Chapter 1: Managerial Economics

 Understand the difference between leadership and management

o Managers look at details
o Leaders look at big picture
 Economics: the science of the allocation of scarce resources in order to maximize profit (or
benefit if nonprofit)
o Resource types:
 Labor: work done by humans
 Capital: things that you produce with (buildings, machine, things that have
productive capacity)
 Land
 Entrepreneurial skills

Six Principles for Effective Management:

 1. Understanding constraints.
 Examples include: limited resources, legal constraints, and technological constraints
 2. Understanding markets.
 Multiple players
 Rivalries take place, consumer rivalries (auctions), consumer to producer rivalry (lowest
price possible), producer to producer rivalry (competition)
 3. Understanding incentives.
 Aligning interest
 All kinds of incentives in the market
 4. Importance of profits.
 Capitalism drives this
 Rewarding an entrepreneur that provides that society wants
 Profits are good, free markets
 5. Understanding time value of money.
 Money has value
 Do not let money sit idle
 Investing money helps the economy
 Understand opportunity cost is the interest rate
 PV = sum of future cash flow / (1+i)^t
 1000 per year
 Interest rate is 3% for 5 years
 Therefore PV = 1000 / (1 +.03)^2 + 1000/ (1+.03)^2 + 1000/ (1+.03)^3 + 1000/
(1+.03)^4 + 1000/ (1+.03)^5
 = 4579.71
 Present value of all future earnings is how we value companies
 6. Understanding marginal analysis.
 Maximize profit:
 Profit is revenue - expenses
 P = R(Q) - C(Q)
 dy/dx = ∂r/∂q - ∂c/∂q
 Set this equal to zero
 ∂r/∂q = ∂c/∂q
 Understand that the change in revenue for a one unit change in quantity
 Understand that the change in cost for a one unit change in quantity
 Example: marginal revenue (∂r/∂q)
 MR = MC : Profit is maximized
 Example:
 Revenue: 150 + 28Q - 5Q^2
 Cost: 100 + 8Q
 Marginal Revenue: 28 - 10Q
 Marginal Cost: 8
 How to maximize profit? Marginal Rev = Marginal Cost
 28 - 10 Q = 8
 20 - 10 Q = 0
 20 = 10Q
 Q=2
 Revenue (2) - cost (2) = $70 maximum profit we can obtain