggregate level,for example, the total consumption and production of a region. Microeconomics andmacroeconomics each have their merits. The microeconomic approach is essential forunderstanding the behavior of atomic entities in an economy. However,understanding the systematic interaction of the many households and businesseswould be too complex to derive from descriptions of the individual units. Themacroeconomic approach provides measures and theories to understand the overallsystematic behavior of an economy. Since the purpose of Managerial Economics is toapply Economics for the improvement of Managerial decisions in an organization,most of the subject material in Managerial Economics has a microeconomic , since managers must consider the state of their environment in makingdecisions and the environment includes the overall economy, an understanding ofhow to interpret and forecast macroeconomic measures is useful in makingmanagerial Why Managerial Economics Is Relevant for ManagersAvailable underCreative Commons-NonCommercial-ShareAlike International License( ).

5 In a civilized society, we rely on others in the society to produce and distribute nearlyall the goods and services we need. However, the sources of those goods and servicesare usually not other individuals but organizations created for the explicit purpose ofproducing and distributing goods and services. Nearly every organization in our1society whether it is a business, nonprofit entity, or governmental unit can beviewed as providing a set of goods, services, or both. The responsibility for overseeingand making decisions for these organizations is the role of executives and readers will readily acknowledge that the subject matter of Economics applies totheir organizations and to their roles as managers. However, some readers mayquestion whether their own understanding of Economics is essential, just as they mayrecognize that physical sciences like chemistry and physics are at work in their livesbut have determined they can function successfully without a deep understanding ofthose subjects.

6 Whether or not the readers are skeptical about the need to study andunderstand Economics per se, most will recognize the value of studying appliedbusiness disciplines like marketing, production/operations management, finance, andbusiness strategy. These subjects form the core of the curriculum for most academicbusiness and management programs, and most managers can readily describe theirrole in their organization in terms of one or more of these applied subjects. A carefulexamination of the literature for any of these subjects will reveal that economicsprovides key terminology and a theoretical foundation. Although we can applytechniques from marketing, production/operations management, and finance withoutunderstanding the underlying Economics , anyone who wants to understand the whyand how behind the technique needs to appreciate the economic rationale for thetechnique. We live in a world with scarce resources, which is why Economics is apractical science.

7 We cannot have everything we want. Further, others want the samescarce resources we that provide goods and services will survive and thrive only if they meetthe needs for which they were created and do so effectively. Since the organization scustomers also have limited resources, they will not allocate their scarce resources toacquire something of little or no value. And even if the goods or services are of value,when another organization can meet the same need with a more favorable exchangefor the customer, the customer will shift to the other supplier. Put another way, theorganization must create value for their customers, which is the difference betweenwhat they acquire and what they produce. The thesis of this book is that thosemanagers who understand Economics have a competitive advantage in creating Managerial Economics Is Applicable to DifferentTypes of OrganizationsAvailable underCreative Commons-NonCommercial-ShareAlike International License( ).

8 In this book, the organization providing goods and services will often be called a business or a firm, terms that connote a for-profit organization. And in someportions of the book, we discuss Principles that presume the underlying goal of theorganization is to create profit. However, Managerial Economics is relevant tononprofit organizations and government agencies as well as conventional, for-profitbusinesses. Although the underlying objective may change based on the type oforganization, all these organizational types exist for the purpose of creating goods orservices for persons or other organizations. Managerial Economics also addressesanother class of manager: the regulator. As we will discuss in Chapter 8 "Market2 Regulation", the economic exchanges that result from organizations and personstrying to achieve their individual objectives may not result in the best overall patternof exchange unless there is some regulatory guidance.

9 Economics provides aframework for analyzing regulation, both the effect on decision making by theregulated entities and the policy decisions of the The Focus of This BookAvailable underCreative Commons-NonCommercial-ShareAlike International License( ).The intent of this book is to familiarize the reader with the key concepts, terminology,and Principles from Managerial Economics . After reading the text, you should have aricher appreciation of your environment your customers, your suppliers, yourcompetitors, and your regulators. You will learn Principles that should improve yourintuition and your Managerial decisions. You will also be able to communicate moreeffectively with your colleagues and with expert consultants. As with much ofmicroeconomic theory, many of the economic Principles in this book were originallyderived with the help of mathematics and abstract models based on logic and this book, the focus is on the insights gained from these Principles , not thederivation of the Principles , so only a modest level of mathematics is employed hereand an understanding of basic algebra will suffice.

10 We will consider some keyeconomic models of Managerial decision making, but these will be presented eitherverbally, graphically, or with simple mathematical representations. For readers whoare interested in a more rigorous treatment, the reference list at the conclusion of thistext includes several books that will provide more detail. Alternatively, a web searchusing one of the terms from this book will generally yield several useful links forfurther exploration of a concept . A note about economic models is that models aresimplified representations of a real-world organization and its environment. Someaspects of the real-world setting are not addressed, and even those aspects that areaddressed are simplifications of any actual setting being represented. The point ofusing models is not to match the actual setting in every detail, but to capture theessential aspects so determinations can be made quickly and with a modest are effective when they help us understand the complex and uncertainenvironment and proceed to appropriate How to Read This BookAvailable underCreative Commons-NonCommercial-ShareAlike International License( ).