Managerial Economics: WC Aranas

ECONOMICS – is the study of the production, distribution, and growth of wealth in society. It is the study of how individuals and societies optimally
allocate scarce resources to meet their needs and desires.

MANAGERIAL ECONOMICS – deals with the application of the economic concepts, theories, tools, and methodologies to solve practical problems
in a business. In other words, it is the combination of economics theory and managerial theory. It helps the manager in decision-making.

MICROECONOMICS – study of economics at an individual, group or company level. It is the study of economic tendencies, or what is likely to
happen when individuals make certain choices or when the production changes. It does not try to explain what should happen in a market, instead,
only explains what to expect if certain conditions change.

MACROECONOMICS – study of the national economy as a whole.

The following fields may be considered in business/managerial economics:

1. Demand Analysis & Forecasting

2. Cost & Production Analysis
3. Pricing Decisions
4. Profit Management
5. Capital Management

THEORY OF THE FIRM – this theory holds that the over-all nature of companies is to maximize profits. The theory governs decision making in
variety of areas include resource allocation, production techniques, pricing adjustments, and the volume of production.

MICROECONOMICS

DEMAND

- DEMAND is the relationship between the price of a good and the quantity demanded. It is also defined as the schedule of quantities of a
good that people are willing to buy at different prices.
- The QUANTITY DEMANDED of a good is the amount that consumers plan to buy during a period at a particular price.
- The LAW OF DEMAND states that “the higher the price of a good, the smaller the quantity demanded. Higher prices decrease the quantity
demanded for two reasons:
1. SUBTITUTION EFFECT – a higher relative price raises opportunity cost of buying a good. As a result, people buy less of the good as
there could be other available goods with a lower price.
2. INCOME EFFECT – a higher relative price reduces the amount of goods people can afford to buy.
- A DEMAND CURVE shows the inverse relationship between the quantity demanded and price. Demand curves are negatively sloped.

PRICE vs. QUANTITY

₱600.00
₱500.00
₱400.00
PRICE

₱300.00 Demand 1
₱200.00 Demand 2
₱100.00
₱0.00
1 2 3 4 Quantity Demanded

 A change in the price of the product causes movement along the demand curve, also called a CHANGE IN QUANTITY DEMANDED.
 A shift in the demand curve is called a CHANGE IN DEMAND. An increase in demand drives the demand curve to shift rightwards.

The factors that affect the demand for a product are the following:

FACTOR EFFECT ON DEMAND

Price of SUBTITUTE GOODS*
Price of COMPLEMENTARY GOODS**
Expected future prices
Consumer wealth/income
DIRECT: Example: If the price of the pork increases, the demand for beef may increase.
INVERSE: Example: If the price of the gasoline increases, the demand for cars tends to
decrease.
DIRECT: If the price of the good is expected to increase in the future, there will be an increase
in demand.
DIRECT for NORMAL GOODS. As consumer’s income goes up, the demand for many
products (normal goods) increases.
 Managerial Economics: WC Aranas

INVERSE for INFERIOR GOODS: Demand for inferior goods (instant noodles, sardines)
Consumer wealth/income increases as consumer’s income decreases since consumer buy more inferior goods when
they are short for money.
Population Growth DIRECT: An increase in population increases number of potential buyers.
Size of Market DIRECT: As market size expands, demand for the product also increases.
INDETERMINATE: The effect depends on whether the shift in taste or preference is favorable
Consumer tastes/preference
or unfavorable to the demand for the product.
*SUBTITUTE GOODS are those goods that can be used in place of another because they could perform the same function: butter and
margarines; pens and pencils.
**COMPLEMENTARY GOODS are products that go hand in hand: whiteboard & whiteboard markers; CPU and monitors.

ELASTICITY OF DEMAND (ED) – which measures the sensitivity of demand to changes in price, is computed:

∆ % 𝐢𝐧 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐃𝐞𝐦𝐚𝐧𝐝 ∆ 𝐢𝐧 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐃𝐞𝐦𝐚𝐧𝐝𝐞𝐝 ∆ 𝐢𝐧 𝐏𝐫𝐢𝐜𝐞

𝑬𝒍𝒂𝒔𝒕𝒊𝒄𝒊𝒕𝒚 𝒐𝒇 𝒅𝒆𝒎𝒂𝒏𝒅 = = ÷
∆% 𝐢𝐧 𝐏𝐫𝐢𝐜𝐞 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐏𝐫𝐢𝐜𝐞

Example: Day 1 – unit price was set at P 2.50 each, the sales reach 200 units.
Day 2 – unit price was lowered to P 1.50 each, the sales increased to 400 units.
Using the above formula: ED = (200/300) ÷ (1.00/2.00) = 1.33
 If ED > 1, demand is said to be ELASTIC (sensitive to price changes)
 If ED = 1, demand is said to be UNIT- ELASTIC/UNITARY (insensitive to price changes)
 If ED < 1, demand is said to be INELASTIC (not that sensitive to price changes)

The elasticity of demand is greater for a product when there are more substitutes for a good, a larger proportion of income is spent on the
good, and a longer period of time is considered. For example, the demand for LUXURY goods tends to be more elastic than the demand
for necessities.

- If demand is price-elastic, an increase in sales price results in a decrease in the total revenue for all producers. In the above example,
demand is elastic, (1.33), the price decline of 1-peso resulted in an increase in total revenue Php 600.00 (400 @ 1.50) vs Php 500.00 (200
@ 2.50).
- An individual demands a particular good because of the utility (satisfaction) received form consuming it. The more goods an individual
consumes, the more utility the individual receives. However, the marginal (additional) utility from consuming each additional unit
decreases. This is referred to as the LAW OF DIMINISHING MARGINAL UTILTY.
- CONSUMPTION decisions depend on many factors but the main one is PERSONAL DISPOSABLE INCOME. Personal Disposable
Income is the amount of income consumers have after paying taxes to the government. When personal disposable income goes up,
consumers buy more.
- The consumer’s MARGINAL PROPENSITY TO CONSUME (MPC) describes how much of each additional peso in personal disposable
income that the consumer will spend. The MARGINAL PROPENSITY TO SAVE (MPS) is the percentage of additional income that is
saved. Since consumer can either spend or save money, then MPC + MPS = 100%

SCENARIO #1 SCENARIO #2

A neighboring factory that produces A rival company cuts the price of their
Xbox games drops their price as part of version of the Xbox, making it half the
Independence Day Sale. price of our product.

What happens to our demand curve? What happens to our demand curve?
Explain Explain

SCENARIO #4
SCENARIO #3
Google and facebook cut its services
The local paper mill in a small town
to Huawei phones. As a result, Huawei
(where Xbox sales are high) closes,
cuts its price to P 100.00 per unit on
causing many people to loose their
any model.
jobs
What happens to the demand curve of
What happens to our demand curve?
all other mobile phone companies?
Explain
Explain
 Managerial Economics: WC Aranas

QUIZ NO. 1: 50 points – 1 hour

Part 1: Assuming 10 years from now, you’re the sole proprietor and the accountant of Your Company. Your Company is a merchandise company
selling various products to the general market. Assuming that the following data were available:
1. Which product is the most elastic in terms of demand? Support your answer. Computation can be used. 10 points
2. Which product provides the greatest value to Your Company? Support your answer. Computation can be used. 10 points
3. Which product do you think is a product within the basic needs of your market? Why? 10 points

Particulars 2017 2018

Beginning Inventory for Product 1 (in units) 10,000 10,000
Beginning Inventory for Product 2 (in units) 25,000 30,000
Beginning Inventory for Product 3 (in units) 6,000 9,000
Purhases for Product 1 30,000 20,000
Purhases for Product 2 25,000 35,000
Purhases for Product 3 10,000 10,000
Ending Inventory for Product 1 10,000 10,000
Ending Inventory for Product 2 20,000 20,000
Ending Inventory for Product 3 6,000 7,000
Gross Sales from Product 1 95,000 100,000
Gross Sales from Product 2 95,000 120,000
Gross Sales from Product 3 400,000 600,000
Total Expenses (10:35:55) 200,000 500,000

Part 2: Define the following: 3 points each

1. Demand Analysis & Forecasting
2. Microeconomics
3. Demand Curve
4. Elasticity of Demand
5. Price Elastic

Part 3: What is the relevance and uses of microeconomics? 5 points

QUIZ NO. 1: 50 points – 1 hour

Part 1: Assuming 10 years from now, you’re the sole proprietor and the accountant of Your Company. Your Company is a merchandise company
selling various products to the general market. Assuming that the following data were available:
1. Which product is the most elastic in terms of demand? Support your answer. Computation can be used. 10 points
2. Which product provides the greatest value to Your Company? Support your answer. Computation can be used. 10 points
3. Which product do you think is a product within the basic needs of your market? Why? 10 points

Particulars 2017 2018

Beginning Inventory for Product 1 (in units) 10,000 10,000
Beginning Inventory for Product 2 (in units) 25,000 30,000
Beginning Inventory for Product 3 (in units) 6,000 9,000
Purhases for Product 1 30,000 20,000
Purhases for Product 2 25,000 35,000
Purhases for Product 3 10,000 10,000
Ending Inventory for Product 1 10,000 10,000
Ending Inventory for Product 2 20,000 20,000
Ending Inventory for Product 3 6,000 7,000
Gross Sales from Product 1 95,000 100,000
Gross Sales from Product 2 95,000 120,000
Gross Sales from Product 3 400,000 600,000
Total Expenses (10:35:55) 200,000 500,000

Part 2: Define the following: 3 points each

1. Demand Analysis & Forecasting
2. Microeconomics
3. Demand Curve
4. Elasticity of Demand
5. Price Elastic

Part 3: What is the relevance and uses of microeconomics? 5 points

Managerial Economics: WC Aranas
 Managerial Economics: WC Aranas

SUPPLY
- SUPPLY is the relationship between the price of the good and the quantity supplied. It is also defined as the schedule of quantities of a
good that people are willing to sell at different prices.
- The QUANTITY SUPPLIED as the amount of a good that producers plan to sell at particular price during a given time period.
- The LAW ON SUPPLY states that “the higher the price of a good, the greater is the quantity supplies”
- A SUPPLY CURVE shows the positive relationship between the quantity supplied and price” Supply curves are positively sloped.

PRICE vs. QUANTITY

₱600.00
₱500.00
₱400.00
PRICE

₱300.00 Supply 1
₱200.00 Supply 2
₱100.00
₱0.00
1 2 3 4 Quantity Supplied

 A change in the price of the product causes movement along the supply curve, also called a CHANGE IN QUANTITY SUPPLIED.
 A shift in the supply curve is called a CHANGE IN SUPPLY. An increase in supply drives the supply curve to shift rightwards.

The factors that affect the supply for a product are the following:

FACTOR EFFECT ON DEMAND

Production Cost INVERSE: As production cost go up, fewer products will be supplied
Price of COMPLEMENTARY GOODS** INVERSE: Example: If the price of the gasoline increases, the demand for cars tends to
decrease.
Expected future prices DIRECT: If the price of the good is expected to increase in the future, there will be an increase
in demand.
Consumer wealth/income DIRECT for NORMAL GOODS. As consumer’s income goes up, the demand for many
products (normal goods) increases.
Consumer wealth/income INVERSE for INFERIOR GOODS: Demand for inferior goods (instant noodles, sardines)
increases as consumer’s income decreases since consumer buy more inferior goods when
they are short for money.
Population Growth DIRECT: An increase in population increases number of potential buyers.
Size of Market DIRECT: As market size expands, demand for the product also increases.
Consumer tastes/preference INDETERMINATE: The effect depends on whether the shift in taste or preference is favorable
or unfavorable to the demand for the product.
*SUBTITUTE GOODS are those goods that can be used in place of another because they could perform the same function: butter and
margarines; pens and pencils.
**COMPLEMENTARY GOODS are products that go hand in hand: whiteboard & whiteboard markers; CPU and monitors.

- ELASTICITY OF DEMAND (ED) – which measures the sensitivity of demand to changes in price, is computed:

∆ % in Quantity Demand ∆ in Quantity Demanded ∆ in Price

𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 = = ÷
∆% in Price Average Quantity Average Price

Example: Day 1 – unit price was set at P 2.50 each, the sales reach 200 units.
Day 2 – unit price was lowered to P 1.50 each, the sales increased to 400 units.
Using the above formula: ED = (200/300) ÷ (1.00/2.00) = 1.33
 If ED > 1, demand is said to be ELASTIC (sensitive to price changes)
 If ED = 1, demand is said to be UNIT- ELASTIC/UNITARY (insensitive to price changes)
 If ED < 1, demand is said to be INELASTIC (not that sensitive to price changes)

The elasticity of demand is greater for a product when there are more substitutes for a good, a larger proportion of income is spent on the
good, and a longer period of time is considered. For example, the demand for LUXURY goods tends to be more elastic than the demand
for necessities.
 Managerial Economics: WC Aranas

- If demand is price-elastic, an increase in sales price results in a decrease in the total revenue for all producers. In the above example,
demand is elastic, (1.33), the price decline of 1-peso resulted in an increase in total revenue Php 600.00 (400 @ 1.50) vs Php 500.00 (200
@ 2.50).

- An individual demands a particular good because of the utility (satisfaction) received form consuming it. The more goods an individual
consumes, the more utility the individual receives. However, the marginal (additional) utility from consuming each additional unit
decreases. This is referred to as the LAW OF DIMINISHING MARGINAL UTILTY.

- CONSUMPTION decisions depend on many factors but the main one is PERSONAL DISPOSABLE INCOME. Personal Disposable
Income is the amount of income consumers have after paying taxes to the government. When personal disposable income goes up,
consumers buy more.

- The consumer’s MARGINAL PROPENSITY TO CONSUME (MPC) describes how much of each additional peso in personal disposable
income that the consumer will spend. The MARGINAL PROPENSITY TO SAVE (MPS) is the percentage of additional income that is
saved. Since consumer can either spend or save money, then MPC + MPS = 100%
-