1.1 Fundamentals of Managerial Economics

Economics

The science of making decisions in the presence of scarce resources

Managerial Economics

Economics applied in decision making

Manager

Person that directs resources to achieve a certain goal

Identify Goals and Contraints

depends on the managers goals and achieving different goals means making different decisions

different units within a firm may be given different goals

An effective manager must recognize the nature and importance of profits

By pursuing its self-interest a firm meets the needs of society

The more firms enter, the less the market share

Accounting Profit

amount taken from sales minus cost

Economic Profit

Total Profit - Opportunity Cost = EP

Opportunity cost

explicit cost of a resource + the implicit cost of giving up its best alternative

Explicit Cost

Monetary payments a business pays to run the business

Implicit costs

opportunity costs of using the owner's own resources in a business without an explicit monetary transaction

Five Forces Framework

Business strategies designed to enhance your prospects of earning

Entry

Heightens competition and reduces the market share of already existing firms

Power of Input Suppliers

Profits tend to be lower when suppliers are given the power to negotiate terms on their favor

Power of Buyers

Profits tend to be lower when customers or buys have the power to negotiate terms on their favor

Industry Rivalry

Profit depends on intensity of the markets rivalry

Threats of substitutes and complements

More threats means less profit

Understand the markets

The market depends on the relationship the buyer has with the consumer

Consumer-Producer Rivalry

When the consumer negotiates for a lower price, and the producer negotiates for a higher price, until both parties reach and equilibrium

Consumer-Consumer Rivalry

When there is low supply and high demand (ex. Bidding)

Producer-Producer Rivalry

When there is low demand and high supply (ex. Pricing Wars)

Government and the Market

In a situation wherein both buyers and producers are at a disadvantage, the government intervenes

Ceiling Price

The government sets a price wherein the price cannot increase from there

Floor Price

A minimum set price set wherein the price cannot decrease from there

Recognize Time Value of Money

The timing of many decision involves a gap between the time when the costs of a project are borne and the time when the benefits of the project are received

Marginal Analysis

States the optimal managerial decisions involve the marginal benefits and marginal costs