Reviewer MGL ECON (QUIZ #1) PDF

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FUNDAMENTALS OF MANAGEMENT ECONOMICSECONOMICS The science of making decisions in the presence of scarce resources.MANAGERIAL ECONOMICS economics applied in decision making. Is a branch of economics that applies economic theory and decision sciencemethodology.MANAGER a person that directs resourc...

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FUNDAMENTALS OF MANAGEMENT ECONOMICS

ECONOMICS



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

MANAGERIAL ECONOMICS

 

economics applied in decision making. Is a branch of economics that applies economic theory and decision science methodology.

MANAGER



a person that directs resources to achieve goals.

PROFITS



are a signal to resource holders where resources are most highly valued by society.

ACCOUNTING PROFIT

  

Total revenue minus the amount of cost of producing goods. EXPLICIT COST: - Wages, rent, cost of goods materials Formula: AP = TR – Explicit Costs

ECONOMIC PROFIT

  

The difference between the total revenue and opportunity cost. OPPORTUNITY COST - explicit cost of a resource plus the implicit cost of giving up its best alternative. Formula: EP = TR – Opportunity Cost

FIVE FORCES FRAMEWORK

 

Pioneered by Michael Porter. Identify: - State of competition - Profitability of an industry

CONTENT:



ENTRY - Heightens competition and reduces the margins of existing firms in a wide variety of industry settings.



POWER OF INPUT SUPPLIERS - profits tend to be lower when suppliers have the power to negotiate favorable terms for their inputs. - Supplier power tends to be low when inputs are relatively standardized and relationship-specific investments are minimal.



POWER OF BUYERS - Industry profits tend to be lower when customers or buyers have the power to negotiate favorable terms for the products or services produced in the industry.



INDUSTRY RIVALRY - The sustainability of industry profits also depends on the nature and intensity of rivalry among firms competing in the industry.



THREATS IN SUBSTITUTES AND COMPLEMENTS - The level and sustainability of industry profits also depend on the price and value of interrelated products and services.

BARGAINING OF CONSUMERS AND PRODUCERS



CONSUMER – PRODUCER - Consumers attempt to negotiate or locate low prices, while producers attempt to negotiate high prices.



CONSUMER – CONSUMER RIVALRY - When there is scarcity, consumers will compete with one another for the right to purchase the available goods. PRODUCER – PRODUCER RIVALRY - firms that offer the best-quality product at the lowest price earn the right to serve the customers.



GOVERNMENT AND THE MARKET



When agents on either side of the market find themselves disadvantaged in the market process, they frequently attempt to induce government to intervene on their behalf.

UNDERSTAND INCENTIVES



Within a firm, incentives affect how resources are used and how hard workers work.

TIME VALUE OF MONEY



PV OF SINGLE FUTURE VALUE - Formula:

PV = 

PV OF STREAM OF FUTURE VALUE - Formula:

PV =



FV (1+i )n

FV 1

(1+i )

1

+

FV 2

( 1+i )

2

+ …+

FV n

( 1+i ) n

FV OF OPPORTUNITY COST OF WAITING - Formula:

PV =

FV 1

(1+i )

1

+

FV 2

( 1+i )

2

+ …+

FV n

( 1+i ) n

N PV = FV −OCW 

PV OF INDEFINELTY LIVED ASSETS - Formula:

PV Perpetuity = 

CF i

PV AND PROFIT MAXIMIZATION - Formula:

PV =Value of the firm(

1+i ) i−g

PV firm ex. dividend = Value of the firm – Dividend

MARGINAL ANALYSIS

 

One of the most important managerial tools. states optimal managerial decisions involve comparing the marginal benefits and marginal costs.

MARGINAL PRINCIPLE



To maximize net benefits, the manager should increase the managerial control variable up to the point where marginal benefits equal marginal costs.

MARGINAL BENEFITS AND MARGINAL COST



Substitute from the functions of (Q).

LEVEL OF Q



Formula:

MB = MC MARGINAL NET BENEFITS



Formula:

MNB = MB’(Q) – MC’(Q)

LAW OF DEMAND



Price and quantity demanded are inversely related.

MARKET DEMAND CURVE



Illustrates the relationship between the total quantity and price per unit of a good all consumers.

CHANGES IN QUANTITY DEMANDED



The change is only in price.

CHANGES IN DEMAND



The change is in the demand shifters.

DEMAND SHIFTERS 1. Income - Normal good – income increases, demand increases (vice versa) - Inferior good – income increases, demand decreases (vice versa)

2. Price of Related Goods - Substitute good - the price for product A increases, the demand for product B increases (vice versa) - Complementary good – the price for good X increases, the demand for good Y decreases (vice versa)

3. 4. 5. 6.

Advertising and consumer tastes Population Consumer Expectations Other Factors

LINEAR DEMAND FUNCTION

 

mathematical representation describing how many units will be purchased at different prices for X, the price of a related good Y, income and other factors that affect the demand for good X. Formula:

Qxd = ao + axPx + ayPy + aMM + aHH

INVERSE DEMAND FUNCTION

 

solving for Px Used to construct market demand curve.

CONSUMER SURPLUS



the extra value that consumers derive from a good but do not pay extra for.

LAW OF SUPPLY



Price and quantity supplied are directly related.

MARKET SUPPLY CURVE



A curve indicating the total quantity of a good that all producers in a competitive market would produce.

CHANGES IN QUANTITY SUPPLIED



The change is only on price.

CHANGES IN SUPPLY



The change is in the supply shifters.

SUPPLY SHIFTERS 1. Input Prices 2. Technology or government regulation 3. Number of firms - Entry - Exit 4. Substitutes in productions 5. Producers’ Expectations 6. Taxes - Excise tax, tax on each unit of output sold/tax revenue is collected from the supplier - Ad valorem tax, percentage tax

LINEAR SUPPLY FUNCTION

 

a mathematical representation describing how many units will be produced at alternative prices for X, alternative input prices W, and alternative values of other variables that affect the supply for good X Formula:

Qxs = bo + bxPx + byPy + bMM + bHH

INVERSE SUPPLY FUNCTION

 

Solving for Px Used to construct market supply curve.

PRODUCER SURPLUS



The amount producers receive in excess of the amount necessary to induce them to produce the good.

EQUILIBRIUM

  

Where of market demand and market supply curves intersect with each other. Balanced. Formula:

Qd = Qs EQUILIBRIUM PRICE



A price that equates quantity demanded and quantity supplied.

SURPLUS

 

Sobra!!! Formula:

Qs - Qd SHORTAGE

 

Kakulangan!!! Formula:

Qd - Qs

EQUILIBRIUM PRICE

 

Get the value of Pe. Formula:

Qd (Pe) = Qs (Pe)

EQUILIBRIUM DEMAND

 

Substitute the value of Pe. Formula:

Qd (Pe) = Qs (Pe) PRICE CEILING

  

Maximum legal price that can be charge. Solves for shortage. Solves for Pfull.

PRICE FLOOR

  

Minimum price imposed by the government. Solves for surplus. Solves for price per unit

CHANGES OF DEMAND



Demand is directly related to equilibrium price and quantity.

CHANGES IN SUPPLY



Supply is inversely related to the equilibrium price and quantity....