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Chapter 1

Foundations of Managerial
Economics

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What is Economics?

•What to produce

•How to produce

•How to distribute

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Definition, scope and functions

Microeconomics Macroeconomics Decision Sciences

Managerial Economics

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The BIG Picture
Income spent Revenue earned
Product R
Market e
Goods demand v
Goods supplied
e
n
Households u Firms
e

Inputs supplied Inputs demand


Factor
Income earned Market Factor costs

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Objective of the Firm
• Profit maximization
- economic profit:
total revenue minus total economic
costs
- economic costs are “relevant” costs

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Invisible Hand

Furthering selfish interest

Furthers growth of the Nation

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Problems in Managerial
Economics
Classified into two broad categories:
• Those requiring ‘optimal’ solutions
- Total, Average and Marginal
magnitudes
• Those requiring equilibrium solutions
- Supply – Demand Analysis

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Graphical Solution to Supply- demand
Analysis

P D
S

S D

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Algebraic Solution
P = 300 – Qd P = 60 + 2Qs
a = 300; b = 1; c = 60; d = 2

300 – Q = 60 + 2Q

Q* = 80 P* = 220

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Total, Average, and Marginal
magnitudes
Q P TR MR Q P TR MR
(=AR)
0 10 0 - 6 4 24 -1
1 9 9 9 7 3 21 -3
2 8 16 7 8 2 16 - 5
3 7 21 5 9 1 9 -7
4 6 24 3
5 5 25 1

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Relation between Total, Average
and Marginal Magnitudes
• When Total is rising, Marginal is positive
• When Total is falling, Marginal is negative
• When Total is maximum, Marginal is zero
• When Average falls/rises, Marginal
falls/rises at a faster rate

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Concept of Margin

• Rate of Change

• Derivative- Calculus

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