Managerial Economics Eighth Edition Truett + Truett Chapter 1: Introduction, Basic Principles and Methodology John Wiley & Sons, Inc. 11/11/2018 Slides by Jim Witsmeer

Topics of Discussion Decision making in a global environment Supply and Demand Preparing the tools we will need 11/11/2018

Introduction Managerial Economics: Applying economic principles to assist business managers in making good decisions. Identifying problems and opportunities Analyzing alternatives Making the best choices 11/11/2018

What is “the best choice”? Identify opportunities and problems Consider alternatives Make optimal choices to maximize: Profit Market share Managerial interests Government influence National interests Social and environmental benefits 11/11/2018

Ten Economic Principles Managers make decisions Decisions are between alternatives Alternatives have costs and benefits Decision goal is to add value to the firm Value is measured by profits or expected profits Revenue depends on demand for the product Maximum profit entails minimum cost Strategy must be consistent with market Growth requires rational investment decisions Legal and ethical behavior leads to success 11/11/2018

Supply and Demand Demand Function and Curve Supply Function and Curve Perfect Competition Large number of buyers & sellers Identical products No artificial interferences Perfect knowledge Freedom of entry or exit 11/11/2018

Demand Function and Curve Qx = f(Px,Py,I…) where Qx is quantity demanded and Py, I, etc. are determinants of demand Change in Demand Change in Quantity Demanded 11/11/2018

Supply Function and Curve (surplus) Qx = f(Px,Py,I…) where Qxis quantity supplied and Py, I, etc. are determinants of supply Under Perfect Competition  Market surplus Surplus Qs Qd Pe Qe Market equilibrium A price that is higher than equilibrium will result in a surplus or excess of quantity supplied (Qs)over quantity demanded (Qd). This will cause a drop in price. 11/11/2018

Supply Function and Curve (shortage) Qx = f(Px,Py,I…) where Qxis quantity supplied and Py, I, etc. are determinants of supply Under Perfect Competition Pe Qe  Market shortage Shortage Qs Qd Market equilibrium A price that is lower than equilibrium will result in a shortage or excess of quantity demanded (Qd) over quantity supplied (Qs). This will cause an increase in price. 11/11/2018

Consumer Sovereignty and the Free Market What power does the consumer exert? What limits the suppliers ability to respond? When does the supplier have the power? Does Perfect Competition exist? 11/11/2018

Mathematical Tools Textbook approach The language of mathematics Appendix A Calculus Footnotes The language of mathematics Review of the basics Functions and graphs Total and partial derivatives Rules for differentiation 11/11/2018

Mathematical Functions A function describes a relationship between variables For every value of x there is a value of y In this case, x is the independent variable and y is the dependent variable. 11/11/2018

Linear Functions A linear function can always be put in the form: where I and S are constants and I is the value of y when x is zero and S is the slope. Δx=2 Δy=8 Similarly a multi-variable linear function with three variables can always be put in the form: 11/11/2018

Interchanging Dependent and Independent Variables (1) (2) (3) y=f(x) x=f(y) 11/11/2018

How to Plot a Linear Function Assume • (0,2) (4,18) (1) Substitute x = 0 ; find y = 2 (2) Substitute x = 4 ; find y = 18 (3) Plot both of these points (4) Draw a straight line through these points CAUTION: Where the line is near vertical you may have difficulty finding points within your plot area. 11/11/2018

Slope of a Curved Line • • The slope of a curved line is the slope of the tangent to the curve at that point and is the derivative. ARC • dy/dx • The average rate of change (ARC) between two points on a curved line is the slope of the line including those points 11/11/2018

Rules of Differentiation Constant Rule Power Function Rule Sum-Difference Rule Product Rule Chain Rule Quotient Rule If y = f(x) = C then dy/dx = 0 If y = f(x) = Cxn then dy/dx = nCxn-1 If y = f(x) +g(x) then dy/dx = df(x)/dx + dg(x)/dx If y = f(x)·g(x) then dy/dx = df(x)/dx·g(x) + f(x)·dg(x)/dx If y = f(z) and z = g(x) then dy/dx = dy/dz·dz/dx If y = f(x)/g(x) then 11/11/2018

Partial Derivatives Only apply to multivariable functions y = f(u,v,x,…) symbolizes the partial derivative of y with respect to u If y = f(x,z) = x3 + 5x2z +3xz2 + 10 then and 11/11/2018

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