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economics
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the study of decision-making in the presence of
scarcity
scarcity
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managerial economics
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application of economic analysis to
managerial decision-making
managerial decision-making
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managers
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-Make economic decisions by allocating the scarce resources at their disposal
-Must understand the behavior of consumers, workers, other managers, and governments to make good
decisions
-Must understand the behavior of consumers, workers, other managers, and governments to make good
decisions
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production manager
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objective: normally to achieve a production target
at the lowest possible cost.
constraints: the manager has to use the existing
factory
at the lowest possible cost.
constraints: the manager has to use the existing
factory
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human resource managers
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objective: design compensation systems to
encourage employees to work hard.
constraints: limited funding and available
employees in the firm
encourage employees to work hard.
constraints: limited funding and available
employees in the firm
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marketing manager
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objective: promote the product most effectively.
constraint: the manager has a limited marketing
budget.
constraint: the manager has a limited marketing
budget.
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top manager
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objective: coordinate and direct all these activities
to maximize profit.
constraints: resources of the firm.
to maximize profit.
constraints: resources of the firm.
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profit =
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revenue-costs
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chief executive (CEO) goal
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1. maximize profit
2. firms position relative to competition
2. firms position relative to competition
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production trade offs
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to produce a given level of output, a firm must use
more of one input if it uses less of another input
more of one input if it uses less of another input
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product pricing trade offs
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consumers buy fewer units of a product when its
price rises given their limited budgets.
price rises given their limited budgets.
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economic model
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simplification of reality that contains only its
most important features
most important features
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positive statement
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concerns what is or what will happen and describes reality, you can test the truth of the argument (does not mean you are certain the argument is true)
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supply & demand model
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provides a good description of many markets and applies particularly well to markets in which there are many buyers and sellers
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demand curve relationship
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higher own price, lower quantity demanded
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demand shocks
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factors other than own price that move demand curve
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substitutes effect on demand
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price increase, demand increase
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compliments effect on demand
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price increase, demand decrease
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government regulations effect on demand
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1. ban, restrict, tax, (all decrease demand)
2. or subsidize (increases demand) goods or services
2. or subsidize (increases demand) goods or services
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quantity demanded
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amount of a good that consumers are willing to buy at a given price, holding constant the other factors that influence purchases
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law of demand assumption
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income, the prices of other goods tastes and other factors that influence the amount goods, tastes, and other factors that influence the amount they want to consume are constant
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movement along demand curve
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in response to changes in price
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shift of the demand curve
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change in any relevant factor other than the price of the good
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other factors of supply
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costs of production, technological change, government regulations
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own price in supply
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quantity increases, price increases
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technological advance
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allows a firm to produce its good
at lower cost, the firm supplies more of that good at any given price
at lower cost, the firm supplies more of that good at any given price
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upward sloping supply curve
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higher price leads to more output being offered for sale
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shocks to equilibrium
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occurs if the D curve or the S curve shift
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price ceiling (below price)
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predicts an equilibrium with a shortage: a persistent excess demand (no effect if set above equilibrium price)
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govt limits on who can buy
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decreases the quantity or alcohol to children. This decreases the quantity
demanded for those goods at each price and thereby shifts
their demand curves to the left
demanded for those goods at each price and thereby shifts
their demand curves to the left
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govt restrictions on imports
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shifts the importing country's supply curve to the left.
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govt start buying a good
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shifts the demand curve to the right
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price floors
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create excess supply
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sales tax
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causes the equilibrium price
consumers pay to rise, the equilibrium quantity that firms receive to fall, and the equilibrium quantity to fall
consumers pay to rise, the equilibrium quantity that firms receive to fall, and the equilibrium quantity to fall
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taxes fully passed to consumers
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shifts supply up, demand vertical
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taxes fully paid by firms
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shifts demand down, supply vertical
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demand elasticity
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% change in quantity demanded, Q, divided by the % change in price, p
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point elasticity
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measures the effect of a small change in
price on the quantity demanded
price on the quantity demanded
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arc elasticity
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based on a discrete change between two
distinct price distinct price-quantity combinations on a demand curve
distinct price distinct price-quantity combinations on a demand curve
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elasticity of demand
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is a more negative number the higher the price and hence the smaller the quantity
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perfectly elastic
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e=0, where the demand curve hits the vertical axis
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unitary elasticity
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at the midpoint of the demand curve
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horizontal demand curve
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-price increases, demand falls to zero.
-demand curve is perfectly elastic: a small increase in prices causes an infinite drop in quantity
-demand curve is perfectly elastic: a small increase in prices causes an infinite drop in quantity
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vertical demand curve
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-price goes up, the quantity demanded is unchanged
-∆Q=0.
-demand curve is perfectly inelastic
-demand curve is vertical for essential goods
-∆Q=0.
-demand curve is perfectly inelastic
-demand curve is vertical for essential goods
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income inelasticity
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the %change in the quantity demanded divided by the percentage change in income Y
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normal goods
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positive income elasticity
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inferior goods
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negative income elasticity
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complement goods
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negative cross price elasticity
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substitute goods
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positive cross price elasticity
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cross price elasticity
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% change in the quantity demanded divided by the % change in the price of another good
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