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1.1- Demand Theory.pdf

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Olivia Mesta

Managerial Economics vs Microeconomicsmanagerial economics provides a framework or analyzing manager actions and their impact on firm performancemanagerial uses formal models to shed light on business concepts such as cost demand profit competition compensation pricing strategic behaviour etcmicrofocus on a firm or marketmanagerialfocus on managerial behaviourmanagerial can describe specific actions that a manager may pursue rather than just describing the market that a firm exists inmanagerial provides analytical tools which provides students with a big picture view that can integrate concepts from other business coursesmanagerial encourages thinking beyond the short term Expected Net Present ValueENPV of profitsManagers will choose actions that will increase their firms profits over timeENPV of future profits TRTotal Revenue TCTotal Cost iinterest rate ttimea managers decisions will determine total revenues and costs for their organizations influencing profitsManagers do not have total control as their decisions are limited by operating constraints such as scarce inputs laws and contractsWhat is profit and why should it existmicro version differs from the accounting versionEconomists view profit anything that is earned over and above what the owners labour and capital employed in the business could earn elsewhereopportunity costs Managerial Interests and he PrincipalAgent problemmanagers and firm owners sometimes have different interestsownersshareholdersprincipals are interested in maximizing a firms long term value and they trust managersagents to make appropriate decisions to achieve thisManagers may share this goal but may also have the goal of increasing managerial compensationpotential conflict The principalagent problem centres on whether managers pursue their own objectives at a cost to the ownersto address owners give managers a financial stake in the future success of the firm and try to address the issueother incentives to be examined include moral hazards and insurance as well as product liability and consumer safetyDemand Supply Market EquilibriumMarket demand curve shows the amount buyers will purchase at a price levelMarket supply curve shows the amount that producers are willing to sell at each priceMarket equilibrium price and quantity are determined by intersection of supply and demand curve P is known as market clearing priceDemand and Supply shiftsdemand and supply curves will shift over time affecting the equilibrium price and outputDemand curve shiftsLeft lower equilibrium price and quantityRight higher equilibrium price and quantitySupply curve shiftsRight Higher equilibrium price will fall and quantity will riseLeft Higher equilibrium price will rise and quantity will fallMarket and Firm DemandMarket demand schedule is a table that shows the relationship between the sales of a product and its price while the market demand curve is the market demand schedule plotted on a graphMarket Demand Curve1 Price is measured on the vertical axis and quantity demanded is measured on the horizontal axis2 The total demand for each good is shown at each price not the demand for the good from a single firm3 The curve has a downward slope showing that the quantity demanded falls as price rises4 The curve pertains to a specific time periodWhat influences the position and shape of the market demand curve1 The time period depicted2 consumer tastes3 consumer income4 size of the populationMarket demand functionshows the relationship between quantity demandedQ and the various factors that influence this quantitygenerally written as Qfprice of x income tastes prices of other goods etcex QaPbIcSdAQquantity demanded of laptops Pprice of average laptop Iper capita disposable income Sthe cost of software Athe cost of advertising abcd are estimated The
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