Chapter 1 the fundamental of managerial economics
Managerial economics provides useful insights into every facet of the business and nonbusiness
world in which we live-including household decision making.
A manager is a person who directs resources to achieve a stated goal. The definition includes all
individuals who (1) directs the efforts of others, including those who delegates tasks within
organization such as a firm, a family, or a club; (2) purchase inputs to be used in the production
of goods and services such as the output of the firm, food for the needy, or shelter for the
homeless; or (3) are in charge of making other decisions, such as product cost or quality.
A manager generally has responsibility for his or her own actions as well as for the actions of
individuals, machines, and other inputs under the manger’s control.
Economics is a science of making decisions in a presence of scare resource. Economic decisions
thus involve the allocation of scare resources, and a manger’s task is to allocate the scare
resources so as to best meet the manager’s goals.
Managerial economics defined
Managerial economics, therefore, is a study of how to direct scare resource in a way that most
efficiently achieves a managerial goal.
The key to making sound decisions is to know what information is needed to make an informed
decision and then to collect and process the data.
The economics of effective management
An effective manager must (1) identify goals and constraints; (2) recognize the nature and
importance of profits; (3) understand incentives; (4) understand markets; (5) recognize the time
value of money; and (6) use marginal analysis.
Identify goals and constraints.
www.notesolution.com The first step in making sound decision is to have a well-defined goal because achieving different
goals entails making different decisions.
Decision makers face constraints that affect the ability to achieve a goal. Constraints are an
artefact of scarcity.
Recognize the nature and importance of profits.
Here’s we mean economic profits.
Economic profit is the difference between the total revenue and total cost of producing a firm’s
goods and services.
The opportunity cost of using a resource includes both explicit (or accounting) cost and implicit
cost of giving up the best alternative use of resource. The opportunity cost of a good or service
generally is higher than accounting cost because it includes both dollar value of cost (accounting
cost) and any implicit costs.
Economic cost is opportunity cost, it includes both implicit cost and explicit cost.
The role of profit
By pursuing its self-interest-the goal of maximizing profits-a firm ultimately meets the need of
society. Profits signal the owners of resources where the resources are most highly valued by
society. By moving scare resources towards the production of goods most valued by society, the
total welfare of society is improved.
The five force framework and industry profitability: Sustainable industry profits
The ability of existing firms to sustain profits depends on how barriers to entry affect the ease
with which other firms can enter the industry. Here are a number of economic factors affect the
ability of entrant to erode existing industry profits:
www.notesolution.com Entry cost; Suck cost; Network effects; Switching costs; Speed of adjustment; Economics of
scale; Reputation; Government restraints
2. Power of input suppliers
• Supplier concentration (chapter 7)
• Price/productivity of alternative inputs
• Relationship-specific investment (chapter 6)
• Supplier switching cost
• Government restraints
3. Power of buyers
• Buyer concentration
• Price/value of substitute products or services
• Relationship-specified investment
• Customer switching costs
• Government restraints
4. Industry rivalry
• Price, quantity, quality, or service competition
• Degree of depreciation
• Switching cost
• Timing of decisions
www.notesolution.com • Government restraints
5. Subsititute and complements
• Price/value of surrogate products or services
• Price/value of compleme