This document provides an overview of key concepts in managerial economics. It begins with learning objectives around understanding managerial economics and how it can help analyze business situations. It then defines managerial economics as using economics to direct scarce resources to efficiently achieve managerial goals like profit maximization. The document contrasts accounting profits with economic profits and discusses opportunity costs. It introduces Michael Porter's five forces framework for assessing industry profitability. Finally, it discusses economic incentives and the role of governments in markets.

1. CHAPTER 1
The Fundamentals of Managerial Economics

2. Greeting
• Assalamualaikum and greetings to all my students.
• Welcome to Business Economics class.
• Before we begin the class, let us look at the learning
objectives.
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3. Learning Objectives
• Dear students, what will you learn in this module?
• In this module, you will learn the fundamentals of
Managerial Economics
• This knowledge will help you to achieve the
following module outcomes:
• What is managerial economics, and how it is a valuable tool for
analysing business situations?
• Why is it important to understand the difference between
accounting profits and economic profits?
• How do managers account for time gaps between costs and
revenues to make decisions?
• What economic principles can managers use to maximise profits?
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4. Learning Objectives
• This knowledge will help you to achieve the
following module outcomes:
• What is managerial economics, and how it is a valuable tool for
analysing business situations?
• Why is it important to understand the difference between
accounting profits and economic profits?
• How do managers account for time gaps between costs and
revenues to make decisions?
• What economic principles can managers use to maximise profits?
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5. MANAGERIAL
ECONOMICS
Terms and Definition
5

6. What is Managerial Economics?
• Managerial economics is a valuable tool for
analysing business situations. It is a tool to
help managers make better decision.
• Why is managerial economics so valuable to a
diverse group of decision makers?
• In order to understand about managerial
economics and why it is so valuable, we need
to know the meaning of the term Manager and
Economics.
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7. “Manager” in Managerial Economics
Who is “the Manager”?
• A person who directs resources (whether its people, money,
machine, etc) to achieve a stated goal (growth, revenue,
profit etc)
• Directs the efforts of others (followers, common people,
employees etc)
• Purchases inputs used in the production of output.
• Directs the product price or quality decisions.
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8. “Economics” in Managerial Economics
What is Economics?
• The science of making decisions in the presence of scarce (limited)
resources.
• Resources are used to produce a good or service.
• Economic Decisions are important because there are trade-offs
between scarcity and competition.
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9. So, what is Managerial Economics
• It is the study to understand how to direct
scarce resources (such as capital, assets,
people etc) in the way that most efficiently
achieves a managerial goal.
• That goal could be lower cost, higher revenue,
and higher profit.
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10. What is Managerial Economics
• Managerial Economics help firms make
difficult business decision such as:
• Whether it should purchase components from other manufacturers
or produce them within the firm?
• Whether it should specialize in making one type of computer or
produce several different types?
• How many computers should it produces, and at what price should
it sells them?
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11. MANAGERIAL ECONOMICS
AS A TOOL FOR DECISION
MAKING
Using economics to manage organization effectively
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12. Managerial Economics a Valuable Tool
• Dear students, now you know what is "Manager",
"Economics" and "Managerial Economics".
• Now we need to understand how managerial economics
is a valuable tool for analyzing business situations
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13. Economics of Effective Management
What is the use of economics for effective business
management?
 Since this course is designed for you as managers of
firms or businesses, we focus on studying the usage of
economics for effective managerial decisions as they
relate to maximising profits or the value of the firm.
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14. Economics of Effective Management
• What are the basic Economic Principles for Effective
Management?
• We will go through each principle to understand what can
influence the economic decisions.
• It begins with identify goals and constraints
• Sound decisions must have well-defined goals.
• The decision maker often faces constraints that affect the ability to
achieve a goal.
• For example, if your goal is to maximise your grade in this course
rather than maximise your overall grade point average, your study
habits will differ accordingly.
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15. The Goal of Maximizing Profits
• The goal of maximising profits requires a decision about
the optimal price for a product.
• Total Sales (Revenue) = Price x Unit of Product/Services Sold
• Profit = Sales – Cost
• The managers should decide how much to produce, use
of technology, input use, and how to react to the decision
made by competitors.
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16. Accounting Profit vs. Economic Profit
Accounting Profit
• The total amount of money taken in from sales (total
revenue) minus the dollar cost of producing goods and
services.
• Accounting Profit = Sales – Cost of Producing Goods and Services
Economic Profit
• The difference between the total revenue (sales) and the
total opportunity cost of producing the firm's goods or
services.
• Economic Profit = Total Revenue – Total Opportunity Cost of
Producing Goods and Services
• Please view
• https://www.youtube.com/watch?v=a0nUWrnuUdo

17. Opportunity Cost
•The opportunity cost of using a
resource includes both explicit (or
accounting cost) and implicit cost of
giving up the best alternative use of
the resource.
•Implicit costs are very hard to measure
and therefore managers often
overlook them.

18. A VIDEO ABOUT
"Opportunity Cost Definition and Real World
Examples"

19. Explicit Cost vs. Implicit Cost
• For example, an employee could take a
vacation and travel.
• The explicit costs would include travel
expenses, the cost of a hotel room, and costs
related to entertainment.
• The implicit costs relate to the tradeoff,
namely the wages that the employee could
have earned if the vacation was not taken.

20. AN ARTICLE ABOUT
"Differences between Explicit Cost and
Implicit Cost"

21. Opportunity Cost
•Profits signal to resource holders
where resources are most highly
valued by society.

22. AN ARTICLE ABOUT
"The Role of Profit in an Economy”

23. FRAMEWORK FOR
SUSTAINABLE INDUSTRY
PROFITS
5 Porter Forces
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24. Framework for Sustainable Industry Profits
• Michael Porter’s “five forces” framework
organises many complex managerial economics
issues into five categories or “forces” that impact
the sustainability of industry profits:
• Entry
• Power of Input suppliers
• Power of buyers
• Industry rivalry
• Substitutes and Complements

25. Five Forces and Industry Profitability
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Power of
Input Suppliers
Supplier Concentration
Price/Productivity of
Alternative Inputs
Relationship-Specific
Investments
Supplier Switching Costs
Government Restraints
Power of
Buyers
Buyer Concentration
Price/Value of Substitute
Products or Services
Relationship-Specific
Investments
Customer Switching Costs
Government Restraints
Entry
Substitutes & ComplementsIndustry Rivalry
Concentration
Price, Quantity, Quality,
or Service Competition
Degree of Differentiation
Level, Growth,
and Sustainability
of Industry Profits
Entry Costs
Speed of Adjustment
Sunk Costs
Economies of Scale
Network Effects
Reputation
Switching Costs
Government Restraints
Price/Value of Surrogate Products
or Services
Price/Value of Complementary
Products or Services
Network Effects
Government
Restraints
Switching Costs
Timing of Decisions
Information
Government
Restraints

26. Five Forces and Industry Profitability
Based on Michael Porter's Five Forces
Framework, you may refer to the descriptions
below for each of the elements:
Entry
• More competition and reduces the margins of
existing firms in the wide variety of industry
settings.
• Sustainable profits of existing firms depend on
barriers to entry.
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27. Five Forces and Industry Profitability
Power of Input Suppliers
• Industry profits tend to be lower when suppliers
have the power to negotiate favorable terms for
their inputs.
Power of Buyers
• Industry profits tend to be lower when customers
have the power to negotiate favorable terms for
the products or services produced in the industry.
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28. Five Forces and Industry Profitability
Industry Rivalry
• Sustainability of industry profits depends on the
nature and intensity of rivalry among firms. The
rivalry is less in the concentrated industries.
Substitutes and complements
• Industry profits also depend on the price and
value of interrelated products and services.
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29. A VIDEO ABOUT
Five Forces and Industry Profitability
"Five Forces Explained – Airline Industry"
And
"Five Forces Explained - Mobile Phone Industry"

30. ECONOMIC INCENTIVES
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31. Understanding Incentives
•Changes in profits (growth in profit)
provide an incentive to how resource
holders use their resources.
•Economic incentives are what
motivates you to behave in a certain
way, while preferences are your
needs, wants and desires. Economic
incentives provide you the motivation
to pursue your preferences.
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32. A VIDEO ABOUT
"How people respond to incentives”

33. Understanding Incentives
• Within a firm, incentives impact how resources
are used and how hard workers work.
• One role of a manager is to construct incentives
to induce maximal effort from employees.
• Salary
• Commission
• Bonus
• Many professionals and owners of small
establishments have difficulties because they do
not fully comprehend the importance of the role
incentives play in guiding the decisions of others
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34. What is a Market?
• Market transaction has two sides:
• Buyer.
• Seller.
• Bargaining position of consumers and
producers is limited by three rivalries in
economic transactions:
• Consumer-producer rivalry.
• Consumer-consumer rivalry.
• Producer-producer rivalry.
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35. Role of Government in a Market
•What is the role of the government to
regulate the market?
•When agents on either side of the
market find themselves disadvantaged
in the market process, they attempt to
induce the government to intervene on
their behalf.
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36. A VIDEO ABOUT
"Can the Government run the Economy"

37. TIME VALUE OF MONEY
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38. The Time Value of Money
• Dear students, we now discuss how
managers can use present value analysis
to properly account for the timing of many
decisions involves a gap between the time
when the costs of a project are borne and
the time when the benefits of the project
are received.
• Managers can use present value analysis
to properly account for the timing of
receipts and expenditures.
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39. A VIDEO ABOUT
"Time value of money – concept of present
value"

40. Present Value Analysis
• The amount that would have to be invested today at the
prevailing interest rate to generate the given future value.
• Present value of a future value
• The amount that would have to be invested today at the prevailing
interest rate to generate the given future value:
𝑃𝑉 =
𝐹𝑉
1 + 𝑖 𝑛
• Present value reflects the difference between the future value and
the opportunity cost of waiting:
𝑃𝑉 = 𝐹𝑉 − 𝑂𝐶𝑊
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41. The Time Value of Money
• Consider a project that returns the following income
stream:
• Year 1, $10,000; Year 2, $50,000; and Year 3, $100,000.
• At an annual interest rate of 3 percent, what is the present value of
this income stream?
𝑃𝑉 =
$10,000
1 + 0.03 1
+
$50,000
1 + 0.03 2
+
$100,000
1 + 0.03 3
= $148,352.70
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42. Present Value Analysis
•The higher the interest rate, the higher
the opportunity cost of waiting to
receive a future amount and thus the
lower the present value of the future
amount.
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43. Net Present Value
• The present value of the income stream generated by a
project minus the current cost of the project:
• Given the present value of the income stream that arises
from a project, one can easily compute the net present
value of the project.
Profit maximization principle
• Maximizing profits means maximizing the value of the firm, which is
the present value of current and future profits.
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44. MARGINALANALYSIS
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45. Understanding Marginal Analysis
• Dear Students, Marginal analysis is the important concept
in economics.
• What is marginal analysis?
• The marginal analysis states that optimal managerial
decisions involve comparing the marginal (or incremental)
benefits of a decision with the marginal (or incremental)
costs.
• Given a control variable, , denote the
• total benefit as , total benefits derived from Q units.
• total cost as , representing the total costs of corresponding level of
Q.
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46. Understanding Marginal Analysis
• Marginal benefit refers to what people are willing
to give up in order to obtain one more unit of a
good, while;
• marginal cost refers to the value of what is given
up in order to produce that additional unit.
• Additional units of a good should be produced as
long as marginal benefit exceeds marginal cost.
• Manager’s objective is to maximize net benefits
(produce goods at maximum profit)
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47. A VIDEO ABOUT
"Marginal Analysis"

48. Marginal Analysis
• How can the manager maximize net benefits?
• Use marginal analysis
• Marginal benefit: 𝑀𝐵 𝑄
• The change in total benefits arising from a change in the managerial
control variable, 𝑄.
• Marginal cost: 𝑀𝐶 𝑄
• The change in the total costs arising from a change in the managerial
control variable, 𝑄.
• Marginal net benefits: 𝑀𝑁𝐵 𝑄
𝑀𝑁𝐵 𝑄 = 𝑀𝐵 𝑄 − 𝑀𝐶 𝑄

49. Marginal Analysis Principle
•Marginal principle
• To maximize net benefits, the manager
should increase the managerial control
variable up to the point where marginal
benefits equal marginal costs.
• At this level (MB = MC) marginal net
benefits are zero; nothing more can be
gained by further changes in that variable.
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50. Figure below depicts the marginal benefits,
marginal costs, and marginal net benefits.
Quantity
(Control Variable)
Total benefits
Total costs
0
𝐵 𝑄
𝐶 𝑄
Maximum total benefits
Maximum net
benefits

51. Determining the Optimal Level of a Control
Variable II
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Quantity
(Control Variable)
Net benefits
0
Maximum
net benefits
Slope =𝑀𝑁𝐵(𝑄)
𝑁 𝑄 = 𝐵 𝑄 − 𝐶 𝑄 = 0

52. Determining the Optimal Level of a
Control Variable III
Quantity
(Control Variable)
Marginal
benefits, costs
and net benefits
0
𝑀𝐶 𝑄
𝑀𝐵 𝑄𝑀𝑁𝐵 𝑄
Maximum net
benefits

53. Maximum Total Benefits
• At the level Q where the marginal benefit curve intersects
the marginal cost curve, marginal net benefits are zero.
That level Q maximizes net benefits.
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54. RECAP
On Key Terms and Concepts
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55. Review the following key concepts and terms
Economics
• Trade offs
• Opportunity costs
• Implicit costs and explicit costs
• Economic profits and accounting profits
• Marginal benefits and marginal costs
• Present value and net present value
• Time value of money
• Porter’s five forces
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