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LESSON 2: THE NATURE, SCOPE, AND PRACTICE 4. To Promote Economic Security:

OF MANAGERIAL ECONOMICS Ensuring continued existence of the
market economy by securing incomes.
I. Introduction to Economics 5. To Attain High Level of Economic
Growth(Development): Increasing the
Major Fields of Economics: capacity to produce goods and services
more rapidly than population growth.
 Microeconomics: Deals with individual
decisions of consumers and firms. Types of Economic Systems:
 Macroeconomics: Deals with the nation's
economy as a whole.  Traditional Economy: A subsistence
economy where families produce everything
Tools in Economics: they consume.
 Command Economy: Production is owned
 Positive Science: Deals with what is. by the government.
 Normative Economics: Deals with what it  Market Economy: Resources are privately
ought to be. owned, and decisions are made by
Stages of Scientific Approaches: individuals.
 Mixed Economy: A combination of
1. Observation traditional, command, and market economy
2. Definitions & Assumptions elements.
3. Deductions
4. Empirical Testing Macroeconomic Models:
5. Macroeconomics: 1. AD/AS (Aggregate Demand/Aggregate
Definition: Supply): Represents the price level and level of
real output based on equilibrium in aggregate
Macroeconomics - studies the performance, demand and aggregate supply. (Helps
structure, behavior, and decision-making of the entire understand inflation)
economy. 2. IS/LM (Investment-Saving/Liquidity
Preference-Money Supply): Shows the
Key Concepts: equilibrium in interest rates and output based on
equilibrium in the goods and money markets.
 Aggregation: Combining many individual (Helps understand monetary and fiscal policy)
markets into one overall market.
 Composition of Demand & Supply: Analyzing Macroeconomic Problems:
demand and supply across various markets.
 Economic Fluctuations: Understanding how  National income
markets move up or down together during  Output
economic cycles.  Consumption
 Key Indicators: GDP/GNI, Unemployment  Unemployment
rates, Literacy rates, Price Indices  Inflation
 Savings
Microeconomics & Macroeconomics:  Investment
 International trade
Key Differences:  International finance
 Macroeconomics assumes most details are Shift in Demand Curve:
relatively unimportant, while microeconomics
focuses on these aspects in individual markets.  Inflation: Sustained increase in the price level,
 Macroeconomics ignores these issues, while leading to an outward shift of the aggregate
microeconomics focuses on allocating resources demand curve.
and distributing income.  Recession: A period of decline in total output
and production, leading to job losses and a
Supply & Demand in Macroeconomics: leftward shift of the aggregate demand curve.
 Aggregate Demand Curve: Represents the Macroeconomic Policies:
quantity of domestic products demanded at each
possible price level. 1) Fiscal Policy: refers to the use of government
 Aggregate Supply Curve: Represents the spending and taxation to influence the economy.
quantity of domestic products supplied at each 2) Monetary Policy: refers to actions taken by a
possible price level. central bank to manage the money supply and
credit conditions to influence the economy.
Goals of Economics: 3) Trade Policy: refers to government actions that
1. To Strengthen Economic Freedom: influence international trade flows.
Includes consumer choice, occupational
choice, consumption or saving, ownership II. Introduction to Managerial
of property, and enterprise. Economics
2. To Promote Economic Efficiency: Managerial Economics
Producing more output with fewer
resources.  Applies economic concepts and analysis to help
3. To Promote Economic Stability: managers make rational decisions.
Maintaining consistent growth and  Used in areas like investment assessment,
minimizing economic fluctuations. product choice, and output determination.
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Common applications include:  Emphasized the choice process and social
interaction in economic analysis.
1. Risk analysis
2. Production analysis Growth Economics:
3. Pricing analysis
4. Capital budgeting  Studies factors that explain economic
growth, the increase in output per capita
Managerial Decision Areas: of a country over a long period of time.

- Assessment of investible funds John Maynard Keynes:

- Selecting business area
- Choice of product  Aggregate demand for goods might be
- Determining optimum output insufficient during economic downturns,
- Sales promotion leading to high unemployment and losses
of potential output.
Scope of Managerial Economics:  Introduced the IS-LM model.

- Demand Decision Production Possibility Curve:

- Production Decision
- Theory of Exchange or Price Theory  A graphical representation of the alternative
- All Human Economic Activity combinations of the amounts of goods or
services.
Demand Decision:
The Economic Profession:
 Demand is the willingness of potential customers
to buy a commodity.  Professional economists are employed as
 It defines the market size and customer base consultants, in industry (banking and
composition. finance), and in government agencies.
 Demand analysis is important for a firm's
Law and Economics:
revenue, profits, and employee income.
 Economic analysis of law.
Economics:
 Uses economic concepts to explain the
 A social science concerned with the factors that effects of legal rules, assess economic
determine the production, distribution, and efficiency, and predict future legal rules.
consumption of goods and services.
Political Economy:
 Focuses on the behavior and interactions of
economic agents and how economies work.  Combines economics, law, and political
 Microeconomics vs. Macroeconomics science to explain how political
 Positive Economics vs. Normative Economics institutions, the political environment,
and the economic system influence each
Key Economists and Their Contributions:
other.
Adam Smith:  Studies questions related to monopoly,
rent-seeking behavior, and externalities.
 "The Wealth of Nations"
 Discusses benefits of specialization by Energy Economics:
division of labor.
 Includes topics related to energy supply
 Introduced the "invisible hand" concept.
and energy demand.
Jean Baptiste Say:
HISTORY
 Defined economics as the science of
Thomas Aquinas:
production, distribution, and consumption
of wealth.  Founder of scientific economics, including
monetary, interest, and value theory
John Stuart Mill:
within a natural-law perspective.
 Focused on the distinct difference
Thomas Robert Malthus:
between the market's two roles:
allocation of resources and distribution of  Developed the concept of diminishing
income. returns.
Alfred Marshall: David Ricardo:
 Defined economics as the study of man  Focused on the distribution of income
in the ordinary business of life. among land owners, workers, and
capitalists.
Lionel Robbins:
 Introduced the principle of comparative
 Defined economics as a science that advantage.
studies human behavior as a relationship
Karl Marx:
between ends and scarce means.
 Author of "Das Kapital".
Gary Becker:
 Developed the labor theory of value and
theory of surplus.
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Milton Friedman:

 Emphasized that the social responsibility III. Economic Decisions

of business should be to increase profits
through open and free competition. Decision-Making Principles

Key Economic Concepts:  Decision making lies at the heart of most

important problems managers face. Managerial
 Diminishing Returns: As more units of economics applies the principles of economics to
a variable input are added to a fixed analyze business and government decisions.
input, the marginal product of the
variable input will eventually decline. Seven Examples of Managerial Decisions:
 Comparative Advantage: Countries
can benefit from specializing in the 1) Determining Prices and Outputs to
production of goods and services in which Maximize Profit:
they have a lower opportunity cost. 1.1 Economic Decision Making:
 Invisible Hand: The idea that individual 1.2 Demand Analysis and Optimal Pricing
self-interest in a free market leads to a (Estimation):
beneficial outcome for society as a whole. 1.3 Estimating and Forecasting Demand:
1.4 Theory of Production and Cost:
What Is Corporate Social Responsibility (CSR)? 2) Competing Within the Markets:
2.1 Perfect Competition:
 CSR is the idea that businesses have a 2.2 Monopoly:
responsibility to society beyond just profit 2.3 Oligopoly:
maximization. 2.4 Game Theory and Competitive Strategy:
 It involves self-regulation and positive 3) Public-Sector Decisions:
impact on the world. 3.1 Market Failures and Regulation:
 It's often guided by the "triple bottom 3.1.1 Market Failure Due to Monopoly:
line" - profit, people, and planet. 3.1.2 Market Failure Due to Externalities:
3.1.3 Market Failure Due to Imperfect Information:
Types of Corporate Social Responsibility:
4) Regulatory Decision (Regulation, Public
Environmental Responsibility: Goods, and Benefit-Cost Analysis):
4.1 Benefit-Cost Analysis and Public Goods
5. Minimizing environmental impact through Provision:
practices like reducing pollution, 4.1.1 Public Goods:
regulating energy consumption, and 4.1.2 The Basics of Benefit-Cost Analysis:
offsetting negative impacts. 4.1.3 Evaluating a Public Project:
4.1.4 Valuing Benefits and Costs:
Ethical Responsibility: 5) Decision Making Under Uncertainty:
5.1 Uncertainty, Probability, and Expected Value:
6. Operating in a fair and ethical manner 5.2 Decision Trees:
through fair treatment of stakeholders 5.3 Sequential Decisions:
and ethical sourcing practices. 5.4 Risk Aversion:
Philanthropic Responsibility: 6) Bargaining and Negotiation:
6.1 The Economic Sources of Beneficial
7. Actively making the world a better place Agreement:
through donations and charitable 6.2 Multiple-Issue Negotiations:
initiatives. 6.3 Negotiation Strategy:
7) Auctions and Competitive Bidding:
Economic Responsibility: 7.1 The Advantages of Auctions:
7.2 Bidders Strategies:
8. Ensuring that financial decisions 7.3 Optimal Auctions:
positively impact the environment,
people, and society. SIX STEPS TO DECISION MAKING
Benefits of Corporate Social Responsibility: STEP 1: DEFINE THE PROBLEM
STEP 2: DETERMINE THE OBJECT
9. Powerful marketing tool for positive brand STEP 3: EXPLORE ALTERNATIVES
image. STEP 4: PREDICT THE
10. Improved employee engagement and CONSEQUENCES
satisfaction. STEP 5: MAKE A CHOICE
11. Attraction of potential employees with STEP 6: PERFORM SENSITIVITY
strong values. ANALYSIS
12. Reflection on business practices leading  This framework is flexible. The degree to which a
to innovative solutions and increased decision is analyzed is itself a choice to be made
profits. by the manager.
Phenomenon:  Experience, judgment, common sense,
intuition, and rules of thumb all make
13. The rise of companies identifying as potential contributions to the decision-
socially responsible, such as B making process. However, none of these can
Corporations (B Corps), social purpose take the place of a sound analysis.
corporations (SPCs), and low-profit
limited liability companies (L3Cs).
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 In the private sector, the principal objective is  Demand Curve: A graphical representation of
maximizing the value of the firm. The firm’s value the demand schedule, showing the quantity
is the present value of its expected future profits. demanded at each price.
 In the public sector, government programs and
projects are evaluated on the basis of net social 4. Individual Demand vs. Market Demand
benefit, the difference between total benefits and
 Individual Demand: The demand of a single
costs of all kinds. Benefit-cost analysis is the
consumer for a good or service.
main economic tool for determining the dollar
 Market Demand: The total demand for a good
magnitudes of benefits and costs.
or service by all consumers in a market. Market
 Models offer simplified descriptions of a process
demand is calculated by summing up the
or relationship. Models are essential for
individual demands of all consumers.
explaining past phenomena and for generating
forecasts of the future. Deterministic models take 5. Factors Affecting Demand
the predicted outcome as certain. Probabilistic
models identify a range of possible outcomes  Price of the good: The higher the price, the
with probabilities attached. lower the quantity demanded.
 The principal objective of management is to
maximize the value of the firm by maximizing Price of related goods:
operating profits.
 Substitutes Goods: Goods that can be used in
 Other management goals sometimes include
place of each other (e.g., Coke and Pepsi). If the
maximizing sales or taking actions in the
price of a substitute good increases, the demand
interests of stakeholders (its workers, customers,
for the original good will increase.
neighbors). The principal objective of public
 Complementary Goods: Goods that are used
managers and government regulators is to
together (e.g., cars and gasoline). If the price of a
maximize social welfare. According to the
complementary good increases, the demand for
criterion of benefit-cost analysis--a public
the original good will decrease.
program should be undertaken if and only if its
total dollar benefits exceed its total dollar costs. Income:
 Sensitivity analysis considers how an optimal
decision would change if key economic facts or  Normal Goods: Goods for which demand
conditions are altered. increases as income increases.
 Inferior Goods: Goods for which demand
decreases as income increases.
 Tastes and preferences: Changes in tastes and
IV & V. DEMAND ANALYSIS AND ESTIMATION
preferences can affect demand.
The Economics of Demand  Population: A larger population will generally
lead to a higher demand for goods and services.
I. Demand  Expectations: Expectations about future prices,
 Demand indicates how much of a product incomes, and availability of goods can affect
consumers are both willing and able to buy at current demand.
each possible price during a given period,
assuming other factors remain constant.
II. Law of Demand VI & VII. FORECASTING DEMAND
 The law of demand states that quantity
demanded varies inversely with price, other CONSUMER SURVEYS
things being equal. In other words, the higher the
price, the smaller the quantity demanded.  A direct way to gather information is to ask
people. Whether face to face, by telephone,
Reasons for the Law of Demand: online, or via direct mail, researchers can ask
current and prospective customers a host of
 Substitution Effect: Changes in the relative
price (the price of one good relative to the prices questions:
of other goods) cause the substitution effect. If all  How much of the product do you plan to buy this
prices change by the same margin, there would year?
be no substitution effect.  What if the price increased by 10 percent? Do
 Income Effect: Money income refers to the price rebates influence your purchase decisions,
number of dollars you receive per period. Real
and, if so, by how much?
income, on the other hand, is measured in terms
of how many goods and services you can buy.  What features do you value most?
 Law of Diminishing Marginal Utility: Marginal  Do you know about the current advertising
utility is the additional satisfaction you derive campaign for the product?
from each item. The law of diminishing marginal  Do you purchase competing products? If so, what
utility states that the additional satisfaction you do you like about them?
derive from each additional item consumed EXAMPLE:
decreases as your consumption increases (e.g.,
pizza slices).  Campbell Soup Company questions over
3. Demand Schedule and Demand Curve 100,000 consumers about foods and uses
the responses to modify and improve its
 Demand Schedule: A table that shows the product offerings and to construct demand
relationship between price and quantity equations.
demanded.
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Today, the explosion of online surveys  Firms can also generate data on product
allows firms to collect thousands of demand by selling their product in several
responses (often highly detailed) at smaller markets while varying key demand
very low cost. determinants, such as price, across the markets.
SURVEY PITFALLS  The firm might set a high price with high
advertising spending in one market, a high price
SAMPLE BIAS and low advertising in another, a low price and
 market researchers may ask the right high advertising in yet another, and so on.
questions, but of the wrong people.  By observing sales responses in the different
 Random Sampling – protects against markets, the firm can learn how various pricing
sample bias. and advertising policies (and possible
RESPONSE BIAS interactions among them) affect demand.
TYPES OF MARKET STUDIES:
 Respondents might report what they
believe the questioner wants to hear. CROSS-SECTIONAL DATA
(“Your product is terrific, and I intend to buy it  data observations of economic entities
this year if at all possible.”) (consumers or firms) in different regions or
 Alternatively, the customer may attempt to markets during the same time period.
influence decision making. (“If you raise TIME-SERIES DATA
the price, I definitely will stop buying.”)
NOTE: Neither response will likely reflect the  the firm chooses a single geographic area
potential customer’s true preferences. and varies its key decision variables over time
to gauge market response
RESPONSE ACCURACY  Time-series experiments have the advantage that
 Even if unbiased and forthright, a potential they test a single (and, one would hope,
customer may have difficulty in answering a representative) population, thus avoiding
question accurately. (“I think I might buy it at some of the problems of uncontrolled factors
that price, but when push comes to shove, who encountered in cross-sectional studies.
knows?”) NOTE: Whatever the type, traditional market
 Potential customers often have little idea of how tests and studies are expensive often
they will react to a price increase or to an extremely so
increase in advertising. UNCONTROLLED MARKET DATA
 Cost is a final difficulty.
CONTROLLED CONSUMER EXPERIMENTS  the market itself produces a large amount of
data.
 An alternative to consumer surveys  Many firms operate in multiple markets.
 this approach shares some of the same Population, income, product features, product
difficulties as surveys. quality, prices, and advertising vary across
 Subjects know they are participating in an markets and over time.
experiment, and this may affect their  All of this change creates both opportunity and
responses. difficulty for the market researcher.
 are expensive  Change allows researchers to see how changing
 they generally are small (few subjects) and factors affect demand.
short, and this limits their accuracy.  During the last 20 years, firms have increasingly
 Naay instances na mas oa mag react ang used sophisticated computer-based methods
customers sa price compared sa actual to gather market data.
since they are aware na giexperimentahan DATA MINING
sila   (oa leveled up)
NOTE: Consumer surveys and experiments do  using computers featuring massively parallel
not always accurately foretell actual demand. processors and neural networks, companies can
search through and organize millions of
EXAMPLE pieces of data about customers and their
buying habits.
 Consumers are given money (real or script) and
REGRESSION ANALYSIS:
must make purchasing decisions.
Researchers then vary key demand variables  is a set of statistical techniques using past
(and hold others constant) to determine how the observations to find (or estimate) the equation
variables affect consumer purchases. Because that best summarizes the relationships among
consumers make actual decisions (instead of key economic variables.
simply being asked about their preferences and The method requires that analysts
behavior), their results are likely to be more
accurate than those of consumer surveys. 1) collect data on the variables in question,
CONTROLLED MARKET STUDIES
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2) specify the form of the equation relating the  Q/ ¯¿-is the overall mean
variables,  n- is the number of observations.
3) estimate the equation coefficients, and NOTE: (We use n - 1 instead of n for technical
4) evaluate the accuracy of the equation. reasons.) As the dispersion of
ORDINARY LEAST-SQUARES REGRESSION
the observations increases, so does the
 The most common method of computing variance (mag assume lang ta iring dapit )
coefficients
EXAMPLE STANDARD DEVIATION (S)

An airline’s management used a demand equation to  is simply the square root of the variance
predict ticket sales and to make operating decisions s 2=11,706 /16=731.6 . In turn, the standard
along a Texas–Florida air route. Let’s examine how deviation of the airline’s sales is given by: s=¿√
the airline can use regression analysis to estimate
such an equation. The airline begins by collecting 731.6=27.0 seats.
data.
NOTE: using the sample mean always
TABLE 4.1 Ticket Prices and Ticket Sales along minimizes the sum of squared errors.
an Air Route
- the sample mean is the most accurate
YEAR AND AVERAGE AVERAGE estimate of sales
QUARTER NUMBER OF PRICE
COACH The next step is to translate this scatter plot of
SALES points into a demand equation.
Y1 Q1 64.8 250
Q2 33.6 265 FORMULA:
Q3 37.8 265
Q4 83.3 240 Q=a+bP .
Y2 Q1 111.7 230
Q2 137.5 225 Left-hand variable- (the one being predicted or
Q3 109.6 225 explained) is called THE dependent variable.
Q4 96.8 220
Y3 Q1 59.5 230 Right-hand variable- (the one doing the
Q2 83.2 235 explaining) is called the independent (or
Q3 90.5 245 explanatory) variable.
Q4 105.5 240
Y4 Q1 75.7 250 Each coefficients represents:
Q2 91.6 240
Q3 112.7 240 - a -is called the constant term.
Q4 102.2 235
MEAN 87.2 239.7
- b -(which we expect to have a negative sign)
represents the slope of the demand
STANDARD 27.0 12.7
DEVIATION equation.
EXAMPLE

NOTE: The scatter of observations slopes PREDICTED SALES= DEMAND CURVE – AVERAGE
downward: high prices generally imply low PRICE
ticket sales, and vice versa. (inverse
PS= PREDICTED SALES
relationship )
AS= ACTUAL SALES
MEAN
NOTE: AS IS EQUAL TO THE AVERAGE NUMBER
-
is,( the average) gives us some idea of the
OF COACH SALES SEE FIGURE 4.1 hehe 
level of sales we can expect
SAMPLE VARIANCE Q= 330-1P

- The usual measure of variability Where: b assumes to be 1

FORMULA: STANDARD VARIANCE
YEAR AND QUARTER PS AS
(Q*) (Q)

Y1 Q1 80 64.8
Q2 65 33.6
Q3 64 37.8
WHERE: Q4 90 83.3
Y2 Q1 100 111.7
 Qi - denotes each of the quarterly sales figures Q2 105 137.5
Q3 105 109.5
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Q4 110 96.8
Y3 Q1 100 59.5
Q2 95 83.2
Q3 85 90.5
Q4 90 105.5
Y4 Q1 80 75.7
Q2 90 91.6
Q3 90 112.7
Q4 95 102.2
87.2
MEAN 90.3 87.2

 THEN COMPUTE THE SUM OF SQUARED

ERRORS BY SUBTRACTING THE ACTUAL
SALES FROM THE PREDICTED SALES AND
SQUARED:
FORMULAS:

SUM OF SQUARED ERRORS

∑ (Q*-Q)^2

MEAN OF SUM OF SQUARED ERRORS

∑ (Q*-Q)^2/ n

ESTIMATION ERRORS-This difference (positive

or negative).

NOTE: The sum of squared errors (denoted

simply as SSE) measures the equation’s
accuracy. The smaller the SSE, the more
accurate the regression equation.

-ordinary least-squares regression computes

coefficient values that give the smallest sum of
squared errors

-Naka depende sa estimates ang total sa sum

of squared errors.

ANOTHER INSTANCES:

-Suppose that the estimated equation is of the form

and that the data to be fitted consist of n pairs of x-y
observations (xi,yi).i= 1,2,3……

-Then the least-squares estimators are:

b=∑ ¿/∑ ¿
a= y / –¯ b ¿