LESSON 1: MANAGERIAL ECONOMICS (4) Cost analysis » Everything is held constant CHANGE IN CHANGE IN [ PRICES OF RELATED GOODS ]

(5) Pricing and except for price and quantity sold QUANTITY DEMAND » Changes in the prices of related
» Managerial Economics integrates competitive strategy » This seeks to determine how DEMANDED goods generally shift the demand
economic theory with business practice. (6) Profit analysis much would be purchased at Changes in the Changes in curve for a good. For example, if the
price of a good variables other
It deals with the use of economic (7) Environmental issues alternative prices. The market price of a Coke increases, most
lead to a change than the price
concepts and principles for decision (8) Business cycles research reveals that, holding all in the quantity of a good, such consumers will begin to substitute
making in a business unit. (9) Capital management other things constant, the quantity demanded of as income or Pepsi, because the relative price of
of jeans consumers are willing and that good. This the price of Coke is higher than before.
BUT WHAT’S THE PURPOSE? The practice of managerial able to purchase goes down as the corresponds to another good, SUBSTITUTES COMPLEMENTS
» Economics provides a set of tools that economics is a decision making price rises. a movement lead to a change Goods for which Goods for which
can help managers make process along a given in demand. This An increase an increase
effective decisions. demand curve. corresponds to (decrease) in (decrease) in the
---------------------------------------------- DEMAND CURVE
» Managerial economics focus on how a shift of the the price of one price of one good
LESSON 2: » A curve indicating the total entire demand
to apply economic reasoning to good leads to an leads to a decrease
MARKET FORCES: quantity of a good all consumers curve. increase(decrea (increase) in the
problems commonly faced by managers. DEMAND AND SUPPLY are willing and able to purchase at se) in the demand for the
THIS INCLUDES: each possible price, holding the demand for the other good.
STUDYING THE
» Managers make decisions about how » Supply and demand analysis is a prices of related goods, income, other good.
DEMAND SHIFTERS
to produce products that will be offered tool that managers can use to advertising, and other variables
for sale visualize the “big picture.” Many constant. [ INCOME ] [ ADVERTISING AND
» How to minimize the cost of companies fail because their
» Because income affects the CONSUMER TASTES ]
production managers get bogged down in the
ability of consumers to purchase a » Another variable that is held
» Prices to charge day-to-day decisions of the
good, changes in income affect how constant when drawing a given
» How to interact with rivals and business without having a clear
much consumers will buy at any demand curve is the level of
suppliers picture of market trends and
price. In graphical terms, a change advertising. An increase in
changes that are on the horizon.
in income shifts the entire demand advertising shifts the demand curve
CHARACTERISTICS OF Absent a view of the big picture,
curve. Whether an increase in to the right.
MANAGERIAL ECONOMICS you are likely to negotiate the
income shifts the demand curve to
(1) MICRO-ECONOMICS wrong prices with suppliers and
the right or to the left depends on [ POPULATION ]
(2) NORMATIVE SCIENCE customers, carry too much DEMAND SHIFTERS the nature of consumer » The demand for a product is also
(3) PRAGMATIC inventory, hire too many » Economists recognize that consumption patterns. influenced by changes in the size
(4) MULTI-DISCIPLINARY employees, and—if your business variables other than the price of a
(5) ART AND SCIENCE spends money on informative and composition of the population.
good influence demand. NORMAL INFERIOR
(6) FUNDAMENTAL advertising—purchase ads in GOOD GOOD Generally, as the population rises,
SHIFTERS: more and more individuals wish to
ACADEMIC SUBJECT which your prices are no longer A good for A good for
» Consumer Income buy a given product, and this has
(7) USES MACRO ECONOMICS competitive by the time they reach which an which an
» Prices of Related Goods the effect of shifting the demand
(8) USES THEORY OF FIRM print increase increase
» Advertising and Consumer tastes (decrease) in (decrease) in curve to the right. Over the
(9) MANAGEMENT ORIENTED » Population income leads to income leads to twentieth century, the demand
DEMAND » Consumer Expectation an increase a decrease
SCOPE OF MANAGERIAL ECONOMICS » The consumer's desire to curve for food products shifted to
(decrease) in (increase) in
(1) Resource allocation purchase a particular good or the right considerably with the
the demand for the demand for
(2) Demand estimation service. that good. that good. increasing population.
(3) Managing Inventory and handling entire demand
queuing problem LAW OF DEMAND: curve.
» Price and quantity demanded
are inversely related.
[ CONSUMER EXPECTATION ] produce output at a given price [ TAXES ] DIFFERENTIATE CHANGE IN
» Changes in consumer expectations changes. In particular, as the price » The position of the supply curve QUANTITY SUPPLIED AND
also can change the position of the of an input rises, producers are is also affected by taxes. An excise CHANGE IS SUPPLY
demand curve for a product. For willing to produce less output at tax is a tax on each unit of output
example, if consumers suddenly expect each given price. This decrease in sold, where the tax revenue is
the price of automobiles to be supply is depicted as a leftward collected from the supplier.
significantly higher next year, the shift in the supply curve. Another form of tax often used by a
demand for automobiles today will government agency is an ad
increase. In effect, buying a car today is [ TECHNOLOGY OR valorem tax. An ad valorem tax is a
a substitute for buying a car next year. SUPPLY SHIFTERS GOVERNMENT REGULATIONS ] percentage tax; the sales tax is a
» Variables that affect the position » Technological changes and well-known example.
OTHER FACTORS of the supply curve are called changes in government regulations
» In concluding our list of demand supply shifters. also can affect the position of the [ PRODUCERS EXPECTATION ]
shifters, we simply note that any SHIFTERS: supply curve. Changes that make it » Producer expectations about
variable that affects the willingness or » Prices of Inputs possible to produce a given output future prices also affect the
ability of consumers to purchase a » The Level of Technology at a lower cost, have the effect of position of the supply curve. In
particular good is a potential demand » The Number of Firms increasing supply effect, selling a unit of output today
shifter. Health scares affect the demand in the Market Taxes and selling a unit of output
for cigarettes. The birth of a baby affects » Producer Expectations [ NUMBER OF FIRMS ] tomorrow are substitutes in
the demand for diapers. » The number of firms in an production. If firms suddenly
CHANGE IN CHANGE IN
QUANTITY DEMAND industry affects the position of the expect prices to be higher in the
SUPPLY SUPPLIED supply curve. As additional firms future and the product is not
» The total amount of a specified Changes in the Changes in enter an industry, more and more perishable, producers can hold
product or service that is available to price of a good variables other output is available at each given back output today and sell it later
customers lead to a change than the price price. This is reflected by a at a higher price. This has the effect
in the quantity of a good, such DIFFERENTIATE CHANGE IN
rightward shift in the supply curve. of shifting the current supply curve
supplied of that as input prices QUANTITY DEMANDED AND
LAW OF SUPPLY Similarly, as firms leave an to the left.
good. This or technological CHANGE IS DEMAND
» As the price of a good rises (falls) and corresponds to advances, lead industry, fewer units are sold at ----------------------------------------------
other things remain constant, the a movement to a change in each price, and the supply
quantity supplied of the good rises along a given supply. This decreases (shifts to the left).
(falls). supply curve. corresponds to
» Deals with the relationship between a shift of the [ SUBSTITUTES IN
price and supply entire supply PRODUCTION ]
curve.
» Producers are willing to produce » Many firms have technologies
more output when the price is high than that are readily adaptable to
STUDYING THE
when it is low. several different products. For
SUPPLY SHIFTERS
example, automakers can convert a
SUPPLY CURVE truck assembly plant into a car
[ PRICES OF INPUTS ]
» A curve indicating the total quantity of assembly plant by altering its
a good that all producers in a » The supply curve reveals how production facilities. When the
competitive market would produce at much producers are willing to price of cars rises, these firms can
produce at alternative prices. As
each price, holding input prices, convert some of their truck
production costs change, the
technology, and other variables assembly lines to car assembly
willingness of producers to lines to increase the quantity of cars
affecting supply constant.
supplied. This has the effect of shifting
the truck supply curve to the left.