This is an introduction to managerial economics.

1. INTRODUCTION TO
MANAGERIAL ECONOMICS
CHAPTER 1

2. ECONOMICS
 Has two main branches; Macroeconomics and
Microeconomics.
MACROECONOMICS
Discusses the economy as a whole.
MICROECONOMICS
Focuses on the behavior of individuals and decision-making
of firms.

3. MANAGERIAL ECONOMICS
 Specializes on understanding decision making of enterprises
in efficiently and effectively utilizing their resources to
maximize its profit.
 In this chapter , important terms which sets as a guide to
understand further managerial economics will be presented.
 Definition of the goals and objectives of the firm, its profit
maximization and decision making will also be covered in this
chapter.

4. THE BASICS OF ACCOUNTING
 Is the science that deals with the management of scarce
resources in demand. It is also described as a scientific study
on how individuals and the society generally make
choices. (Fajardo, 1977)
 It studies problems on using available economic resources as
efficiently as possible so as to attain the maximum fulfillment
of society’s unlimited demand for goods and services.
 Efficiency and effectiveness is necessary in the study of
managerial economics.
ECONOMICS

5. EFFICIENCY
 Refers to productivity and proper allocation of economic
resources and effectiveness means attainment of goals and
objectives.
OPPORTUNITY COST
 Refers to the foregone value of the next best alternative. It is
the value of what is given up when one makes a choice.
PRODUCTION
 Is an economic activity that combines its factor from land, labor,
and capital to entrepreneurs.

6. LAND
 Refers to all natural resources, which are given by, and found
in nature, and therefore, not manmade.
ENTREPRENEURSHIP
 Is any form of human effort exerted in the production of other
goods and services.
LABOR
 Pertains to the skills, talent, and risk-taking behavior needed
in building, operating, expanding a business.
 An economic resource that is remunerated in the form of
profit.

7. Two major branches of study:
 One is concerned with individual decision making which is
microeconomics.
 The other which is involved in understanding the behavior of
the society as a whole, is macroeconomics.

8. MICROECONOMICS
 Is the branch of economics which deals with the individual
decisions of units of the economy firms and households, and
how their choices determine relative prices of goods and
factors of production.
 The market being the central concept of microeconomics,
focuses in its two main players:
 The buyer (maximizes satisfaction) and the seller (maximizes
profit)
 Their interaction with one another

9. MACROECONOMICS
 Discusses relationship among broad economic aggregates like
national income, national output, money supply, bank
deposits, total volume of savings, investment, consumption
expenditure, general price level of commodities, government
spending, inflations, recession, employment, and money
supply.
CETERIS PARIBUS
 All other things held constant or all else equal

10. MANAGERIAL ECONOMICS
 Analyzes the relationship between two variables while the
other factors are held unchanged.
 The utilization of managerial skills in the business by applying
economic theories and concepts to maintain efficiency in
costing and production and its effectiveness on every decision
making by the firms to fully maximize their profits.
 Utilization of managerial skills is used in such a way that it
depicts the necessary function of management.

11. EFFICIENCY IN COSTING AND PRODUCTION
 Explained as an essential means to minimize expenses.
EFFICIENCY IN DECISION MAKING
 Is also presented as the output of this managerial economic
process. Through these processes, it is expected that
maximization of profit will be achieved by the business or
firm.

12. According to…
 It is described as the pull out component from
microeconomic theory, concepte and techniques that helps
every manager select strategic direction to allocate efficiently
the resources available wnr respond effectively to tactical
issues.
McGuigan, Moyer & Harris (2008)
Baye (2010)
 It is the study of how to direct scarce resources in the way
thay most efficiently achieves a managerial goal.

13. According to…
 It is the discipline that helpe decision makers deal with the
nature of the firm, how and why it is organized the way it is, in
order to make a better, more efficient and more highly
rewarded executive.
McCormick (1993)
Salvatore (2004)
 It is the application of economic theory and the tools of
analysis od decision science to examine how an organization
can achieve its aims or objecitvee most efficiently

14. According to…
 It is the branch of economics which deals with the application of
the theories, tools, and findings of economic analysis to managerial
decision making in all typee of organizationz, including
government agancies, educational centers, not-for-profit
foundations, and business enterprises.
Villegas (1999)

15. RELATIONSHIP OF MATHEMATICAL ECONOMICS
WND ECONOMETRICS TO MANAGERIAL
ECONOMICS
 The utilization of mathematical economics to managerial
economics is essential as it is used to formalize (exprees in
equation form) the economic models postulated by economic
theory to firmly identify the proper solution to a managerial
decision problem.

16. THE NATURE OF MANAGERIAL ECONOMICS
 Figure 1.1 illustrates a managerial economics process on how
firms or businesses deals with management decision
problems.

17. MANAGERIAL ECONOMICS AND OTHER
BUSINESS DISCIPLINES
 Principles of Managerial Economics is intertwined with other
businees disciplines like marketing, finance, management
science/ operational research, strategic management, and
managerial accounting.
 It relates to marketing in such a way the determine the
demand and price elasticity of the market.

18. ESTABLISHING A BUSINESS
 Figure 1.2 illustrates the reason ehy an individual establishes a
business. People establish business mainly because of their goal
to earn additional income or profit.

19. THE THEORY OF FIRM
Earning Profit
 Profit is defined as the difference that arises when a firm’s
total revenue is greater than its cost.
 It is also the prime motivator in a capital system.
 The firm should maximize wealth or vakue of the firm which is
their general goak or objective.
 Funds are invested in a business to earn sufficient return on
investment; it can be done through getting bonds or selling
ownership through stocks.
 In finance parlance, the value of the firm is driven upward
when the vakue of its stocks arises.

20. FIGURE 1.3 GOALS OF THE FIRM

21. THREE IMPORTANT GOALS OF THE FIRM
 To earn profit, of which is a prime goal.
 To increase its value through the firm's growth and
stabilization
 To improve life in the community by giving job opportunities
and civic activities.

22. Goods and Services
 Made available to the public and are billed to customers or
clients with sufficient mark up to cover operating expenses,
financing charges, income taxes, and desired net income.

23. INCREASING ITS OWN VALUE AS AN
ECONOMIC ACTIVITY
 is a sign of expansion and part of success that can be measured in
terms of increase in assets that appreciate in value, greater
production capacity accompanied by increase in sales volume, and
increase in owner's equity.
Growth of the Firm
Stability of the Firm
 it shows the strength and survival of the firm through test of
time in the market. It also refers to the firm's ability to
continue operations despite anticipated risks in a business. It
is measured primarily based on the relative amount of
owner's equity.

24. Improving the Quality of Life in the Community
 The firm has a chance of improving the life of a certain
person by providing job opportunities at the same time
earning proper salary or wages.
 They also support other entities that are directly and
indirectly affected by its transactions.

25. Corporate Social Responsibility (CSR)
 It involves the company providing civic activities such as
providing medical and health services, recreational facilities,
livelihood training facilities, and financial assistance for
community projects.

26. THE DECISION MAKING MODELS
 The decision making of every manager is considered as the
heart and soul of any enterprise.
 According to McGuigan, Moyer and Harris (2008), it starts
with:
 Establishing the objectives of the organization
 Identifying the problems
 Determining the probable solution given the choices and
alternative solutions
 Examining the best possible or the cost and benefit
 Making an analysis and implementation of the solution in the
organization’s problem

27. THE ROLE OF PROFIT
 Defined as the difference between total revenue and total
economic cost
ECONOMIC PROFIT
ECONOMIC COST
 Defined as the cost of the alternative opportunity that is
foregone
OPPORTUNITY COST
 Is the cost of explicit and implicit resources that is
considered as foregone given the choices

28. TEMPORARY DISEQUILIBRIUM THEORY OF PROFIT
 Based on the assumption that the investment risk experienced
by the owners of the organization should be compensated by
economic profits above a competitive rate of return
RISK BEARING THEORY OF PROFIT
 When the firm earned a long run equilibrium normal rate of
profit that should be adjusted to risk
MONOPOLY THEORY OF PROFIT
 Assumes one firm which dominates the industry has the
possibility to earn above normal rates of returns for a long
period of time because of zero competition

29. INNOVATION THEORY OF PROFIT
 Assumes that due to innovation success, an organization is
rewarded by above normal profit. According to Joseph
Schumpeter, an Australian political economist, it has been a
success theory of entrepreneurship wherein creativity or
successful innovation fuels economic profits
MANAGERIAL EFFICIENCY THEORY OF PROFIT
 Assumes that exceptional managerial skills of well managed
enterprise meet the above normal profit also called
compensatory theory of profit, the higher the efficiency level
of the firm, the higher the compensatory factor will be that
goes above normal returns

30. PROFIT MAXIMIZATION
 Any enterprise needs profit. This is a sign of success in
decision making, efficiency in utilizing resources, and effective
execution or implementation of all the activities in the
organization
WHY IS PROFIT NECESSARY?
THE SHAREHOLDER WEALTH MAXIMIZATION
MODEL OF THE FIRM
 The firm should focus in maximizing its value and the
managers should increase the wealth of the shareholders.

31. GOALS IN PUBLIC SECTOR AND NON
PROFITABLE ENTERPRISES
 The objective of the private sectors regarding its value
maximization is completely different from the objectives of
the public sector and non profitable enterprises
Characteristics of a Non-profitable Enterprise
 No one possesses a right to receive profit, surpluses, or
dividends
 Exempted from corporate taxes
 Getting benefits by accepting donations that are tax
deductible.

32. Non-profitable Enterprise is comprise of :
 performing arts group
 Museums
 Libraries
 Hospitals
 Churches
 volunteer organizations
 Cooperatives
 credit and labor unions
 professional societies
 Foundations
 fraternal organizations

33. Non-profitable Objectives according to
McGuican, Moyer and Harris (2008)
 The objectives of non- profitable organizations are:
 Maximizing the quantity and quality of the output subject to a
break-even budget constraint
 Maximizing cash flows
 Maximizing the utility or satisfaction of contributors
 Maximize the costs while achieving a fixed level of benefits
 Maximize the net benefits

34. UNDERSTANDING THE MARKETS
 In analyzing the concepts and theories of microeconomics, it
centers on the main idea that in transactions of the market, if
there is a customer of a commodity, there is also producer of
goods and services
CONSUMER-PRODUCER RIVALRY
 The consumer versus producer rivalry is always present in any
type of market. This rivalry deals with price changes and stock
of the commodities (demand and supply). Moreover, the
consumer wishes for a lower price to gain more satisfaction,
while the producer wants higher price in selling their
commodities to gain more profits

35. CONSUMER-CONSUMER RIVALRY
 The power of the consumer in dominating the market is
proven and tested in years, but when it comes to the basic
economic problem which is scarcity, the consumer battle for
survival, the goods or services will be offered at the highest
possible price and consumers who can afford this are better
off.
PRODUCER-PRODUCER RIVALRY
 The marketplace is also a battlefield for all the producers. The
presence of competition on commodities/ services offered to
the consumers will be rough and intense. Their competition
varies from product quality, designs, logo, prices, and
appearance and features to fast, reliable and satisfactory
services offering to the consumers.

36. GOVERNMENT AND THE MARKET
 Government has big role on determining the market structure
in the economy. For instance, when it comes to electricity
services, it should be run by a sole (monopoly) producer
stated under the government rules and regulations. With this,
the producer to producer rivalry will not be applicable.
Moreover, some enterprises in the economy are also
characterized according to their types from perfect
competition, monopolistic competition, oligopoly and
duopoly.

37. END OF PRESENTATION