Managerial Economics1

Managerial Economics To provide basic knowledge to the learners about the economic concepts, tools of analysis and their applications in the process of business decision-making. Prof. (Dr.) T.R. Dash

Prepared by: CHUOP Theot Therith

2010

Managerial Economics Part I: Questions & Problems

1. As a manager of a firm, how the study of managerial economics will help you in the process of decision making? Explain your answer with the help of examples. 2. What are the determinants of demand in general? Select a product/ service; find out its determinants. Show how they affect the demand for the product/ service. 3. Two managers of Mobitel Mr. Sokheng and Ms. Sokny estimated the expected sales of cell card worth of $10 along with further reduction of its price for the month of April, 2009 as follows:

 Values ($) 10 09 08 07 06 05 04   

Sokheng‟s estimate  Sokny‟s estimate Quantity Quantity 200 150 220 180 230 240 250 300 280 400 300 600 350 800

Calculate the Total Revenue (TR), Marginal Revenue (MR) and Average Revenue (AR) for each value (price $). Show whether demand is elastic or inelastic on the basis of each set of estimates. What is the relationship between TR and elasticity? (Calculations should be done at each value and not only total)

4. The demand for public travel is always linked to the prices of petrol and diesel. Whenever there is a rise in the prices of petroleum products, not only the prices of public transport system increase but also their demand since many people shift from private travel to public travel. 

Which concept in economics describes the effect of a change in the price of one good on the prices and demand for related goods?  – explain in detail.

5. The short run costs (STC) for different levels of output (Q) are given as foll ows: Q STC($)

0 80

20 200

40 60 80 260 300 320

100 340

120 370

140 420

150 453

160 500

180 720

The total revenue (TR) of the firm is $ 4Q. Find out the levels of output at which i. ii. iii.

Total loss is maximized. Total profit is maximized. Break even points.

6. The total product of labor (TP L), average product of labor (AP L), and the marginal product of labor (MPL) schedules are given below. It is assumed that the wage per unit of labor over a period of time is $ 600. L TPL  APL  MPL

0 0 -

1 200 200 -

2 600 300 400

3 1400 466 800

4 2000 500 600

5 2400 480 400

6 2600 434 200

7 2700 388 100

 You are required to derive the total variable cost (TVC), average variable cost (AVC), and the marginal cost (MC) schedules, from the above data. 7. Explain the application of Break even analysis in managerial decision making with examples.

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Managerial Economics Part II: Answers and Solution

1. As a manager of a firm, the study of managerial economics will help me in the process of decision making such following: This course provides me with an understanding of how economics can be used by business leaders to manage and compete more effectively. Tools of microeconomics will be used to evaluate the internal structure, incentives, and decisions within a firm as well as the competitive forces external to the firm.  After the study of this course I am able to understand and apply appropriate economic concepts to assist managerial decision making, such the nature and scope of managerial economics, demand and supply analysis, product analysis, theory of cost, break-even analysis, and competition and market structures. Especially it helps me in the process of decision making to reach the business success with 8 factors understanding. Firstly, economic environment is analyzing on the environment of economic „PEST – Political, Economic, Social and Technological‟ and economic system  – plans, policies, program, and problem of economic. Example, what‟s economics problem in Cambodia? As we know, Cambodia income from agriculture, tourism and garment factory but Cambodia imports technology and raw material from the other countries. So the major problem is low diversity of economic activity (only produce). Secondly consumer behavior, we must understand the need of consumer i.e. in Cambodia GNI per capita in 2006 is 490 dollars or income a day per one is 490/(12*30) = 1.1 $. Means the need of Cambodian consumer is low priced/inexpensive but high volume. Thirdly, understanding production, as a manager must know the market needs  –  what business to start, the process of production, and proper utilization of resource. Fourth, Understanding cost of operation means manager must well know the factor of production such as rental expense, wage, interest, salary. And the other 4 are: understanding competition, understanding investment decision, understanding profit and break even point and understanding macro variable.

2. In general, the determinants of demand are:  Price of the own commodity (P) P increases  D decreases: Negative relation  Income of the consumer (Y)  Y increases  D increases: Positive relation  Taste & Preference of the Consumer (T) T increases  D increases: Positive relation  Price of Related Commodities (Pr)  Price of Substitutes (Ps) PTea increases  Dcoffee increases: Positive relation  Price of Complementary (Pc) Pvcd player increase  Dvcd decreases: Negative relation  Expectation of the Consumer (E)  Expectation of the Future Price (Ep) Ep increases  Cd (Currend demand) increases: Positive relation  Expectation of the Future Income (Ey) Ey decrease  Cd decrease: Positive relation  Number of Consumers (N) N increases  D increases: Positive relation  Distribution of Consumers (D)   Advertisement (A) A increases  D increases: Positive relation Find out the determinants of a product  “Coffee”  D = f(P, Y, PTea, PSugar, Nconsumer, …) where P is price of coffee, Y is consumer‟s income, PTea is price of tea, PSugar is price of suger, N consumer is number of consumer, and etc.  Affecting demand for the coffee: if P increases  D decrease, Y increases   D increases, PTea increases  D increases, PSugar increases  D decreases, N increases  D increases. D is demand for coffee. It means P and P Sugar are negative relation with D (demand for coffee) and Y, PTea, and N are positive relation with D. 3. a/. Calculate the Total Revenue (TR), Marginal Revenue (MR) and Average Revenue (AR) for each value

 Values ($) 10 09 08 07 06 05 04

Sokheng‟s estimate Quantity TR MR 200 2000 220 1980 -1 230 1840 -14 250 1750 -4.5 280 1680 -2.3 300 1500 -9 350 1400 -2

AR 10 09 08 07 06 05 04

Sokny‟s estimate Quantity TR MR 150 1500 180 1620 4 240 1920 5 300 2100 3 400 2400 3 600 3000 3 800 3200 1

AR 10 09 08 07 06 05 04

b/. Show whether demand is elastic or inelastic on the basis of each set of estimates Sokheng‟s estimate . At basis value = $10

Ep =

220 200

10

9 10

200

 x

= 1 Unit elastic

. At basis value = $9 Ep =

230 220

9

89

220

 x

250  230

8  x

7 8

230

= 0.41 inelastic

280 250

7

67

250

 x

= 0.69 inelastic

300 280

6

56

280

 x

= 0.84 inelastic

350  300

5

45

300

 x

9 10

150

= 2 elastic

Ep =

240180

9

89

180

 x

= 3 elastic

Ep =

300 240

8  x

7 8

240

= 2 elastic

Ep =

400 300

7  x

67

300

= 2.33 elastic

. At basis value = $6 = 0.43 inelastic

. At basis value = $5 Ep =

10

 x

. At basis value = $7

. At basis value = $6 Ep =

180150

. At basis value = $8

. At basis value = $7 Ep =

Ep =

. At basis value = $9

. At basis value = $8 Ep =

Sokny‟s estimate . At basis value = $10

Ep =

600 400

6

56

400

 x

= 3 elastic

. At basis value = $5 = 0.83 inelastic

So, 0 26,050 QB3= 300,000/ (10-2) = 37,500 > 26,050  As the result, QB1 of technology I < Estimated sales (Es), so technology I is the best. ii. A means in taking “make or buy decision”  Example: Mr. THERITH plant to run a business. His business need out-source material from the market that costs 14 dollars per unit. If manufactured bye his own business, the TFC would be 40,000 $ and the AVC would be 3 $ per unit. What decision Mr. Therith will consider if the requirement of material for the business is 3,850 units. Solution: Calculate the B-E point: Q B= 44,000/ (14 – 3) = 4,000 > 3,850  According to calculation, QB  > Requirement, therefore Mr. Therith will decide to buy material from the market. iii. Helps in allocating budget for promotional activities Example: the FC for producing a product is 10,000 $. The AVC is 1 $, the sale price is 3 $. Whether the firm will decide to incur an expenditure of 2,000 $ towards promotion if it expects its sale to increase to 7,500 units. The firm will incur the expenditure on promotion or not. Solution: find out the B-E point, Q B= (10,000+2,000)/ (3-1) = 6,000 < 7,500 So, the firm will incur the expenditure on promotion because expected sale > Q B. iv. Guides in Production planning. It is an indicator of maximum contribution towards profit and loss. Example: A university intends to find out the most profitable item to be produced out of running PhD program or DBA program. The Total Fixed Cost is 80,000 dollars in both cases. The fee of program is 1,000 dollars and 1,200 dollars and the Average Variable Cost is 200 $ and 300 $ for PhD program and DBA program respectively. Which one should be produced by the university? Solution: Calculate the B-E point for each case. Let Q B1 is B-E point of PhD program and QB2 is B-E point of DBA program. QB1 = 80,000/(1,000-200) = 100 and Q B2 = 80,000/(1,200-300) = 88  As the result, QB2 < QB1, so the university should produce DBA program.