MGCR 293 Chapter Notes -Substitute Good, Economic Equilibrium, Demand Curve

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5 Feb 2013
Department
Course
Professor
Cheat Sheet Managerial Economics
Chapter 1
Theory of the firm: a firm’s objective is to maximize it’s wealth, which is the present value of its future
profits. Calculated as follows:
n
tt
i
PV
1)1(
Three fertile profit-generating areas: innovation, risk and market power.
Principal-agent problem: When managers pursue their own objectives, even though this decreases
the profit of the owners.
Shifts in the demand curve are caused by a number of reasons (known as “non-price determinants):
Income
Changing tastes and preferences
The price of related goods
Expectations about the future
Market size (population, advertising, etc)
If consumer has a more important income, or tastes in the product increases, then the demand
curve will shift to the right.
Equilibrium price increase if demand curve shifts right / Equilibrium price decrease if demand curve
shifts left.
Shifts in the supply curve are caused by a number of reasons (known as “non-price determinants):
Cost on inputs
Technology and Productivity
Taxes and Subsidies
Price Expectations
If lower-cost production technology is developed, then managers will be willing to sell more units
at any price, then the supply curve will shift to the right.
Equilibrium price increase if supply curve shifts left / Equilibrium price decrease if supply curve shifts
right.
As long as the actual price is greater than the equilibrium price, there is downward pressure on
the price.
As long as the actual price is less than the equilibrium price, there is upward pressure on the
price.
Adam Smith: Invisible hand: When no governmental agency is needed to induce producers to drop or
increase their prices.
Appendix A
The marginal value of a dependent variable is the change in this dependent variable (e.g., Q)
associated with a 1-unit change in a particular independent variable (e.g., P)
The average of a function (i.e. average profit) is the total dependent variable divided by the total
independent variable.
Marginal Profit is the change in profit associated with 1 additional unit of output
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