“Theories and

Principles Learned

from the Course

Managerial

Economics That Will

Enhance Managerial

Decision Making”
 TABLE OF CONTENTS

Title Page …………………………………………………………………………………………

Table of Contents ……….……………………………………………………………………….

Introduction ……….……………………………………………………………………….

MAIN PARTS

Chapter 1 ………………………………………….……….……………………………

Chapter 2 ………………………………………………………………………………

Chapter 3 ………………………………………………………………………………

Chapter 4 ……………………………………...…….…………………………………

Chapter 5 ………………………………………...…...…………………………………

Chapter 6 ………………………………………...…...…………………………………

Chapter 7 ………………………………………...…...…………………………………

Chapter 8 ………………………………………...…...…………………………………

Conlusion ……….……………………………………………………………………….……….

Bibliography …………………………………………..…………..…………………………

Group Leader and Members………………………………..…………………..……………..…

Introduction
Chapter 1: Introduction to Managerial Economics
Chapter 2: Key Measures and Relationships
Chapter 3: Demand and Pricing
Chapter 4: Cost and Production

In Chapter 4 of Saylor Foundation's free e-book concepts of Managerial

Economics, we studied about multiple theories and principles that may help a business manager

generate a better decision.

One of these are the Average Cost Curves. Average cost is a crucial performance

measure in producing goods or services. It reflects the cost per unit, including variable costs and

fixed costs. The average cost varies as a function of production volume per period, with fixed

costs increasing with quantity produced. The variable cost portion changes less dramatically in

response to production volume than the average fixed cost. In actual production environments,

average variable cost may fluctuate with volume. At very low production volumes, resources

may not be used efficiently, leading to higher variable cost per unit. Pushing production levels to

the upper limits of an operation's capability can result in other inefficiencies, increasing average

variable cost. Figure 4.1 shows a breakdown of average cost into average fixed cost and average

variable cost. Despite the continued decline in average fixed cost, there is a production level

(marked Q*) where the average total cost is at its lowest value, known as the capacity of the

operation.

Figure 4.1 Breakdown of Average Cost Function Into Variable Cost and Fixed Cost Component
 The production level at the lowest average cost point indicates the short-run capacity of

the business operation.

Capacity refers to the volume level where the most efficient operation is achieved in

terms of average cost. Businesses can operate over capacity, but this can lead to higher costs due

to resource overuse or congestion. If the price is high, businesses may make more profit by

operating over capacity. Conversely, if demand is weak, businesses may make better by

operating below capacity. If a firm operates above or below capacity, it may need to resize to

improve profits.

The Long-Run and Short-Run Average Cost and Scale theories and concepts may

also help managers make better decisions. Let's look at the distinctions between the two and how

they could help managers make decisions. Short-run demand and long-run production decisions

are crucial in determining a company's success. In the short run, consumers are limited by their

lifestyles, consumption technologies, and understanding, while in the long run, businesses have

sufficient time to expand, contract, or modify facilities, add employees, reduce employees,

retrain, or redeploy. The duration needed for long-term decisions varies by organization or

industry, with retail outlets potentially redefining themselves in a short period, and electricity

power generators taking decades to plan and construct.

Costs in short-run production decisions are fixed and variable, while in the long run, all

costs can be regarded as variable costs. The ability to alter capacity is another key distinction

between short-run and long-run production. In the short run, a firm's capacity is fixed, but it

cannot optimize production for a selected output level. In the long run, a firm can redesign its

operations to suit a targeted level of production, leading to flatter average cost curves.

A long-run average cost curve represents the lowest possible average cost of an

operation resized optimally for a specific level of production. It trends downward at low target

production rates, but the decline is flatter due to the ability to readjust all factors of production.

This is often due to efficiencies in cost or production that can be exploited for modest increases

in quantity. For example, a business can assign different assembly steps to different workers,

speeding up production. Larger firms, as buyers and sellers, can reduce the contribution of

acquired parts and materials to the average cost.

Figure 4.2 Graph of Long-Run Average Cost (LRAC) Function Shown as the Short-

Run Average Cost (SRAC) at Capacity for Different Scales of Operation

The ability to reduce long-run average costs through increased production efficiencies is

crucial for a firm's survival in competitive seller markets. The minimum efficient scale is the

production level where the long-run average cost curve flattens out. The increase in capacity

needed to achieve minimum efficient scale varies by business type, with some businesses having

a high minimum efficient scale.

Economies of scale are businesses that can lower average costs by increasing their scale,

while diseconomies of scale are those that will see average costs increase if further scale is

increased. Businesses that achieve at least their minimum efficient scale and maintain constant

economies of scale may have constant economies of scale.

Returns to scale are the impact of an increase in scale on production, based on the

percentage increase in potential quantity of output created. If potential output increases by a

higher percentage, operations have increasing returns to scale, while if output increases by the

same percentage, operations show constant returns to scale

 The Economies of Scope and Joint Products theories and principles may also help

managers make a better decision. Businesses often provide multiple goods and services to

reduce per unit costs, creating economies of scope. These economies can be achieved by sharing

fixed costs across product and service lines, reducing per unit variable costs, and doing similar

activities in larger volumes. For example, expanding from selling one product to two similar

products can support the second with minimal cost increase. Alternatively, acquiring raw

materials at a smaller per unit cost by purchasing in larger volumes can reduce labor costs. Joint

products, formed from a combined process, can also create economies of scope. However, these

economies usually dissipate after exploiting the obvious combinations of goods and services, as

the complexity of managing a firm with too many goods and services may offset any cost

savings.

The Cost Approach Versus Resource Approach to Production Planning theories and

concept is also one of those topic that can help to enhance managerial decision making. The

conventional cost approach to production planning involves determining the production

configuration to achieve the desired output at the lowest cost, focusing on reducing costs to

maximize profit. However, achieving true cost minimization is not feasible for most complex

ventures due to the wide range of production options and potential differences in actual costs.

The decision to provide a good or service also requires assessing marginal cost, which may vary

with output levels. This dilemma can be addressed through iteration between output planning and

production/procurement planning or using computer models to determine optimal output levels

and minimum cost production configurations simultaneously. The resource approach, on the

other hand, recognizes key areas of a firm's operations and determines the best goods or services

to exploit these capabilities. Both approaches can help a business manager decide what goods

and services to provide and how to arrange production.

The Marginal Cost of Inputs and Economic Rent theories and principles will help

managers make better decisions in a competitive market by ensuring that the marginal cost of an

input equals the actual cost of acquiring it. In less competitive marketplaces, the marginal cost

may be larger than the price of acquiring an additional unit, as price increases may apply to all

units purchased. For example, employing a new accountant may have a larger marginal cost than

the direct cost of adding the new accountant.

 This can be a decision variable for a business management in the sense that, in cases

where inputs are in a ready supply, the price of an additional unit typically reflects the

opportunity cost or minimum amount needed to induce a new unit to become available.

However, some production inputs may be in limited supply, and the marginal revenue product

may still exceed its marginal cost. The business manager for these goods and services may

demand a price rise to balance the marginal cost with the marginal revenue product.

The Productivity and Learning Curve theories and principles will be helpful as well in

managerial decision making, as productivity is a crucial aspect of production management,

ensuring all resources are used effectively in the creation of goods and services. Smart

businesses assess the productivity of key production resources to track improvements and

compare their operations to others. Marginal product measures how productive an additional unit

of input would be in creating additional output. Average productivity, a ratio of the total number

of units of output divided by the total units of an input, is used to measure collective

performance. Average productivity can be calculated by dividing labor hours billed by

accountants hired or by the total revenue over a period divided by the available square footage.

Productivity may change over time, with individual workers' productivity increasing as

they gain experience and new workers can be trained more effectively. Learning improvements,

also known as learning by doing, can lead to decreased average costs. The learning curve, which

represents the relationship between cumulative production experience and average cost, helps

business managers anticipate these gains and make informed decisions about new ventures.
Chapter 5: Economics of Organization

Enterprise expansion decisions are shaped by factors such as product diversification,

downsizing, capitalizing on economies of scale, acquiring competitors, involvement in key

production stages, and risk mitigation through unrelated products or services. These

considerations play a pivotal role in businesses' decision-making processes.

The value chain for expanding enterprises encompasses raw material extraction, part

processing, assembly, distribution, and the sale of manufactured units to consumers.

Expansion strategies involve horizontal integration (within the same value chain stage),

vertical integration (across different stages), or conglomerate mergers (across diverse value

chains), with firms implementing risk reduction strategies.

Ronald Coase's Transaction Cost Economics guides firms in deciding when to expand,

break apart, or divest business units, elucidating the costs associated with transactions.

Cost centers aim to maximize profitability by minimizing output goals for each division,

facing risks such as compromising quality and stifling innovation. Profit centers strive to

optimize value by balancing revenues and costs, with division managers emphasizing efficiency

and waste reduction.

Transfer price represents the assigned value for an exchanged item. Employee motivation

relies on their belief in utilizing their abilities effectively, influenced by compensation,

incentives, principal-agent problems, and signaling concepts. Managers and executives benefit

from compensation and tournament theory, encouraging extra effort and future success.
Chapter 6: Market Equilibrium and the Perfect Competition Model
Chapter 7: Firm Competition and Market Structure
Chapter 8: Market Regulation

Market Economies Versus Collectivist Economies

• Market Economies - Societies Saylor that rely primarily on markets to determine the

creation of goods and services.

• Collectivist Economies - Societies that primarily use centralized authorities to manage

the creation and distribution of goods and services.

The choice between market economies and collectivist economies significantly

influences managerial decision-making. In market economies, managers navigate dynamic,

competitive landscapes, emphasizing flexibility, profit incentives, and innovation. In collectivist

economies with centralized planning, decision-making is more controlled, constrained by

adherence to central plans, and may involve different incentives. The economic system plays a

pivotal role in shaping the strategies and considerations that guide managerial decisions.

Efficiency and Equity

• Efficiency - is a shortened reference to what economists call Pareto efficiency.

1. Pareto efficiency - The outcome of a set of exchanges between decision-making units in a

market or network of markets.

• Equity - corresponds to the issue of whether the distribution of goods and services to

individuals and the profits to firms are fair.

Efficiency and equity are pivotal in managerial decision-making. Managers aim for

operational efficiency by optimizing resource allocation, reducing waste, and adapting to market

changes. Simultaneously, decisions must align with principles of fairness and just distribution of

resources to maintain ethical standards and positive stakeholder relationships. A balanced

integration of efficiency and equity contributes to sustainable business practices and long-term

organizational success.

Circumstances in Which Market Regulation May Be Desirable

• Market failure caused by seller or buyer concentration.

• Market failure that occurs when parties other than buyers and sellers are affected by

market transactions but do not participate in negotiating the transaction.

• Market failure that occurs because an actual market will not emerge or cannot sustain

operation due to the presence of free riders who benefit from, but do not bear the full costs of,

market exchanges.

• Market failure caused by poor seller or buyer decisions, due to a lack of sufficient

information or understanding about the product or service in all four situations, the case can be

made that a significant degree of inefficiency results when the market is left to proceed without

regulation.

Market regulation becomes desirable in instances of information asymmetry, natural

monopolies, negative externalities, and economic crises. Managers need to recognize these

circumstances to ensure compliance with regulatory frameworks, mitigate risks associated with

market failures, and foster a business environment conducive to sustainability and ethical

practices.

Regulation to Offset Market Power of Sellers or Buyers

• Antitrust laws - statutes developed by governments to protect consumers from predatory

business practices and ensure fair competition.

1. The Philippine Competition Act (PCA) or R.A. 10667 - the primary competition law of

the Philippines for promoting fair competition in the marketplace and protecting the well-being

of consumers in the process.

When the purpose of the price drop is merely to chase out the competition, the practice is

labeled predatory pricing and is considered illegal. Courts are left to determine whether such

actions are simply aggressive competition or are intended to create a more concentrated market

that allows for greater profits in the long run.

• Buyer Power - refers to a customer's ability to reduce prices, improve quality, or

“generally play industry participants off one another.”

The goal of regulation may be to push prices higher.

 Regulation addressing the market power of sellers or buyers is pivotal for managerial

decision-making. It ensures fair competition and prevents abuse of dominance. Managers need to

align pricing, market-entry, and strategic decisions with regulatory frameworks to navigate

competitive landscapes ethically and contribute to a balanced marketplace.

Externalities

• Harmful externalities are called negative externalities; beneficial externalities are called

positive externalities.

• Negative externalities create inequity because third parties are harmed without any

compensation.

• Regulation of externalities usually takes two forms: legal and economic.

1. Legal measures are sanctions that forbid market activity, restrict the volume of activity,

or restrict those who are allowed to participate as buyers and sellers.

2. Economic analysis of externalities involves understanding their nature, recognizing their

impact on market outcomes, and devising policy measures to internalize external costs or

benefits for more efficient resource allocation.

Externalities, whether positive or negative, are crucial in managerial decision-making.

Managers must consider spillover effects on society. Strategies for positive externalities involve

internalizing benefits, while for negative externalities, managers need to mitigate impacts.

Addressing externalities in decision-making promotes corporate responsibility and long-term

business sustainability.

Externalities Taxes

• The optimum tax is the value of the marginal externality damage created by the

consumption of an additional item from a market exchange.

• In the case of positive externalities, the optimum tax is negative.

Externalities taxes are integral to managerial decision-making, especially in addressing negative

externalities like pollution or congestion. Managers must consider these taxes when evaluating

production processes and creating economic incentives for environmentally responsible

practices. This aligns profit motives with regulatory compliance, fostering sustainable business

strategies.

Public Goods and the Risk of Free Rider Consumer

• Free Rider - an individual or entity that benefits from a resource, service, or good without

directly contributing to the cost of providing it.

• In the case of rival goods, the party consuming the product is easily linked to the party

that will purchase the product.

• When the benefits of a purchased good or service can benefit others without detracting

from the party making the purchase, economists call the product a public good.

• As with the market failure for initial entrants with high startup cost, there is a potential

agreement where all benefactors would be willing to pay an amount corresponding to their value

that, if collected, would cover the cost of creating the good or service. The problem is that

individuals would prefer to let someone else pay for it and be a free rider. So, the inability of the

market to function is a case of inefficiency.

Public goods management poses challenges as consumers may engage in free-rider

behavior. The non-excludable and non-rivalrous nature complicates ensuring contributions from

all. Managers must use strategies like pricing or subsidies to address free rider issues,

maintaining effective provision while balancing accessibility and overcoming collective action

problems in decision-making.

Limitations of Market Regulation

• Capture Theory of Regulation - postulates that government regulation is executed to

improve the conditions for the parties being regulated and not necessarily to promote the public’s

interest in reducing market failure and market inefficiency.

For managers, awareness of this phenomenon is essential. It guides strategic decisions

and engagement with regulators, emphasizing transparency and compliance to navigate

regulatory environments with a focus on genuine public interest rather than undue industry

influence.
Conclusion
6. Bibliography (References): Main reference is our prescribed ebook
Group Leader

and

Members
 Antonio, Clarrysse Faye
Q.
Group Leader

Alfaro. Ramsol Michard S. Añoso, Akisha Nicole Asia, Lanz Jervine DG.
Member Member Member

Bayeta, Jedell Kervey O. Chavez, Kristine P. Delos Reyes, Jemerlyn S.

Member Member Member
Donado, Kinno Nail Man
Member