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Managerial Economics: Key Principles Explained

This document discusses key concepts in managerial economics. It defines economics as allocating scarce resources to maximize profit or benefit. It also outlines six principles of effective management: understanding constraints, markets, incentives, the importance of profits, the time value of money, and marginal analysis. Marginal analysis involves setting marginal revenue equal to marginal cost to find the quantity that maximizes profit.

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12 views2 pages

Managerial Economics: Key Principles Explained

This document discusses key concepts in managerial economics. It defines economics as allocating scarce resources to maximize profit or benefit. It also outlines six principles of effective management: understanding constraints, markets, incentives, the importance of profits, the time value of money, and marginal analysis. Marginal analysis involves setting marginal revenue equal to marginal cost to find the quantity that maximizes profit.

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Chapter 1: Managerial Economics

 Understand the difference between leadership and management


o Managers look at details
o Leaders look at big picture
 Economics: the science of the allocation of scarce resources in order to maximize profit (or
benefit if nonprofit)
o Resource types:
 Labor: work done by humans
 Capital: things that you produce with (buildings, machine, things that have
productive capacity)
 Land
 Entrepreneurial skills

Six Principles for Effective Management:


 1. Understanding constraints.
 Examples include: limited resources, legal constraints, and technological constraints
 2. Understanding markets.
 Multiple players
 Rivalries take place, consumer rivalries (auctions), consumer to producer rivalry (lowest
price possible), producer to producer rivalry (competition)
 3. Understanding incentives.
 Aligning interest
 All kinds of incentives in the market
 4. Importance of profits.
 Capitalism drives this
 Rewarding an entrepreneur that provides that society wants
 Profits are good, free markets
 5. Understanding time value of money.
 Money has value
 Do not let money sit idle
 Investing money helps the economy
 Understand opportunity cost is the interest rate
 PV = sum of future cash flow / (1+i)^t
 1000 per year
 Interest rate is 3% for 5 years
 Therefore PV = 1000 / (1 +.03)^2 + 1000/ (1+.03)^2 + 1000/ (1+.03)^3 + 1000/
(1+.03)^4 + 1000/ (1+.03)^5
 = 4579.71
 Present value of all future earnings is how we value companies
 6. Understanding marginal analysis.
 Maximize profit:
 Profit is revenue - expenses
 P = R(Q) - C(Q)
 dy/dx = ∂r/∂q - ∂c/∂q
 Set this equal to zero
 ∂r/∂q = ∂c/∂q
 Understand that the change in revenue for a one unit change in quantity
 Understand that the change in cost for a one unit change in quantity
 Example: marginal revenue (∂r/∂q)
 MR = MC : Profit is maximized
 Example:
 Revenue: 150 + 28Q - 5Q^2
 Cost: 100 + 8Q
 Marginal Revenue: 28 - 10Q
 Marginal Cost: 8
 How to maximize profit? Marginal Rev = Marginal Cost
 28 - 10 Q = 8
 20 - 10 Q = 0
 20 = 10Q
 Q=2
 Revenue (2) - cost (2) = $70 maximum profit we can obtain

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