1 Managerial Economics Fundamental Economic Concepts Marginal analysis: Analyse the additional (marginal) benefit of any decision and compare it with additional.

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Presentation transcript:

1 Managerial Economics Fundamental Economic Concepts Marginal analysis: Analyse the additional (marginal) benefit of any decision and compare it with additional (marginal) costs incurred  The marginal cost versus marginal revenue.  The additional costs versus additional (or incremental) profits (or benefits). Example page54

2 Total, Average, and Marginal profit Functions Where is the Efficiency Point? Uints of Output Q Total Profit π Total Profit Average Profit Margianl Profit

3 Present Value and Net Present Value A marginal cost is present value (PV) while marginal profit is a future or expected value (FV). Thus comparison is not correct. How to discount future value to get present value? Now compare PV for Present discount Value Net Present Value NPV is present value minus initial outlay (expenditure) of investment. In perfect competitive market NPV should be zero………………………………….….Why?

4 Meaning and Measuring Risks  Risk is the uncertainty.  Statistical measure of Risks is: the Standard Deviation. Discrete versus continuous functions  Discrete values.  Continuous functions: the normal probability distribution.  z= 

5 The Four Steps Procedure to Estimate Risks (standard deviation)  Estimate most Optimistic outcome.  Estimate most Pessimistic outcome.  The Expected Value is midway between both.  Calculate the standard deviation. (using z table in any Statistics Book)

6 The Normal Probability Distribution Curve The normal distribution is an continuous probability distributions, it may be defined by two parameters the mean ("average", μ) and variance (standard deviation squared) σ2, respectively. The standard normal distribution is the normal distribution with a mean of zero and a variance of onecontinuous probability distributionsmeanvariancestandard deviationmeanvariance.

7 Standard Normal Distribution Once calculated Z is obtained the probability of occurrence can be checked from the table

8 Standard Normal Distribution The opposite way of manipulation when you have the probability of occurrence and you check the table for the standard deviations

9 Coefficient of Variations To compare different investment decisions; it is better to have low Coefficient of Variations, even if r is very high.