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Introduction to
Managerial Economics
BY
Qazi Subhan
M. Phil (Eco), QAU, Pak
LLM (IPR), Italy
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Introduction Slide 2
Structure of the course (Up to Midterm)
Weeks 5Demand Estimation
ManagerialEconomics
Weeks 3Concept of Demand and supplyand their importance in M. Eco
Weeks 1Introduction to managerialeconomic
Week 7Theory of Cost andits linkage with M.Eco.
Week 8Estimation of productionand cost functions
Week 9
MID Term ExamWeeks 2Goals of firm
Qazi Subhan Bahria University Department of Management Sciences Spring 2013
Weeks 4
Elasticity of Demand and supplyand its relevance to M. Eco
Weeks 6Theory of Production andMathematical Treatment
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Introduction Slide 3
Structure of the course (After Midterm)
Weeks 14Concepts of Monopolistic
Competition
ManagerialEconomics
Weeks 12Concept of Oligopoly
Weeks 10Introduction to marketstructure
Week 16The role ofgovernment inmarket economy
Week 17Presentations on Final projects
Week 18Presentations on Finalprojects
Week 19
, Final Exam
Weeks 11Concept of Monopoly
Qazi Subhan Bahria University Department of Management Sciences Spring 2013
Weeks 13Practical Application ofOligopoly Models
Weeks 15Price Discrimination
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Introduction Slide 4
Brief Contents
Introduction to Managerial Economics
Economic Goals of Firm
Optimization of the core managerial Objectives
Concept of Supply and Demand and its application in
Managerial Decision Making Elasticities of Demand and Supply and its application
in Managerial Economics
Demand Estimation
Theory of Production
Theory of Cost
Estimation of Cost and Production Functions
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Introduction Slide 5
Brief Contents
Market Structure
Perfect Competition
Monopoly
OligopolyCollusive Oligopoly
Non Collusive Oligopoly
Monopolistic CompetitionPrice Discrimination
Role of Government in Market Economy
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Introduction Slide 6
What is Economics
According to Adam Smith Economics is a Science of Wealth Four dimensions of Definition;
Production of Wealth
Consumption of Wealth
Exchange of Wealth
Distribution of Wealth
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According to Alfred Marshall
A well known Neo-Classical Economisthas defined Economics as BehavioralScience
Economics is the study of mankind in anordinary business oflife.
Alfred Marshall has examined the
individual behavior, ordinary business oflife and use of the material requite of wellbeings.
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According to Prof. Robbins
Economics is a social sciencewhich studies the human behavioras a relationship between multiple
ends and scarce resources whichhave an alternative uses.
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Economics
TheoreticalEconomics
AppliedEconomics
NormativeEconomics
PositiveEconomics
Micro Eco Macro EcoMathematicalEconomics
CLASSIFICATION
OF ECONOMICS
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Manager
A person who directs resources to achieve
a stated goal.
Economics
The science of making decisions in thepresence of scarce resources.
Managerial Economics
The study of how to direct scarceresources in the way that most efficiently
achieves managerial goals.
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Managerial Economics
Managerial economics refers to theapplication of Economic theory and tools ofanalysis of decision science to examine how anorganization can achieve its objectives mostefficiently.
Economic Theory consists of the knowledge ofMicro and Macro economics
Decision science represents the techniques ofMathematics, Statistics and Econometrics
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Introduction Slide 12
Economic theory and methodology lay
down rules for improving business Activity
and public policy decisions.
Managerial economics helps managers to
recognize how economic forces affect
organizations and describes the economic
consequences of managerial behavior.
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Introduction Slide 13
Managerial Economics also links economicconcepts and quantitative methods to
develop vital tools for managerial decision
making.Managerial Economics identifies ways to
achieve goals efficiently.
Managerial economics can be used to
specify pricing and production strategies
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Introduction Slide 14
Managerial economics provides productionand marketing rules to help maximizeprofits
Once management has set relevant goals,managerial economics can be used toefficiently attain those objectives.
Managerial economics can be used todeduce the underlying logic of company,
consumer and government decisions.
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Introduction Slide 15
Main Questions of M.E
How do markets work?
How do customers value the products?
What are the relevant production and costmeasures for decision making?
How does competition affect businessdecisions in different market structures?
What prices should be set?
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Introduction Slide 16
What would be the impact of changes ininterest rates on costs of production?
How important to managerial and
marketing decisions are changes in:foreign exchange rates, technology,incomes, government regulations,sources of energy and the balance of
payments?
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Introduction Slide 17
Role of Economics in Managerial Decisions
What to Produce
How to Produce
For whom to Produce
Product decision
Hiring, staffing,
procurement decision
Market segmentationDecisions
There are three ways to answer this question
Market Process ( Market Forces)
Command Process ( State Involvement)
Traditional Process (use of customs and traditions)
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Introduction Slide 18
Goals of Firm
Economic Goals
Production Max
Profit Maximization Cost Minimization
Market Expansion
Non Economic Goals
Good work environment
Provide good services to
customers
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Introduction Slide 19
Objective and Value of Firm
Theory of firm was
based on the
assumption that the
objective of the firm is
to maximize the valueof firms which can be
presented as Net
Present Value (NPV).
Cr
R
r
R
r
RNPV
3
3
2
2
1
1
)1()1()1(
NPV is the present value of
all expected future profits ofthe firm which can be
presented in the following
formula in which R is
estimated net cash flow from
the project, r is discount rateand C stands for initial cost of
the project. For instance
C=500, discount rate is 12%
and expected Cash Flow (R)
R=200, then NPV for 5 years
would be 220.9.
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Introduction Slide 20
Steps to Managerial Decision Making
Define the Problem Determine the objectives
Explore the Alternative
Predicting the consequences
Make a Choice
Implementing the decision
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Introduction Slide 21
Some Economic Concepts Concept of factors of production
Marginal Analysis
Optimization Techniques
Theories of Profit Risk Bearing theories of profit ( More risk, more profit)
Frictional Theory of profit ( Deviation from Long run equilibrium
Monopoly theory of profit
Innovation theory of profit
Managerial Efficiency Theory of Profit
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Introduction Slide 22
Factors of Production
FOP
Land
Labor Capital
Organization
Prices of FOP
Rent
Wage Interest
profit
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Introduction Slide 23
Marginal Analysis
In the theory of consumer behavior
Concept of MU and Price
In theory of firmMarginal Revenue and Marginal Cost
Qazi Subhan Bahria University Department of Management Sciences Spring 2013
M i l A l i d O ti i ti
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Introduction Slide 24
Marginal Analysis and Optimization(Maximization and Minimization) Techniques
With the help of
Marginal Analysis,
optimization objective
can be achieved
There are four
parameters in the whole
economics which are
maximized and one is
minimized.
MaximizedParameters
Utility
Revenue
Production
Profit
MinimizedParameter
Cost
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Introduction Slide 25
Optimization techniques
If any function either it is total
revenue, profit or total Cost is given
and the objective is to know at which
level of output it is maximized orminimized then there are two
conditions
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Introduction Slide 26
Optimization Techniques for TR Max
min0/
max0/
0/
22
22
forqdTRd
forqdTRd
dqdTR
Qazi Subhan Bahria University Department of Management Sciences Spring 2013
Optimization Techniques for profit ()
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Introduction Slide 27
Optimization Techniques for profit ()Max
min0/
max0/
0/
22
22
forqdd
forqdd
dqd
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Optimization Techniques for Cost
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Introduction Slide 28
Optimization Techniques for CostMinimization
min0/
max0/
0/
22
22
forqdTCd
forqdTCd
dqdTC
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Introduction Slide 29
Lagrange Multiplier
rKwLClkL
FunctionConstraunctionobjectivefL
,
int
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Introduction Slide 30
Practice Questions
Suppose a firm has
an inverse demand
function and its cost
equation then findequilibrium output,
Price, profit and total
revenue.
260420
5.120
QQTC
QP
21045135
75.200
QQTC
QP
Qazi Subhan Bahria University Department of Management Sciences Spring 2013
225.20600
8720QQTC
QTR
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Introduction Slide 31
Sample Question
Suppose
QTC
QP
100120
8.0340
QTCQP
3810048.0140
QTC
QP
5030
3.040
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Introduction Slide 32
Possibilities to ask the questions
TC
TR
AC
TR
TC
AR
AC
AR
AC
Q
TC
P