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DECISION MAKING MODEL

Teamwork skills and the abilit


Managerial economics is the application 1) Establish the Objectives motivate teams is widely acknowle
of microeconomics to decision problems 2) Identify the Problem the single most critical trait of e
faced in the private and public sectors. 3) Examinations of Potential Solutions managers.

4) Analysis of the Relative Costs & Benefits


5) Sensitivity Analysis
6) Implementation of the Decision Economic profit difference betwe
Managerial economics assists managers in revenue and total economic c
efficiently allocating scarce resources, Economic cost includes a “normal
planning organizational strategy, and return on the capital contribution
executing effective tactics. Managers are responsible for proactively firm’s partners.
solving problems in the current business
model before they become crises and for
selecting strategies to assure the more
likely success of the next business model.
economic cost of any activity m
Managerial economics extracts from thought of as the highest valu
microeconomic theory those concepts and alternative opportunity that is fo
techniques that enable managers to select
strategic direction, to allocate efficiently
the resources available to the managers create organizational structure
organization, and to respond effectively to and culture based on the organization’s
tactical issues. mission. opportunity costs—the costs of at
a resource such as investment c
from its next best alternative u
Senior management especially is
managers undertake the critical responsible for establishing a vision of
responsibility of motivating and new business directions and setting
monitoring teamwork. stretch goals to get there.
work skills and the ability to Shareholder wealth- A measure of the
eams is widely acknowledged as Temporary Disequilibrium Theory of value of a firm.
e most critical trait of effective Profit- firms may find themselves earning
managers. a rate of return above or below this long-
run normal return level.
Principal-agent problems arise from the
inherent unobservability of managerial
effort combined with the presence of
c profit difference between total random disturbances in team production.
nue and total economic cost. Monopoly Theory of Profit- effectively
cost includes a “normal” rate of able to dominate the market and
the capital contributions of the persistently earn above-normal rates of
firm’s partners. return. agency costs- Costs associated with
resolving conflicts of interest among
shareholders, managers, and lenders.

mic cost of any activity may be Innovation Theory of Profit- suggests


ght of as the highest valued that above-normal profits are the reward
ve opportunity that is forgone. for successful innovations.
public goods- Goods that may be
consumed by more than one person at the
same time with little or no extra cost, and
for which it is expensive or impossible to
Managerial Efficiency Theory of Profit- exclude those who do not pay.
ity costs—the costs of attracting Above-normal profits can arise because of
rce such as investment capital the exceptional managerial skills of well-
its next best alternative use. managed firms.

Cost-benefit analysis- A resource


allocation model that can be used by
public and not-for-profit sector
organizations to evaluate programs or
investments on the basis of the
magnitude of the discounted benefits
and costs.
FACTORS AFFECTING DEMAND (DEMAND FUNCTION)
EXPECTED EFFECT DEMAND FACTOR
Increase (decrease) Increase (decrease) in price of substitute goods (P s)
Decrease (increase) Increase (decrease) in price of complementary goods (P c)
Increase (decrease) Increase (decrease) in consumer income levels (Y)
Increase (decrease) Increase (decrease) in the amount of advertising and marketing expenditure (A)
Decrease (increase) Increase (decrease) in level of advertising & marketing by competitors (A c)
Increase (decrease) Increase (decrease) in population (N)
Increase (decrease) Increase (decrease) in consumer preferences for the good/service (C p)
Increase (decrease) Expected future price increases (decreases) for the good (P E)
Increase (decrease) Time period of adjustment increases (decreases) (T A)
Decrease (increase) Taxes (subsidiaries) on the good Increase (decrease) (T/S)

FACTORS AFFECTING SUPPLY (SUPPLY FUNCTION)


EXPECTED EFFECT SUPPLY FACTOR
Decrease (increase) Increase (decrease) in the price of inputs (P I)
Decrease (increase) Increase (decrease) in the price of unused substitute inputs (P UI)
Increase (decrease) Technological Improvements (T)
Increase (decrease) Entry (Exit) of other Sellers (EE)
Decrease (increase) Supply disruptions (F)
Decrease (increase) Increase (decrease) in regulatory costs (RC)
Decrease (increase) Expected future price increases (decreases) (P E)
Increase (decrease) Time period of adjustment lengthens (shortens) (T A)
Decrease (increase) Taxes (Subsidies) (T/S)
SHAREHOLDER WEALTH TOTAL, MARGINAL,
stock price V0 2 £ of employee
from period 1 to infinity piet 2 0
required rate of return ke 3 1
REAL OPTION VALUE ROV 2
t 3
4
5

PRESENT VALUE INTEREST FACTOR 0.9708737864 COMPUTATIONS OF EXPECTED RETURNS


i/ percentage 0.03 rj pj
PRESENT VALUE 1165048.543689 200 0.2
Future Value ₱ 1,200,000.00 300 0.6
NET PRESENT VALUE ₱ 165,048.54 400 0.2
Initial Outlay ₱ 1,000,000.00 Expected value:
TOTAL, MARGINAL, & AVERAGE PROFIT RELATIONSHIPS
Total Cost Marginal Cost Average Cost
0- #DIV/0!
3 3 3
7 4 3.5
12 5 4
20 8 5
32 12 6.4

NS OF EXPECTED RETURNS COMPUTATION OF STDEV


rj*pj rj-rbar (rj-rbar)^2 [(rj-rbar)^2]*pj
40 -100 10000 2000
180 0 0 0
80 100 10000 2000
300 4000
STDEV 63.2455532034
COEFFICIENT OF VARIATION 0.2108185107
MARGINAL ANALYSIS & CAPITAL BUDGETING
PROJECT INVESTMENT REQUIRED EXECTED RATE OF RETURN
A 25 0.27
B 15 0.24
C 40 0.21
D 35 0.18
E 12 0.15
F 20 0.14
G 18 0.13
H 13 0.11
I 7 0.08

93.34% that the investment will have a


INTERPRETATION 1.5 stdev below the mean cash flow geater than 205

NORM PROB DIST -1.5019762846 0.0665516168


r 205 0.9334483832
rbar 300
stdev 63.25
DGETING
CUMULATIVE INVESTMENT
25
40
80
115
127
147
165
178
185
PRICE ELASTICITY OF DEMAND #DIV/0! ELASTICITY AND MARGINAL REVENUE
change in quantity demanded #DIV/0! Price Quantity Elasticity Total Revenue
SINGIT LANG TO USE 0 10 1 0 10
Q1 9 2 -6.3333 18
Q2 8 3 -3.4000 24
change in price #DIV/0! 7 4 -2.1429 28
SINGIT LANG TO USE 0 6 5 -1.4444 30
P1 5 6 -1.0000 30
P2 4 7 -0.6923 28
3 8 -0.4667 24
perfectly inelastic 0 2 9 -0.2941 18
inelastic 0 to .99 1 10 -0.1579 10
unit elastic 1
elastic 1 to infinity
perfectly elastic infinity
INCOME ELASTICITY #DIV/0!
Marginal Revenue MR also change in quantity demanded #DIV/0!
0 SINGIT LANG TO USE 0
8 8 Q1
6 6 Q2
4 4 change in income #DIV/0!
2 2 SINGIT LANG TO USE 0
0 0 Y1
-2 -2 Y2
-4 -4
-6 -6 income superior goods +
-8 -8 inferior goods -
CROSS ELASTICITY OF DEMAND #DIV/0!
change in quantity demanded of PRODUCT A #DIV/0!
SINGIT LANG TO USE 0
Q1
Q2
change in price of PRODUCT B #DIV/0!
SINGIT LANG TO USE 0
P1
P2

substitute +
complementary -