This document provides an introduction to key concepts in managerial economics. It begins by defining managerial economics as using economic principles to help managers make better decisions by directing scarce resources efficiently. It then explains accounting profits versus economic profits and the importance of opportunity costs. The document outlines Porter's five forces framework for analyzing industry profitability. It also discusses the time value of money and how present value analysis allows managers to properly account for the timing of costs and revenues. Finally, it introduces the concept of marginal analysis and how managers can maximize profits by producing goods until the point where marginal benefits equal marginal costs.

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
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6. What is ManagerialEconomics?
• 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 ManagerialEconomics
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 ManagerialEconomics
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 ManagerialEconomics
• 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 ManagerialEconomics
• 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. MANAGERIALECONOMICS
AS A TOOL FOR DECISION
MAKING
Using economics to manage organization effectively
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12. Managerial Economics aValuable 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 EffectiveManagement
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 EffectiveManagement
• 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 MaximizingProfits
• 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. EconomicProfit
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.
• Please view
• https://www.youtube.com/watch?v=NwOYLV-L7pc

18. Explicit Cost vs. ImplicitCost
• 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.
• https://keydifferences.com/difference-
between-explicit-cost-and-implicit-cost.html

19. Opportunity Cost
• Profits signal to resource holders where
resources are most highly valued by society.
• To know more on this, you may refer to the
textbook on the role of profits.
• Or
https://www.economicshelp.org/blog/572/
business/the-role-of-profit-in-an-economy/

20. FRAMEWORK FOR
SUSTAINABLE INDUSTRY
PROFITS
5 Porter Forces
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21. Framework for Sustainable IndustryProfits
• 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

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

23. Five Forces and IndustryProfitability
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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24. Five Forces and IndustryProfitability
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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25. Five Forces and IndustryProfitability
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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26. Five Forces and IndustryProfitability
Five Forces Explained – Airline Industry
• https://www.youtube.com/watch?
v=hUWAwor9rcA
Five Forces Explained – Mobile Phone Industry
• https://www.youtube.com/watch?v=h7ve8WhgF6c
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27. ECONOMIC INCENTIVES
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28. 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.
• People respond to Incentives
https://www.youtube.com/watch?v=s1doqxnKH8I
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29. 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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30. What is aMarket?
• 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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31. Role of Government in aMarket
• 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.
• Can the Government run the Economy?
https://www.youtube.com/watch?v=La98xr40Cfk
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32. TIME VALUE OF MONEY
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33. The Time Value ofMoney
• 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.
• Time value of money – concept of present value
https://www.youtube.com/watch?v=1CO5hf2ns18
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34. Present ValueAnalysis
• 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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35. The Time Value ofMoney
• 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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36. Present ValueAnalysis
• 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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37. 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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38. MARGINALANALYSIS
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39. Understanding MarginalAnalysis
• 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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40. Understanding MarginalAnalysis
• 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)
• Marginal Analysis Video
https://www.youtube.com/watch?v=ywHW1-xP0PQ
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41. 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)

42. Marginal AnalysisPrinciple
• 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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43. 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

44. 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

45. Determining the Optimal Level ofa
Control Variable III
Quantity
(Control Variable)
Marginal
benefits, costs
and net benefits
0
𝑀𝐶( 𝑄)
𝑀𝐵( 𝑄)𝑀𝑁𝐵( 𝑄)
Maximum net
benefits

46. Maximum TotalBenefits
• 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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47. RECAP
On Key Terms and Concepts
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48. 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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