Lecture Notes on Managerial Economics, BPUT (1)

Managerial Economics Overview

Module 1: Basic Economic Concepts and Decision Making

• Nature and Scope of Managerial Economics:

  • Managerial Economics integrates economic theory with business practices.

  • Management includes guidance, leadership, and control of people towards common objectives.

  • Economics analyzes how society manages scarce resources with alternative uses.

  • Key economic problems:

    1. What to produce?

    2. How to produce?

    3. For whom to produce?

  • Managerial Economics Applications:

    • Risk analysis, demand estimation, cost analysis, pricing theory, market structure influence.

    • Enhances executive decision-making and resource allocation.

Study of Managerial Economics

• Key Topics:

  • Demand analysis, forecasting, production, cost analysis, pricing strategy.

  • The Theory of Demand:

    • Demand: The quantity consumers are willing to buy at various prices.

    • Influencing factors: Own price, prices of substitutes/complements, income levels, preferences.

  • Price Elasticity of Demand:

    • Measures consumer responsiveness to price changes.

  • Concepts of demand elasticity include:

    1. Elastic demand: > 1

    2. Inelastic demand: < 1

    3. Unitary elastic: = 1

Theory of Costs

• Types of Costs:

  • Fixed Costs: Do not change with output production.

  • Variable Costs: Change with production volume.

  • Total Cost (TC): Sum of fixed and variable costs.

  • Average Cost (AC): TC divided by output quantity.

  • Marginal Cost (MC): Change in TC with additional unit of output.

Market Structures

• Perfect Competition:

  • Identified by many sellers and buyers; homogeneous products.

  • Firms are price takers with no control over market prices.

  • Long-run equilibrium leads to zero economic profits; benefits of efficiency.

• Monopoly:

  • Market dominated by one seller with barriers to entry.

  • Marginal Revenue (MR): Always less than price as quantity increases due to overall demand curve decline.

  • Price discrimination may occur where different prices are charged based on demand elasticity differences.

Pricing Strategies

• Cost-Based Pricing: Includes markup pricing, marginal cost pricing, and target return pricing.

• Competition-Based Pricing: Penetration pricing, limit pricing, and going-rate pricing strategies.

• Product Life Cycle Based Pricing: Differentiation in pricing during introduction, growth, and decline phases.

Conclusions on Economic Theories

• The understanding of cost structures, market competition, and pricing strategies is crucial for effective managerial economics and strategic business decision-making.

Learning Outcomes

1. Explain how the law of demand affects market activity.

2. Explain how the law of supply affects market activity.

3. Describe how the interaction between supply and demand create markets.

4. Describe how markets reach equilibrium.

5. Explain how markets react during periods of disequilibrium.

6. Define and graph the price elasticity of demand.