Chapter 1 & 2 Flashcards

Chapter One: Managerial Economics

What is Managerial Economics?

  • Managerial economics involves applying economic principles to decision-making within an organization.

  • It focuses on the principles, resources, and science of making decisions.

The Seven Fundamentals

  1. Identify Goals/Constraints

    • Firm's overall goal is to maximize profits while acknowledging limitations.

  2. Understanding Profits

    • Profit is defined as Total Revenue (TR) minus Total Costs (TC).

    • Explicit Costs: Direct, out-of-pocket payments for goods and services.

    • Implicit Costs: Indirect opportunity costs of resources invested.

  3. Incentives

    • Motivation for resource holders to alter their economic behavior.

    • Managers need to make informed decisions about resource utilization.

  4. Markets

    • Every market transaction has two sides: buyer and seller.

    • Different types of markets exist, creating competition among buyers and sellers.

  5. Time Value of Money

    • Recognizes the gap between when costs are incurred and when benefits are received.

    • Understanding present value (PV) versus future value (FV).

  6. Marginal Analysis

    • Comparing Marginal Benefit (MB) and Marginal Cost (MC) of any action.

    • The benefit should outweigh the cost.

  7. Making Data Driven Decisions

    • Decisions should be based on economic data and analysis.

Understanding Profits and Markets

Profit Calculation

  • Profit is calculated as:

    • Profit = Total Revenue (TR) - Total Cost (TC)

  • Relationship between buyers and sellers in the market:

    • Consumers seek low prices; producers aim for high prices.

The Role of Governments

  • Governments regulate market transactions and provide market discipline.

  • Opportunity cost is the value of the next best alternative forgone.

Time Value of Money

  • Example: Preference for receiving $1 today versus $1,000 in 5 years due to earning potential (interest).

  • Present Value Calculation:

    • FV = PV(1 + i)

    • Higher discount rates decrease present value.

Chapter Three: Marginal Analysis

Fundamental Concept of Marginal Analysis

  • Marginal Analysis involves examining the MB and MC of decisions.

  • Mathematical Calculation:

    • Example: Total Benefit (TB) function and Marginal Cost (MC) function.

    • Optimal quantity is achieved when MB = MC.

    • When MB > MC: Increase quantity until they are equal.

    • When MB < MC: Decrease quantity.

    • When MB = MC: No further action should be taken.

Chapter Two: Supply & Demand

Law of Demand

  • If the price of a good decreases, the quantity demanded increases and vice versa.

    • Inverse relationship between price and quantity demanded.

Law of Supply

  • Higher prices motivate increased supply, maintaining an upward slope of the supply curve.

    • Supply Shifters: Determinants that influence supply direction.

Demand & Supply Shifters

Demand Shift Factors

  1. Income

    • Higher incomes increase the demand for normal goods and decrease for inferior goods.

  2. Price of Substitutes & Complements

    • An increase in the price of a substitute increases demand for the primary good, while an increase in complementary good price decreases demand.

  3. Taste & Preference

    • Consumer popularity affects demand positively or negatively.

  4. Population

    • A larger market size leads to increased demand.

  5. Price Expectation

    • Future expected price increases lead to current demand increases and vice versa.