Key Terms in Managerial Economics
Capital - is anything that is  Uncertainty – It is the condition
 Economics – It is the study of how
society chooses to use productive
resources that have alternative
uses, to produce commodities of
various kinds, and to distribute
them among different groups.
Two key ideas in Economics:
1. Scarcity of goods
2. Efficient use of resources
 Scarcity – it can be termed as
Excess of Demand
Problem of Scarcity
1. Unemployment
2. Unsold stock of inventory
3. Under-utilized capacity of plan
Economics can be studied under two
heads
1. Micro Economics – It is the branch
where the unit of study only
focuses on individual firm or
household.
2. Macro Economics – it deals with
the performance, structure,
behavior, and decision making as a
whole.
The Problem of Economic Organization
1. What to produce?
2. How to produce?
3. How much to produce?
4. For whom to produce?
 Inputs – It is called factors of
production that refers to the
resources used to produce
goods and services in a society.
1. Land - refers to all natural
resources
-The economic return is called
rent
2. Labor – refers to the human
efforts to produce goods and
services
-The economic return called on
labor is called wages.
3.
produced in order to increase
productivity in the future.
The economic return is called
interest.
4. Entrepreneurship – refers to the
management skills, or the
personal initiative used to
combine resources in productive
ways.
 Outputs – the various useful
goods and services that result
from production process.
 Managerial economics – It is the
analysis or major management
decisions using the tools of
economics.
 Decision Making – It is defined
as the process of selecting the
suitable action from among
several alternative courses of
action.
 Management – It is the process
of selecting the suitable action
from among several alternative
courses of action.
Basic Management Function
 Establishing Goals and
Objectives
 Establishing Plans to accomplish
Goals and Objectives
 Organizing the enterprise,
leading and motivation
 Controlling ongoing activities
Kind of Managers
 Level within the organization
 Area of management
Conditions that affect decision making
 Certainty – it is the situation
when decision maker are fully
informed about a problem.
 Risk – Condition when decision
makers rely on incomplete, yet
reliable information
that exists when little or no
factual information is available
about a problem.
Factors Influencing Managerial Decision
 Human and Behavioral
consideration
 Technological factors
 Environmental factors
 Demand Function – is
comprehensive information
which signifies the factors that
influence the demand of
product.
Types of Demand
 Direct Demand – refers to demand
for goods meant for final
consumption.
Derived Demand – refers to
demand for goods which are
needed for further production.
 Induced Demand – when the
demand for product is tied to the
purchase of some parent product.
Autonomous Demand – it is the
demand for product that is not
derived or induced.
 Perishable Goods – refers to final
output which can be used only
once.
 Durable Goods – refers to items
which can be used repeatedly.
 New Demand – If the purchase or
acquisition of an item is meant as
an additional stock
 Replacement Demand – if the
purchase of an item is meant for
maintaining the old stock of capital
/ asset.
 Demand Schedule – it shows the
quantity of the product demanded
by consumers at any given price.
 Demand Curve – it is a graphical
representation of the demand
schedule
 Change in Quantity demanded -
there is a change if the movement
is along the same demand curve.
Changes (decrease or increase) in
products price changes the
movement.
 Change in demand – at the same
price, if the entire demand curve
shifts to the right result to an
increase in demand. It means
more amounts of goods or
services are demanded by
consumers. (ps: vice versa)
Factors that affect the law of Demand
1. Income
2. Expectation of Future prices
3. Prices of related good such as
substitute and compliment
4. Size of the Population
5. Taste and Preferences
6. Promotion and/or advertisement
Exceptions of Law Demand
1. Speculative Market – the higher
the price, the higher the
demand
2. Geffen’s Goods – Staple product
(Ex: NFA rice)
3. Ignorance – based on the quality
of products
 Elasticity – it means
responsiveness or sensitivity
 Demand elasticity – it is a
measure of the degree of
responsiveness of quantity
demanded of a product to a given
change in one of the independent
variables which affect the demand
for the product.
Classification of Demand Elasticity
1. Price Elasticity of Demand – it is
the responsiveness of consumers’
demand to change in price of the
good sold.
𝑄2 − 𝑄1 𝑃2 − 𝑃1
𝐸𝑃 = ÷
(𝑄1 + 𝑄2)/2 𝑃1 + 𝑃2/2
2. Income Elasticity Demand – it is
the responsiveness of consumers
demand to a change in their
income.
𝑄𝑓 − 𝑄𝑖 𝐼𝑓 − 𝐼𝑖
𝐸𝑃 = ÷
(𝑄𝑖 + 𝑄𝑓)/2 𝐼𝑖 + 𝐼𝑓/2
Δ%𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝐸𝑟 =
Δ% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒
 Normal goods – it is the goods
whose demand tends to increase
as the income of consumer rises.
 Inferior Goods - it is the goods
whose demand tends to fall as the
income of consumer rises.
3. Cross Elasticity Demand – it is the
responsiveness of demand for a
certain good in relation to changes
in prices of related goods.
𝑄𝑓 − 𝑄𝑖 𝑃𝑓 − 𝑃𝑖
𝐸𝑃 = ÷ leftward.
(𝑄𝑖 + 𝑄𝑓)/2 𝑃𝑖 + 𝑃𝑓/2
 Substitute – if the computed
elasticity coefficient has positive
result.
 Compliment - if the computed
elasticity coefficient has negative
result.
Interpretation of Elasticity Coefficient
1. Inelastic – when the computed
elasticity coefficient is less than 1.
2. Elastic – when the computed
elasticity is greater than 1.
3. Unitary – when the computed
elasticity is equal to 1.
 Supply – It refers to the quantity of
commodity offered for sale at some
price during a given period of time.
 Supply Schedule – it states what
the volume of goods offered for
sale would be at each of a series of
prices.
 Supply Curve – is a graphical
representation of supply schedule.
Factors on which supply of a
commodity depends:
1. Price of the Commodity
2. Prices of Related Goods
3. Factor of Production
4. State of technology
5. Natural factors
6. Means of Transportation and
Communication
7. Taxation Policy
8. Future expectation of rise in prices
9. Number of firms in the market
 Change in Quantity Supplied –
there is a change if the movement
is along the same curve. Shifting of
curved is cause by the decrease or
increase of product’s own price.
 Changed in Supply – there is a
change if supply when supply
curves shifts rightward or
- If supply curve shifts to right,
there is an increase in amount
of supply.
- If supply curve shifts to left,
there is a decrease in amount
of supply.
 Elasticity of Supply – It is a
measure of the degree of
responsiveness of elasticity of
supply given to a given change
of price.
𝑄2 − 𝑄1 𝑃2 − 𝑃1
𝐸𝑠 = ÷
(𝑄1 + 𝑄2)/2 𝑃1 + 𝑃2/2
Interpretation in Elasticity of Supply
- Inelastic less than1
- Elastic greater than 1
- Unitary equals to 1