May 2022 Edition!

Introduction Managerial Economics is not only valuable to managers of the Fortune 500 companies but it is also valuable to managers of non-for-profits organizations. Managerial economics is valuable to a manager of a food bank who must choose the best means to distribute food to the needy. It is also valuable to a coordinator of a shelter for the homeless whose primary goal is to help the highest possible number of the homeless given a very limited budget. Managerial economics provides important insights into every area of the business and nonbusiness world we live in, including household decision-making.

Managerial Economics Managerial economic, it is the study of how to direct the scarce resources in the manner that most efficiently achieves the managerial goal. Managerial economics is a broad field as it describes the methods that are useful for directing everything from the resources of a household to maximize a household welfare, to the resources of a company to maximize the company profits.

Market Forces: Demand and Supply Demand: the law of demand states that as the price of good falls (rises) and all other things remain constant, the quantity demanded of the good rises (falls) and the market demand curve is a curve indicating the total quantity of a product all consumers are willing and able to procure at each possible price, holding the prices of related products, income advertising and other variables constant. Demand shifters are variables other than the price of the products that influence demand, they include the consumer income, prices of related products, population, consumer expectation, health scares, advertising and consumer tastes. Supply, the market supply curve is a curve that indicates the total quantity of a product that all the producers in a competitive market would produce at each price holding input prices, technology and other variables affecting supply constant. Supply shifters are variables that affect the position of the supply curve and they include input prices, technology/government regulations, number of firms, substitutes in production taxes and producer expectations.

Consumer Behavior A consumer is an individual who purchases goods and services from companies for the purpose of consumption. A manager of a company should not only be interested in who purchases the goods and services but also in who consumes the goods and services. There are two important factors a manager must consider in characterizing the consumer behavior; 1. Consumer opportunities, they represent the possible services and goods that a consumer can afford to consume and 2. Consumer preferences, it determines which of these goods and services the consumer will consume.

Constraints Individuals face constraints in making decisions and the constraints can be legal constraints, time constraints, physical constraints and budget constraints (Budget constraints, it restricts consumer behaiour by mandating the consumer to select a bundle of goods and services that are affordable. The budget set is the bundles of goods and services the consumer can afford while the budget line is the bundles of good and services that exhaust the consumer’s income.)

The Production Function It is an engineering relation that defines the maximum amount of output that can be produced with a number set of inputs. Mathematically, the production function is defined as: Q = F (K, L) Q = the level of the output produced in the production process, K = the quantity of the capital and L = the quantity of labour. That is the maximum amount of output can be produced with K units of capital and L units of labour. The roles of a Manager in a firm is to use the available production function efficiently meaning that the manager must determine how much of each input to use to produce output.

Measures of Productivity One of the important components of the managerial decision making is the determination of the productivity of the inputs used in the manufacturing process. The three most important measures of the productivity are the average productivity, the total productivity and the marginal productivity. Total Product Total Product, TP is the maximum level of the output that can be produced with a fixed amount of the inputs. The production function defines the maximum amount of the output that can be produced with a fixed level of the input. If workers do not put maximum efforts, output will be low. Average Product Average Product AP, the AP of an input is the total product produced divided by the quantity used for the input. It is the major of the output produced per unit of the input. The average product of labour (APL) is APL = Q / L, while the average product of capital (APK) is APK = Q / K. Marginal Product The Marginal product of an input is the change in total output attribute to the last unit of the input. The marginal product of capital MPK Is the change in the total output divided by the change in capital: MPK = Change in Q / Change in K, while the marginal product of the labour MPL is the change in the total output divided by the change in the labour. MPL = Change in Q / Change in L.

The Cost Function The cost function summarizes information about the production process and it provides essential information the manager needs to determine the profit-maximizing level of the output. The cost function equally reduces the amount of information a manager has to process to make an optimal output decisions. Short-Run Costs The short run is defined as the period over which the amounts of some inputs are fixed. The manager is free to alter the use of variable inputs in the short run but the manager is struck with the existing levels of the fixed inputs. Inputs are costly whether fixed inputs or variable inputs, the total cost of producing an output is the short run consists of; • The cost of the fixed inputs and • The cost of the variable inputs Which are both components called fixed costs and variable costs. Fixed Costs FC These are the costs that do not vary with the output, they include the cost of the fixed inputs used in the production. Variable Costs These are the costs that change when the output is changed, they include the costs of the inputs that vary with the output. Short-Run Cost Function It is the function that defines the minimum possible cost of producing each output level when the variable factors are used in the cost minimizing fashion. It summarizes the minimum possible cost of producing the each level of the output when the variable factors are being employed in the cost minimizing way in the presence of the fixed factors of the production. Sunk Costs Sunk costs are costs that are lost forever after they have been paid. Sunk costs are irrelevant to decision making but they affect the calculations of the total profits. Long-Run Costs The manager is free to adjust all the levels of all inputs, as all the costs are variable in the long-run. The long run average cost curve is that curve that defines the minimum average cost of the producing alternative levels of the output allowing for optimal selection of both the fixed and the variable factors of the production.

Economies of Scale The economies of scale exist whenever the long-run average costs decline as the output increases while the Diseconomies of scale exist whenever the long-run average costs increase as the output increases. The multiple cost function is the function that defines cost of producing the given level of two or more types of outputs assuming all the inputs are used efficiently.

Economies of Scope The Economies of scope exist when the total cost of producing two different products within the same company is lower than when the products are being produced by separate companies. It exist when the total cost of producing P1 and P2 together is less than the total cost of producing P1 and P2 separately. That is C(P1) + C(P2) > C(P1+P2).

Cost Complementarity Cost complementarity exists when the marginal cost of producing one output is reduced when output of another product is increased.

Transaction Costs They are cost associated with acquiring of an input that are in excess amount paid to the input supplier. They play an important role in determining the optimal input procurement. The transaction costs of acquiring inputs are the costs of locating a seller of the input, negotiating the price at which the input will be procured and putting the input to use. The Transactions costs include: • Cost of looking for a supplier that is willing to see a given input. • Cost of negotiating the price at which an input will be procured. The costs may be in terms of the opportunity cost of time, legal fees and so forth. • Other investments cost and expenditures required facilitating the exchange.

Conclusion In the business world, success means winning in the market place no matter how you slice it. CEOs and the Managers in both large and small corporations including privately held firms, nonprofit organizations such as hospitals and universities, managers of any of these kinds of organizations cannot expect to make successful decisions without a clear understanding of how the market forces create both opportunities and constraints for businesses.

BIBLIOGRAPHY. Michael R. Baye and Jeffrey T. Prince, Ninth Edition. Managerial Economics and Business Strategy. • Thomas R. Christopher, Charles S. Maurice. Managerial Economics: Foundations of Business Analysis and Strategy.