Managerial Economics
in a Global Economy
Chapter 1
B
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
 SCOPE OF THE COURSE:
This course emphasizes the practical application of
economic theory to managerial decision-making and
problem solving. A primary focus of the course is to
use the tools of microeconomics together with
quantitative and statistical methods to understand,
analyze, and predict the behavior of consumers and
business firms..
 COURSE REQUIREMENTS:
Prior knowledge of microeconomic & macroeconomics
analysis and statistics is crucial. Student may need to
learn “Internet Searching” for some case studies and
other related assignments.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
COURSE CONTENTS:
·
Introduction: (scope of managerial economics, tools of analysis
& optimization).
·
Demand, markets, and elasticity.
·
Regression analysis, diagnostic statistics, curve fitting, and
violations.
·
Estimating structural demand functions.
·
Forecasting: (Structural demand equations, simple time series
models, & qualitative forecasting).
·
Production, Costs and profitability analysis (short and long run).
·
Market Structure and Globalization: perfect competition,
monopolistic competition, oligopoly, & monopoly, market power
and market domination including; cartels, local and international
dominating firms, and pricing practices (price discrimination,
action reaction pricing policies, and non profit pricing).
·
Capital Budgeting and investment decisions
·
Risk analysis.
·
Linear Programming.
·
Government and Business
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Managerial economics:
provides a wide variety of practical techniques that we can
use to reduce costs and eliminate wastes and maximize profits.
Managerial economics provides a link between economic
theory and the decision sciences in the analysis of managerial
decision making.
Economic theory:
- MICROECONOMICS: focus on individual consumers,
firms, and industries. Its role is relatively important.
Managerial economics draws heavily from microeconomics.
However, managerial economics is quite different.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
- MACROECONOMICS: focus on aggregate output,
income, and employment
 There is a relationship between managerial economics and
decision sciences
 Managerial economics has arisen from a complex mixture of
various parts of economics and the decision sciences
including statistics.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Managerial Decision Problems
Economic theory
Microeconomics
Macroeconomics
Decision Sciences
Mathematical Economics
Econometrics
MANAGERIAL ECONOMICS
Application of economic theory
and decision science tools to solve
managerial decision problems
OPTIMAL SOLUTIONS TO
MANAGERIAL DECISION PROBLEMS
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
THE BASIC PROCESS OF DECISION MAKING
Establish Objectives
Define the Problem
Identify Possible Solutions
Consider input constraints
Consider legal and other constraints
Select the best possible solution
Implement the decision
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Definitions of Profit
Business Profit: Total revenue minus the explicit or accounting
costs of production.




 = TR – TC
e.g.
TR = 100 000,
 = 40 000
TC = 60 000
 Economic Profit: Total revenue minus the explicit and implicit
costs of production.
 Suppose the owner works as the manager and takes the profit
as a reward. But he could manage another company for
30000. He can lend his capital to another firm for 20000.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
 the economic profit = TR - ( TC + Opportunity costs of
factors owned by the firm )
  = 100 000 - ( 60 000 + 30000 + 20000 ) = - 10000
Note: the economic profit is more relevant.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Theories of Profit
 Risk-Bearing Theories of Profit
 Frictional Theory of Profit
 Monopoly Theory of Profit
 Innovation Theory of Profit
 Managerial Efficiency Theory of Profit
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Function of Profit
 Profit is a signal that guides the allocation of society’s
resources.
 High profits in an industry are a signal that buyers
want more of what the industry produces.
 Low (or negative) profits in an industry are a signal
that buyers want less of what the industry produces.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Business Ethics
 Identifies types of behavior that businesses and
their employees should not engage in.
 Source of guidance that goes beyond enforceable
laws.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
The Changing Environment of Managerial
Economics
 Globalization of Economic Activity
 Goods and Services
 Capital
 Technology
 Skilled Labor
 Technological Change
 Telecommunications Advances
 The Internet and the World Wide Web
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Chapter 1: Appendix
The Basics of Demand,
Supply, and Equilibrium
Prepared by , Ph.D.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Law of Demand
 A decrease in the price of a good, all other things
held constant, will cause an increase in the quantity
demanded of the good.
 An increase in the price of a good, all other things
held constant, will cause a decrease in the quantity
demanded of the good.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Change in Quantity Demanded
Price
An increase in price
causes a decrease in
quantity demanded.
P1
P0
Q1
Managerial Economics
Q0
Prof. M. El-Sakka
Quantity
CBA. Kuwait University
Change in Quantity Demanded
Price
A decrease in price causes an
increase in quantity demanded. A
movement from one point to another
a
P0
b
P1
Q0
Managerial Economics
Q1
Prof. M. El-Sakka
Quantity
CBA. Kuwait University
Changes in Demand
 Change in Buyers’ Tastes
 Change in Buyers’ Incomes
 Normal Goods
 Inferior Goods
 Change in the Number of Buyers
 Change in the Price of Related Goods
 Substitute Goods
 Complementary Goods
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Change in Demand
An increase in demand refers
to a rightward shift in the
market demand curve.
Price
P0
Q0
Managerial Economics
Q1
Prof. M. El-Sakka
Quantity
CBA. Kuwait University
Change in Demand
A decrease in demand refers
to a leftward shift in the
market demand curve.
Price
P0
Q1
Managerial Economics
Q0
Prof. M. El-Sakka
Quantity
CBA. Kuwait University
Law of Supply
 A decrease in the price of a good, all other things
held constant, will cause a decrease in the quantity
supplied of the good.
 An increase in the price of a good, all other things
held constant, will cause an increase in the quantity
supplied of the good.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Change in Quantity Supplied
Price
P0
A decrease in price
causes a decrease in
quantity supplied.
P1
Q1
Managerial Economics
Q0
Prof. M. El-Sakka
Quantity
CBA. Kuwait University
Change in Quantity Supplied
An increase in price causes an increase in
quantity supplied. A movement from one
point to another
Price
P1
b
P0
a
Q0
Managerial Economics
Q1
Prof. M. El-Sakka
Quantity
CBA. Kuwait University
Changes in Supply
 Change in Production Technology
 Change in Input Prices
 Change in the Number of Sellers
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Change in Supply
An increase in supply refers
to a rightward shift in the
market supply curve.
Price
P0
Q0
Managerial Economics
Prof. M. El-Sakka
Q1
Quantity
CBA. Kuwait University
Change in Supply
A decrease in supply refers
to a leftward shift in the
market supply curve.
Price
P0
Q1
Managerial Economics
Prof. M. El-Sakka
Q0
Quantity
CBA. Kuwait University
Market Equilibrium
 Market equilibrium is determined at the intersection of
the market demand curve and the market supply curve.
 The equilibrium price causes quantity demanded to be
equal to quantity supplied.
Managerial Economics
Prof. M. El-Sakka
CBA. Kuwait University
Market Equilibrium
Price
D
S
P
Equilibrium price
Q
Managerial Economics
Quantity
Equilibrium quantity
Prof. M. El-Sakka
CBA. Kuwait University
Market Equilibrium
Price
D0
D1
An increase in demand
will cause the market
equilibrium price and
quantity to increase.
P1
P0
Q0 Q1
Managerial Economics
S0
Prof. M. El-Sakka
Quantity
CBA. Kuwait University