| Date post: | 12-Jan-2015 |
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Novus Business and IT Training Program
Managerial Economics
Lesson 7
To learn the basic concepts of managerial economics including analyzing demand, deciding how much to produce, pricing and cost.
2Novus Business and IT Training Program
Managerial Economics
• Economic Theory for a Business• Focuses on Micro-economics– Individual Consumers– Individual Businesses– Individual Industries
3Novus Business and IT Training Program
Primary Focus of Managerial Economics
• Demand Analysis – How Much do Customers Want?
• Production Decision –What to Produce?–How to Produce?–How Much to Produce?– For Whom?
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Demand Curve
• Different for a business than for its market
• Considerations– Price– Competitor Behavior– Time of Year– Business Hours– Location
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Price
• Internal Factors– Things you can control
• External Factors– Things you cannot control
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Price Elasticity
• How a change in one variable affects others
– If prices are lowered, will you sell more?
– If prices are raised, can you still sell as much?
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Competitor Pricing
• Understanding your competitors’ prices is very important
• Same item + your higher price = lower sales for you
• Understand what customers think
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Other Factors
• Competitor Behavior– Customer service
• Convenience• Promotion• Time of Year
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Demand Analysis Summary
• Thorough Market Review• Give Customers a Reason to Come to
You• Consider Seasonality
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Production Decision
• Can you buy or produce enough to meet demand?
• “Production” includes – Goods and services–Made or bought for resale
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Price versus Cost
• Pricing affect Production Decision• Cost categories:– Fixed– Variable–Mixed
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Total Cost
• Fixed + Variable + Mixed = Total• Prices must be high enough to cover
total costQuantity 1
Fixed Costs $50
Variable Costs 2
Total Cost 52
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Average Total Cost
• Average Total Cost = Total Cost / Quantity
• Economies of Scale
Quantity 10 100
Fixed Costs $50 $50
Variable Costs 20 200
Total Cost 70 250
Average Total Cost
$7 $2.50
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Marginal Cost
• Cost to buy / produce / sell one more item
• Usually amount of variable cost (including variable-mixed)
• Sale price should be higher than marginal cost
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Break-Even
• When total cost and sales are equal• Calculation of break-even
Fixed Costs $50
Sales Price $3
Marginal Cost
$2
Difference $1
Break even units
50 units
16Novus Business and IT Training Program
Summary
Production
Price
Demand
Competitors
Market
