Managerial Economics

Managerial economics

Science of cost effective management of scarce resources

Competitive Market, Market Power, Imperfect Markets

branches of Managerial Economics

Value added

The difference between buyer benefit and seller cost

Economic Profit

An essential concept for managerial decision making

buyer’s benefit

difference between buyer’s benefit and their expenditure

economic equation

income - savings = expense

economic profit

difference between revenue that the seller’s receives(buyer’s expenditure) and the cost of production(seller cost)

Average Value

total of the variable divided by the total quantity of the measure

Marginal Value

change in the variable associated with a unit increase in a measure

Sunk-cost fallacy, status quo bias, Anchoring

give three (3) systematic biases

Sunk-cost Fallacy

Cognitive Bias where you continue a doomed endeavor simply because you have already invested time, money, or effort into it

Status Quo Bias

a cognitive bias where people prefer things to stay exactly as they are, viewing any change from the currect situation a potential crisis

Anchoring

Cognitive bias where you rely too heavily on the first piece of information you receive when making a decision

Statistic Models

describes behavior at a single point in time or equivalently disregard differences in the sequence of actions and payments

Dynamioc Models

explicitly focus on the timing and sequence of actions and payments

Discounting

Procedure to transform dollars into an equivalent number of present dollars

Net Present Value

sum of discounted values of inflows and outflows overtime

Vertical Boundaries

delineate activities closer to or further from the end users

Horizontal Boundaries

defined by the organization’s scale and scope operation

Outsourcing

purchase or supplies from external sources

Vertical Integration

opposite of sourcing, affects the vertical boundaries of the organization

Scale

refers to the rate of production or delivery of a good or service

Scope

refers to the range of production or delivery of a good or service

Market

consists of Buyers and Sellers who communicate with one another for voluntary exchange

Consumer Product

buyers are households and sellers are businesses

Industrial Product

both buyers and sellers are businesses

Human Resources

the buyer are businesses and sellers are households

Industry

in contrast with market, it consists of businesses engaged in the production or delivery of the same or similar items

Competitive Market

buyers provide the demand and sellers provide the supply, ACA Demand-Supply Model

Market Power

ability of a buyer and a seller to influence Market Conditions

Imperfect Market

when one party directly conveys a benefit or cost to others; or when one party has better information than the others.

Individual Demand

amount of a product a single buyer wants and can buy at a set price

Individual Demand Curve

a graph that shows the quantity that the buyer will purchase at every possible price

Marginal benefit

benefit provided by an additional unit of the item

Primciple of diminishing marginal benefit

each additional unit of consumption provides less benefit

Normal Product

when demand for an item increases as the buyer’s income increases, and demand decreases as the buyer’s income decreases.

Positively Related

demand for normal product _____ ______to the buye’s income

Negatively Related

demand for inferior product _____ ______to the buye’s income

Inferior Product

demand for an item falls as the buyer’s income increases, while demand increases as the buy’s income falls

Prices of related products, Advertising, Durability, Season, and Location

other factors that may affect individual demands

Compliment

if an increase in the price of one causes the demand for the other to fall

Substitutes

if an increase in the price of one causes the demand for the other to increase

Left

demand curve will shift to the ____ if there is either an increase in the price of a complement or a fall in the price of a substitute.

Right

demand curve will shift to the ____ if there is either a fall in the price of a complement or an increase in the price of a substitute.

Informative advertising

communicates information to potential buyers and sellers.

Persuasive advertising

aims to influence consumer choice.

industrial goods

they are bought by business rather than consumers.

business-to-business

In any economy, the majority of economic transactions uses ________ __ _______ sales.

materials, energy, labor, and capital.

The inputs purchased by a business can be classified into

Buyer’s Total Benefit

is the maximum that the buyer is willing to pay.

market demand curve

graph that shows the quantity that all buyers will purchase at every possible price.