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

2. Topics of Discussion Decision making in a global environment
Supply and Demand
Preparing the tools we will need
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3. Introduction
Managerial Economics: Applying economic principles to assist business managers in making good decisions.
Identifying problems and opportunities
Analyzing alternatives
Making the best choices
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4. 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
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5. 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
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6. 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
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7. 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
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8. 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.
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9. 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.
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10. 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?
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11. 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
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12. 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.
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13. 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:
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14. Interchanging Dependent and Independent Variables
(1)
(2)
(3)
y=f(x)
x=f(y)
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15. 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.
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16. 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
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17. 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
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18. 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
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19. End of Chapter 1
Copyright © 2004 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the United States copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for resale. The publisher assumes no responsibilities for errors, omissions, or damages, caused by the use of the information contained herein.
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