The Fundamentals of Managerial Economics

Question 1

The Manager

Definition?

Responsibilities (3)

Answer 1

Definition:

• A person who directs resources to achieve a stated goal.

Responsibilities:

• Directs the efforts of others.
• Purchases inputs used in the production of the firm’s output.
• Directs product price or quality/quantity decisions.

Question 2

Economics

Definition?
What are resources used for?
What does scarcity imply?

Answer 2

Definition:

• The science of making decisions in the presence of scarce resources.

Key Points:

• Resources are anything used to produce a good or service, or achieve a goal.
• Scarcity implies trade-offs.

Question 3

Managerial Economics

Definition?
Examples of decisions (3)

Answer 3

Definition:

• The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal.

Examples of Decisions:

• Should a firm purchase components from other manufacturers or produce them internally?
• Should the firm specialize in one type of product or diversify?
• How many units should be produced, and at what price should they be sold?

Question 4

Managerial Economics Defined

Introduction to decision-making
4 components

Answer 4

Components:

• Control variable (e.g., output)
• Benefits (e.g., revenues)
• Costs
• Net benefits (e.g., profit = revenue – costs)

Question 5

Marginal Analysis

Given a control variable, _ , of a managerial objective, denote the
- total benefit as ___ .
- total cost as ____ .
So __________ and _______ are both related to _____________ _
​
· Manager’s objective is to ____________ the ______ ____________:
​
What does the formula look like?

Answer 5

Given a control variable, Q, of a managerial objective, denote the
- total benefit as B (Q).
- total cost as C(Q).
So benefits and costs are both related to variable Q

· Manager’s objective is to maximize the Net Benefit:

NB(Q)=B(Q)-C(Q)

Question 6

Marginal Analysis

What is its objective?
3 key terms

Answer 6

Objective:

• To maximize net benefits.

Key Terms:

• Marginal Benefit ((MB)): Change in total benefits from a change in the control variable.
• Marginal Cost ((MC)): Change in total costs from a change in the control variable.
• Marginal Net Benefits ((MNB)): (MB - MC)

Question 7

Using Marginal Analysis

What is the marginal principle?
Outcome?

Answer 7

Marginal Principle:

• To maximize net benefits, increase the control variable until marginal benefits equal marginal costs.

Outcome:

• At this point, marginal net benefits are zero; nothing more can be gained by further changes in that variable.

Question 8

Marginal Analysis

Marginal priniciple (calculus)

Answer 8

Question 9

Marginal Analysis In Action

Find the MB(Q) and MC(Q) functions
What value of Q makes MNB (Q) zero?

Answer 9

Question 10

Determining the Optimal Level of a Control Variable (picture of graph)

Answer 10

Question 11

Determining the Optimal Level of a Control Variable II (picture of a graph)

Answer 11

Question 12

Determining the Optimal Level of a Control Variable III (picture of 4 graphs)

Answer 12

Question 13

Conclusion

What should you include?
What are made at the margin?

Answer 13

Key Takeaways:

• Include all costs and benefits when making decisions.
• Optimal economic decisions are made at the margin (marginal analysis)