Managerial Economics

The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal

A very broad discipline in that it describes methods used for directing everything from the resources of a household to maximize household welfare to the resources of a firm to maximize profit

An effective manager must:

The total amount of money taken in from sales minus the dollar cost of producing goods or services

It is the first step in making sound decisions

The difference between the total revenue and the total opportunity cost of producing the firm's goods or services

Very hard to measure and therefore managers often overlook them

Two sides to every transaction in a market

3 sources of rivalry that exist in economic transactions

Occurs because of the competing interests of consumers and producers

Reduces the negotiating power of consumers in the marketplace

This disciplining device functions only when multiple sellers of a product compete in the marketplace

The appropriate tool to use for when managers are faced with proposals that require a simple thumbs up thumbs down decision

Additional revenues that stem from a yes or no decision

Additional costs that stem from a yes or no decision

An individual who purchases goods and services from firms for the purpose of consumption

Represent the possible goods and services consumers can afford to consume

Determine which of these goods will be consumed

Simply stated, it restricts consumer behavior by forcing the consumer to select a bundle of goods that is affordable

The bundles of goods a customer can afford

The bundles of goods that exhaust a consumer's income

The value of the output produced by the last unit of an input

The manager's role in guiding the production process:

When a firm acquires an input , it may incur costs in excess of the actual amount paid to the input supplier . These costs are known as:

Transaction costs include:

Costs associated with acquiring an input that are in excess of the amount paid to the input supplier

An expenditure that must be made to allow to parties to exchange but has little or no value and any alternative use

A type of exchange that occurs when the parties to a transaction have made specialized investments

Occurs when the buyer and the seller of an input must locate their plants close to each other to be able to engage and exchange

Refers to a situation where the capital equipment needed to produce an input is designed to meet the needs of a particular buyer and can not be readily adapted to produce inputs needed by other buyers

General investments made by a firm that allow it to exchange with a particular buyer

A fourth type of specialized investment where workers must learn specific skills to work for a particular firm

The bargaining process generally is costly , as it aside employs negotiators to obtain a more favorable price

Specialized investments may be lower than optimal , resulting and higher transaction costs because the input produced is of inferior quality

Once a firm makes a specialized investment , the other party may attempt to "rob" it of its investment by taking advantage of the investment's sunk nature

Pricing strategy in which higher prices are charged during peak hours than during off-peak hours

Pricing strategy in which profits gain from the sale of one product are used to subsidize sales of a related product

Relevant in situations where a firm has cost complementary these and the demand by consumers for a group of products is interdependent. It uses profits made with one product to subsidize sales of another product

Pricing strategy in which a firm optimally sets the internal price at which an upstream division sells an input to a downstream division

A strategy in which a firm advertises a price and a promise to match any lower price offered by a competitor

Pricing strategy and which a firm intentionally varies its price in an attempt to hide price information from consumers and rivals

Selfishly motivated efforts to influence another party's decision

A restriction that limits the quantity of imported goods that can legally enter the country

Like quotas , are designed to limit foreign competition and the domestic market the benefit domestic producers

Two types of tariffs:

A fixed fee that firms must pay the domestic government to be able to sell and domestic market

Requires the importing firms to pay the domestic government a fee on each unit they bring into the country