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    The Fundamentals OfMana erial Economics

    Ir. Muhril A., M.Sc., Ph.D. 1

    The Fundamentals OfManagerial Economics

    http://mesahid.wordpress.com/

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    The Fundamentals OfMana erial Economics

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    Task:Read: Chapter 1, The Fundamentals Of

    Managerial Economics.

    Page 1 - 33

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    The Fundamentals OfMana erial Economics

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    Many students taking managerialeconomics ask:

    Why I should I study economics?

    Will it tell me what the stock market willdo tomorrow?

    Will it tell me where to invest my moneyor how to get rich.

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    The Fundamentals OfMana erial Economics

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    The Manager

    A person who directs resources toachieve a stated goal.

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    Economics

    The science of making decisions in thepresence of scare resources.

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    Managerial Economics Defined

    The study of how to direct scarceresources in the way that most efficiently

    achieves a managerial goal.

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    The Economics Of Effective

    Management

    At least an effective manager must:

    1. Identify goals and constraints.

    2. Recognize the nature and importance ofprofits.

    3. Understand incentives.

    4. Understand markets.5. Recognize the time value of money.

    6. Use marginal analysis.

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    Identify Goals And Constraints

    Have well defined goals.

    Face constraints.

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    Recognize The Nature And

    Importance Of Profits

    The overall goal of most firm is to

    maximize profits or the firms value.

    Economic profits (p):

    The difference between total revenue

    (TR) and total opportunity cost (TC).

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    p = TR TC

    TR = P . Q

    TC = TFC + TVC

    p = profitTR = total revenue

    P = price of output

    Q = quantity sold of output

    TC = total cost

    TFC = total fixed cost

    TVC = total variable cost

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    Recognize The Nature And

    Importance Of Profits (continued)

    Opportunity cost:

    The cost of the explicit and implicit

    resources that are forgone when adecision is made.

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    Recognize The Nature And

    Importance Of Profits (continued)

    The five forces framework and industryprofitability:

    1. Entry.2. Power of input suppliers.

    3. Power of buyer.

    4. Industry rivalry.

    5. Substitutes and complements.

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    Recognize The Nature And

    Importance Of Profits (continued)

    The five forces framework and industry profitability:

    Entry (1st)::

    - Entry costs.

    - Speed of adjustment.- Sunk costs.

    - Economies of scale.

    - Network effects.

    - Reputation.

    - Switching costs.

    - Government restraints.

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    Recognize The Nature And

    Importance Of Profits (continued)

    The five forces framework and industryprofitability:

    Power of input suppliers(2nd

    )::- Supplier concentration.

    - Price/productivity of alternative inputs.

    - Relationship specific investments.

    - Supplier switching costs.

    - Government restraints.

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    Recognize The Nature And

    Importance Of Profits (continued)

    The five forces framework and industryprofitability:

    Power of Buyers(3rd)::

    - Buyer concentration.

    - Price/value of substitute products or

    services.

    - Relationship specific investment.- Customer switching costs.

    - Government restraints.

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    Recognize The Nature And

    Importance Of Profits (continued)

    The five forces framework and industryprofitability:

    Substitutes and complements(4th)::

    - Price/value of surrogate products or

    services.

    - Price/value of complementary products

    or services.- Network effects.

    - Government restraints.

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    Recognize The Nature And

    Importance Of Profits (continued)

    The five forces framework and industry profitability:

    Industry rivalry(5th)::

    - Concentration.

    - Price, quantity, quality, or servicecompetition.

    - Degree of differentiation.

    - Switching costs.

    - Timing of decisions.- Information.

    - Government restraints.

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    Understand Incentives

    Incentives affect how resources are usedand how hard workers work.

    No reward for working hard? and incursno penalty if he fails to make soundmanagerial decisions?

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    Understand Markets:

    1. Consumer-Producer Rivalry.

    - Consumers attempt to negotiate or

    locate low prices.

    - Producers attempt to negotiate high

    prices.

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    Understand Markets

    (continued):

    2. Consumer-Consumer Rivalry.

    - When limited quantities of goods are

    available, consumers will compete

    with one another for the right to

    purchase the available goods.

    - An example: auction.

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    Understand Markets

    (continued):

    3. Producer-Producer Rivalry.

    - Given that consumers are scarce,

    producers compete with one another

    for the right to service the customers

    available.

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    Understand Markets

    (continued):

    4. Government And The Market.

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    Use Marginal Analysis

    Marginal analysis:

    States that optimal managerial decisions

    involve comparing the marginal benefitsof a decision with the marginal costs.

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    Marginal Revenue (MR):

    The change in Total Revenue (TR) arising froma change in the managerial control variableOutput (Q).

    MR = D TR /D QMR = marginal revenueTR = total revenue = P. Q

    P = priceQ = outputD = change

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    Marginal Cost (MC):

    The change in Total Cost (TC) arisingfrom a change in the managerial controlOutput (Q).

    MC = D TC /D Q

    MC = marginal cost

    TC = total cost

    Q = output

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    Maximum Profit:

    MC = MB

    Figure 1-2 Page 23.

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    Q(output)

    (1)

    TR (TotalRevenue)

    (2)

    TC (TotalCost)

    (3)

    Profit

    (4)

    MR(MarginalRevenue)

    (5)

    MC(MarginalCost)

    (6)

    MP(MarginalProfit)

    (7)

    0 0 0 0 - - -

    1 90 10 80 90 10 80

    2 170 30 140 80 20 60

    3 240 60 180 70 30 40

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    Case:

    An engineering firm recently conducted a study to determine

    its revenue and cost structure. The results of the study are

    as follows:

    TR(Q) = 300 Q 6 Q2

    TR = Total Revenue

    Q = Output

    TC(Q) = 4 Q2

    TC = Total Cost

    Q = Output

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    Case (continued):

    MR (Marginal Revenue) =?

    MC (Marginal Cost) =?

    Optimal Y? (when MR?MC?).

    Profit?

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    Case (continued):

    MR (Marginal Revenue) =?MC (Marginal Cost) =?Optimal Y? (when MR?MC?).

    Profit?

    MR = 300 12QMC = 8Q

    MR = MC300 -12Q = 8Q

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    Case (continued):

    300 -12Q = 8Q

    -12Q-8Q = -300

    -20Q = -30020Q = 300

    Q = 300/20 = 15

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    Case (continued):

    Profit = TR TC

    TR = 300Q 6Q2

    TR = (300.15) (6.152)

    TR =

    TC = 4Q2

    TC = 4(15)2

    TC =

    Profit = 2250

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    http://managerialandeconomics.wordpress.com/

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    The Fundamentals Of Ir Muhril A M Sc Ph D 34

    Homework:

    Submit Wednesday June 11, 2008

    Suppose that Total Revenue and Total

    Cost from an activity are, respectivelygiven by the following equations:TR = 150 + 28Q 5Q2TC = 100 + 0.8Q

    a. What level of Q maximizes profit?b. What level of profit maximize?


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