Lecture 32: Revision

Lecture 1: Introduction to Managerial Economics

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

Lecture 2: Demand

• Demand function– Quantity demand as a function of the independent variables

that influence the quantity demanded• Direct demand

– The direct relationship between the quantity demanded and price (other independent variables held constant)

• Inverse demand– The direct relationship between price and quantity

demanded• Demand curve

– A graphical presentation of inverse demand

General Demand Function

• Six variables that influence Qd

– Price of good or service (P)– Incomes of consumers (M)– Prices of related goods & services (PR)– Taste patterns of consumers (T)– Expected future price of product (Pe)– Number of consumers in market (N)

• General demand function

Qd = f(P, M, PR, T, Pe , N)

Lecture 3: Supply

• Quantity supplied (Qs)

Amount of a good or service offered for sale during a given period of time

• Change in quantity supplied– Occurs when price changes– Movement along supply curve

• Change in supply– Occurs when one of the other variables, or determinants

of supply, changes– Supply curve shifts rightward or leftward

General Supply Function

• Six variables that influence Qs

– Price of good or service (P)– Input prices (PI )– Prices of goods related in production (Pr)– Technological advances (T)– Expected future price of product (Pe)– Number of firms producing product (F)

• General supply function–Qs = f(P, PI, Pr, T, Pe, F)

Market Equilibrium

• Excess demand (shortage)– Exists when quantity demanded exceeds quantity

supplied• Excess supply (surplus)

– Exists when quantity supplied exceeds quantity demanded

Lecture 4: Quantitative Demand Analysis

The Elasticity Concept– Own Price Elasticity– Elasticity and Total Revenue– Cross-Price Elasticity– Income Elasticity

Lecture 5: The Theory of Individual Behavior

I. Consumer Behavior– Indifference Curve Analysis– Consumer Preference Ordering

II. Constraints– The Budget Constraint– Changes in Income– Changes in Prices

III. Consumer EquilibriumIV. Indifference Curve Analysis & Demand Curves

– Individual Demand– Market Demand

Lecture 6:Demand Estimation & Forecasting

Direct Methods of Demand Estimation• Consumer interviews• Market studies & experiments

Demand estimation through marketing Research approach

• Consumer surveys and observational Research

• Consumer Clinics

• Market Experiments

Lecture 7: Production

An entrepreneur must put together resources -- land, labour, capital -- and produce a product people will be willing and able to purchase

PRODUCTION FUNCTIONThe relationship between the amount of input

required and the amount of output that can be obtained is called the production function

LAW OF DIMINISHING RETURNSIt holds that we will get less & less extra output when we add additional

doses of an input while holding other inputs fixed.ISOQUANTAN Isoquant or ISO product curve or equal product curve or a production

indifference curve show the various combinations of two variable inputs resulting in the same level of output.

CONSTANT RETURNS TO SCALEThis denotes a case where a change in all inputs leads to a proportional

change in output.INCREASING RETURNS TO SCALEThis is also called economies of scale. This arises when an increase in all

inputs leads to a more-than-proportional increase in the level of output.

DECREASING RETURNS TO SCALEThis occurs when a balanced increase of all inputs leads to a less than

proportional increase in total output.

Lecture 8: Cost of Production

1. The economic concept of cost and profit

2. Fixed and sunk cost

3. Profit maximization with limited capacity

4. The cost of production

5. Long run cost

Lecture 9: Organizing Production

This lecture explains the role of firms and the problems that all firms face

To maximize profit, a firm must make five basic decisions: What goods and services to produce and in what quantities How to produce—the production technology to use How to organize and compensate its managers and workers How to market and price its products What to produce itself and what to buy from other firms

Lecture 10: Perfect Competition

Define perfect competition Explain how price and output are determined in

perfect competition Explain why firms sometimes shut down temporarily

and lay off workers Explain why firms enter and leave the industry Predict the effects of a change in demand and of a

technological advance Explain why perfect competition is efficient

Lecture 11:The Firm’s Decisions in Perfect Competition

The Firm’s Short-Run Supply CurveA perfectly competitive firm’s short-run supply curve shows how the firm’s profit-maximizing output varies as the market price varies, other things remaining the same.Because the firm produces the output at which marginal cost equals marginal revenue, and because marginal revenue equals price, the firm’s supply curve is linked to its marginal cost curve.But there is a price below which the firm produces nothing and shuts down temporarily.

Lecture 12:Monopoly

Explain how monopoly arises and distinguish between single-price monopoly and price-discriminating monopoly

Explain how a single-price monopoly determines its output and price

Compare the performance and efficiency of single-price monopoly and competition

Lecture 13:Price Discrimination

Price discrimination is the practice of selling different units of a good or service for different prices. To be able to price discriminate, a monopoly must: Identify and separate different buyer types Sell a product that cannot be resoldPrice differences that arise from cost differences are not price discrimination.

Lecture 14:Monopolistic Competition

Define and identify monopolistic competition Explain how output and price are determined in a

monopolistically competitive industry Explain why advertising costs are high in a

monopolistically competitive industry

Lecture 15: Oligopoly

Oligopoly is a market in which a small number of firms compete.In oligopoly, the quantity sold by one firm depends on the firm’s own price and the prices and quantities sold by the other firms.The response of other firms to a firm’s price and output influence the firm’s profit-maximizing decision.

Lecture 16: Oligopoly Games

The possible strategies are: Comply CheatBecause each firm has two strategies, there are four possible outcomes: Both comply Both cheat Trick complies and Gear cheats Gear complies and Trick cheats

Lecture 17: Labor and Capital Market

Factors of production are traded in markets where their prices and quantities are determined by the market forces of demand and supply.This chapter focuses on competitive factor markets.The laws of demand and supply apply to a competitive factor market: the demand curve slopes downward and the supply curve slopes upward.

Lecture 18: Capital Market

Capital markets are the channels through which firms obtain financial resources to buy physical factors of production that economists call capital. The available financial resources come from savings. The real interest rate is the return on capital and is the “price” determined in the capital market

Natural Resource Markets

The price (rent) for land and other renewable natural resources is determined solely by market demand.The market supply curve for land is perfectly inelastic, but the supply curve facing any one firm in a competitive land market is perfectly elastic.Each firm can rent as much land as it wants at the going market price.

Market Power in the Labor Market

Just as a monopoly firm can restrict output and raise price, so can a monopoly owner of a resource restrict supply and raise price.The main source of market power in labor markets is a labor union, which is an organized group of workers that aims to increase wages and influence other job conditions.

Lecture 19: Economic Equations and Their Solutions

• Demand function equation• Supply function equation• Demand and Supply equlibrium

Lecture 20: Economics Applications of Derivatives

• Demand function and elasticity of demand• Supply function and elasticity of supply• Utility function• Production function

Lecture 21: ECONOMIC APPLICATION OF DERIVATIVES - A

• Cost function• Revenue function

Lecture 22: ECONOMIC APPLICATION OF DERIVATIVES - A

• Maximizing utility• Minimizing cost• Maximizing Revenues• Maximization of profits

Lecture 23: ECONOMIC APPLICATION OF MAXIMA AND MINIMA-A

• Maximization of profits

Lecture24: MAXIMIZATION OR MINIMIZATION (OTIMIZATION) OF MULTI-VARIABLE FUNCTIONS OR TWO OR MORE VARIABLE

Lecture 25: CONSTRAINED OPTIMIZATION

1. SUBSTITUTION METHOD

Lecture 26: CONSTRAINT OPTIMIZATION -A

2. LAGRANGE MULTIPLIER METHOD

Lecture 27: Correlation & Regression

Correlation is a statistical technique used to determine the degree to which two variables are related

1. Simple Correlation coefficient (r)

It measures the nature and strength between two variables of the quantitative type.

2.Spearman Rank Correlation Coefficient (rs)• Both variables are quantitative.• Both variables are qualitative ordinal.• One variable is quantitative and the other is qualitative ordinal.

Regression calculates the “best-fit” line for a certain set of data

Lecture 28: Measuring a Nation’s Income

• Gross Domestic Product (GDP) measures total income of everyone in the economy.

• GDP also measures total expenditure on the economy’s output of g&s. The Circular-Flow Diagram: • a simple depiction of the macro economy

• illustrates GDP as spending, revenue, factor payments, and income

• Preliminaries:– Factors of production are inputs like labor, land, capital, and natural

resources. – Factor payments are payments to the factors of production (e.g., wages,

rent).

• Gross Domestic Product (GDP) measures a country’s total income and expenditure.

• The four spending components of GDP include: Consumption, Investment, Government Purchases, and Net Exports.

• Nominal GDP is measured using current prices. Real GDP is measured using the prices of a constant base year and is corrected for inflation.

• GDP is the main indicator of a country’s economic well-being, even though it is not perfect.

Lecture 29: MONEY

• Distinguishing Features of Money:– Medium Of exchange– Unit of Account– Store of Value

Lecture 30: MONETARY POLICY

• Inflation• The Monetary and Credit Policy is the policy

statement, traditionally announced twice a year, through which the State Bank of Pakistan seeks to ensure price stability for the economy.

• Fiscal policy refers to the Revenue and Expenditure policy of the Govt. which is generally used to cure recession and maintain economic stability in the country.

Lecture 31: Fiscal Policy and NI Determination