LESSON 1: INTRODUCTION TO MANAGERIAL ECONOMICS

Economics - oikos - household; nomos - management = household management.

Economics is the study of how people and society end up choosing, with or without use of
money, to employ scarce resources that could have alternative uses to produce various
commodities among various persons and groups in society. - Paul Samuelson (Economics)

Economics concerns situations in which choices must be made about how to use limited
resources, when to use them, and for what purposes. Resources can be defined as the things
people use to make the commodities they want. - Roger Le Roy Miller (Economics, Today
and Tomorrow)

Economics is the study of choice under the condition of scarcity. - Hall and Loeberman
(Macroeconomics: Principles and Applications)

Economics is a social science that studies and seeks to allocate scarce human and
non-human resources among alternatives in order to satisfy unlimited human wants and
desires. -Bernardo Villegas (Guide to Economics for Filipinos)
Economics is a scientific study which deals with how individuals and society make choices.
-Gerardo Sicat (Economics)

REASONS FOR STUDYING ECONOMICS

Economics is a study of society and such is extremely important. It trains our mind and enables
one to think systematically about the problems of business and wealth. From the study of this
subject, it is possible for one to predict economic trends with some precision. It also helps one
to choose from various economic alternatives.
COMMON WORDS AMONG DEFINITIONS
Scarcity - a situation wherein the amount of something available is insufficient to satisfy the
desire for it.
Resources - the labor, capital, land, and natural resources and entrepreneurship that are used
to produce goods and services.
Unlimited - without limits, infinite
Wants - desires

FACTORS OF PRODUCTION
● Land
● Labor
● Capital
● Entrepreneurship

DIVISION OF ECONOMICS
Microeconomics
● Specific
● Deals with the economic behavior of the individual units such as consumers, firms, the
owners of factors of productions.
Macroeconomics
● General (economy as a whole)
● Deals with the economic behavior of the whole economy or its aggregate such as
government, business, unemployment, inflation, and the like.
● Refers to the management of income, expenditures, and wealth of resources of a nation.

MANAGERIAL ECONOMICS
● A discipline that combines economic theory with managerial practice.
● It tries to bridge the gap between the problems of logic that intrigue economic theorists
and the problems of policy that plague practical managers.
● The subject offers powerful tools and techniques for managerial policy-making.
● Uses economic concepts and quantitative methods to solve managerial problems.
 ● Offers optimal solutions to management decision problems.
➢ Economic Concepts
a. Marginal analysis
b. Theory of consumer demand
c. Theory of the firm
d. Industrial organization and firm behavior
e. Public choice theory
➢ Management Decision Problems
a. Product selection, output, and pricing
b. Internet strategy
c. Organization design
d. Product development and promotion strategy
e. Worker hiring and training
f. Investment and Financing
➢ Quantitative Methods
a. Numerical analysis
b. Statistical estimation
c. Forecasting procedures
d. Game-theory concepts
e. Optimization techniques
f. Information systems

MANAGERIAL ECONOMICS IS A TOOL FOR IMPROVING MANAGEMENT

DECISION-MAKING
LESSON 2: THE NATURE AND SCOPE OF MANAGERIAL ECONOMICS

NATURE OF MANAGERIAL ECONOMICS

1. Microeconomic in Nature - Managerial economics is concerned with the analysis of
finding optimal solutions to decision-making problems of businesses/firms.
2. Managerial economics is a practical subject. Therefore, it is pragmatic.
3. Managerial economics describes what is observed economic phenomenon (positive
economics) and describes what ought to be (normative economics).
4. Conceptual in Nature - Managerial economics is based on strong economic concepts.
5. Macro in Nature - Managerial economics analyzes the problems of the firms in the
perspective of the economy as a whole.
6. It helps to find optimal solutions to business problems. (problem-solving)

SCOPE OF MANAGERIAL ECONOMICS

1. Demand Analysis and Forecasting
2. Cost and Production Analysis
3. Pricing Decisions, Policies, and Practices
4. Profit Management
5. Capital Management

BASIC ECONOMIC QUESTIONS

1. What to produce?
2. How to produce?
3. For whom to produce?

THE CIRCULAR FLOW OF ECONOMIC ACTIVITY

ECONOMIC PRINCIPLES RELEVANT TO MANAGERIAL DECISIONS
1. Division of Labour - The specialization of tasks or jobs within a society or organization,
where individuals or groups focus on specific tasks to increase efficiency and
productivity.
2. Opportunity Cost - The value of the next best alternative that must be forgone when a
decision is made to pursue one option over another.
3. Equimarginal Principle - A concept in economics that suggests individuals or firms
should allocate their resources in such a way that the marginal utility or benefit is equal
across different options to maximize overall utility or profit.
4. Market Equilibrium - The point at which the supply of a product or service matches the
demand for it, resulting in stable prices and quantities exchanged in a competitive
market.
5. Diminishing Returns - A principle in economics stating that as additional units of a
single input are added to a production process while keeping other inputs constant, the
incremental output or benefit will eventually decrease.
6. Game Equilibrium - In game theory, a situation in which players have no incentive to
change their strategies, as they believe their current choices maximize their expected
outcomes, leading to a stable state.
7. Measurement Principles - A set of guidelines and rules for accurately quantifying and
assessing various phenomena or attributes in fields such as science, statistics, and
metrology.
8. Medium of Exchange - An item or asset, typically currency or money, that is widely
accepted in transactions and serves as a common intermediary in the exchange of
goods and services.
9. Income-Expenditure Equilibrium - In macroeconomics, a state where total income in
an economy is equal to total spending, which can help determine the level of economic
activity, including potential changes in employment and production.
10. Surprise Principle - A concept in management and decision-making emphasizing the
importance of considering unexpected or unpredictable events and their potential
impact when making strategic plans or decisions.
LESSON 3: OPTIMIZATION TECHNIQUES AND NEW MANAGEMENT TOOLS
Managerial Economics - concerned with the ways in which managers should make decisions in
order to maximize the effectiveness or performance of the organization they manage.

Optimization Problems:
1. Consumers make buying decisions to maximize utility.
2. Businesses make hiring/capital investment decisions to minimize cost.
3. Businesses make pricing decisions to maximize profits.
4. Consumers make labor decisions to maximize utility.
5. Consumers make savings decisions to maximize utility.

Optimization Techniques - methods for maximizing or minimizing an objective function.

Ex:
1. Consumers maximize utility by purchasing an optimal combination of goods.
2. Firms maximize profit by producing and selling an optimal quantity of goods.
3. Firms minimize their cost of production by using an optimal combination of inputs.

Optimization Techniques
● First step in presenting optimization techniques is to examine ways to express economic
relationships.
● Economic relationships can be expressed in the form of equation, tables, or graphs.
● If the relationship is simple, a table and/or graph may be sufficient.
● If the relationship is complex, expressing the relationship in equational form may be
necessary. Thus, it is also useful because it allows us to use the powerful techniques of
differential calculus in determining the optimal solution of the problem.

Basic Optimization Techniques:

A. Marginal Analysis -
● Enables managers to use economic relationships more effectively.
● The marginal value of a dependent variable is defined as the change in the
independent variable associated with a one unit change in a particular
independent variable.
 ● As long as the value of marginal profit is positive, the company can raise its total
profit by increasing output.
● When marginal profits shifts from positive to negative, total profit will fall with
any further increase in output.
● In maximizing profit, this is a very important concept.
● It compares the additional benefits derived from an activity and the extra cost
incurred by the same activity.
● Serves as a decision-making tool in projecting the maximum potential profits for
the company through comparing the costs and benefits of the activity.
● Marginal is a term used by economists to refer to the changes resulting from one
unit change in activity.
● Concerned with the incremental cost and benefit streaming from a change in
production..
Marginal profit - the marginal value of profit. It is the change in total profit due to a one
unit change in output.
Total profit - dependent variable
Output - independent variable

Uses of Marginal Analysis

1. Observed changes - used to create controlled experiments based on the observed
changes of particular variables.
2. The opportunity cost of an action - used in making a choice among available options.

Rules of Marginal Analysis in Decision-Making

1. Equilibrium Rule - the activity must be carried out until its marginal cost is equal to its
marginal revenue.
2. Efficient Allocation Rule - an activity should be performed until it yields the same
marginal return for every unit of effort. This rule is premised on the idea that a company
producing multiple products should allocate a factor between two production activities
such that each provides an equal marginal profit per unit.

B. Differential Calculus -
● The study of definitions of properties, and applications of derivatives of a function.
 ● Differentiation is the process of finding the derivative.
● Equation is used to represent the relationship between the variable that we are trying to
maximize (ex: profit) and the variables under the control of the decision-maker (ex:
output).
● Can be employed to find the optimal solutions to the decision-maker’s problem.
Ex:
If we let Y be the dependent variable and X be the independent variable, the Y= f (X).
Let Δ denote change.
Hence. The marginal value of Y can be estimated by:
Change in Y = ΔY
Change in X ΔX

Application of Differential Calculus

Rates of Change → Minimum & Maximum Values → Measuring Profit → Measuring Revenue →
Marginal Revenue → Marginal Profit

New Management Tools

1. Benchmarking - a process of measuring the performance of a company's products,
services, or processes against those of another business considered to be the best in
the industry, aka “best in class.” It is to identify internal opportunities for improvement of
the business.
2. Total Equality Management - a structured approach to overall organizational
management. It focuses on improving the quality of an organization's outputs, including
goods and services, through the continual improvement of internal practices.
3. Reengineering - defined as the redesign of business processes—and the associated
systems and organizational structures—to achieve a dramatic improvement in business
performance.
4. The Learning Organization - Learning organization is improved by decentralized
responsibility, teamwork, staff rotation between departments, investing in training and
positive influence on performance.

Other Management Tools/Ideas

● Direct business model
● Networking
 ● Performance Management
● Pricing Power
● Process Management
● Small World Model
● Strategic development
● Virtual integration
● Virtual management, and others.

LESSON 4: MONETARY POLICIES

Monetary Policy -
● Plays a significant role in building the economic character of the country because money
and credit in a modern economy exercise long lasting influence upon the course, nature,
and volume of economic activities.
● Deliberate and conscious management of money supply for the purpose of attaining a
specific objective or a set of objectives.
● It aims at regulating the flow of currency, credit and other money instruments in an
economy.
Objectives of Monetary Policy -
1. Stability in foreign exchange rates,
2. Full employment,
3. Economic Growth,
4. Price Stability,
5. Stability of financial markets, and
6. Neutrality of Money.

Tools of Monetary Policy

Central banks use various tools to implement monetary policies. The widely utilized policy tools
include:
1. Interest rate adjustment - A central bank can influence interest rates by changing the
discount rate. The discount rate (base rate) is an interest rate charged by a central
bank to banks for short-term loans.
2. Change reserve requirements - Central banks usually set up the minimum amount
of reserves that must be held by a commercial bank. By changing the quired amount,
the central bank can influence the money supply in the economy.
 3. Open market operations - The central bank can either purchase or sell securities
issued by the government to affect the money supply. (Ex: Central banks can
purchase government bonds. As a result, banks will obtain more money to increase the
lending and money supply in the economy).

Role of Monetary Policy in Economic Development and Growth

● Economic development and growth is the main objective of the economic policies of
developing countries in the world.
● Monetary policy does not confine to provide solution to boom and depression but also to
the development.
● Economic development is essential for the developing country to face the advance
countries in the world.
Contractionary - When there is “too much money” in the economy supporting overall demand
for goods & services which, in turn, increases inflationary pressures. The BSP tightens the
faucet to reduce the monetary supply. This action dampens demand which could lead to lower
inflation.
This could be done through:
1. Higher interest rates
2. Less lending/borrowing
3. More savings
4. Less spending
Expansionary - When there is “too little money” in the economy which dampens overall demand
for goods and services, the BSP loosens the faucet to expand money supply.
This could be done through:
1. Lower interest rates
2. More lending/borrowing
3. Less savings
4. More spending

Monetary Frameworks (2002-present) Inflation Targeting

1. Government sets inflation target (in consultation with BSP); BSP announces inflation
target.
2. BSP assesses monetary conditions and forecasts inflation.
 3. “Is the inflation forecast in line with the target?” If YES, no change in policy settings; If
NO, BSP adjusts policy settings.
4. BSP communicates through press statements, highlights of Monetary Board meetings,
inflation reports, and open letter to the President

LESSON 5: FISCAL POLICIES

Fiscal Policy -
● Refers to the budgetary policy and it works through the government budget.
● It is the government’s policy on the generation of its resources through taxation and/or
borrowing, as well as the setting of the level and allocation of expenditures.
● Any type of fiscal policy move ultimately affects the government budget and hence its
impact falls on the economy.
● The government of any country collects different types of taxes and also spends on
different heads in a given year.

Objectives of Fiscal Policy

● It is the objective of the government to pursue and maintain sound fiscal policy.
● This is possible through the establishment of an efficient, equitable, and progressive
revenue system.
● The government is committed to adopt a spending strategy consistent with the
macroeconomic development targets and sectoral priorities.

Components of Fiscal Policy

1. Revenue Policy -
● Revenues of the government include both domestic and external revenue, and
borrowings.
● Government’s policy in raising revenues is rooted in the ability to pay concept.
● Revenue generation must be equitable and efficient.
● Revenues can be raised administratively or legislatively.
● The two objectives as to why government raises revenues are: (1) To increase
or raise revenue collections and (2) for regulatory purposes.
 2. Expenditure Policy -
● The government views expenditures as a tool for effectively implementing
public policy.
● Funds are disbursed for the efficient delivery of services to the public and to
help in economic growth by supporting priority sectors.
● The government allocates funds in the most efficient and effective way to ensure
rational and equitable resource allocation.
3. Debt Management Policy -
● It’s the policy of the government to attain a manageable debt level.
● This is one where the country can afford to pay its maturing liabilities as
scheduled.

Instrument of Fiscal Policy

1. Budget
2. Taxation
3. Public Expenditure
4. Public Works
5. Public Debt

The Effect of Fiscal Policy in Economic Development

● To increase the rate of capital formation so that economic growth could be accelerated.
● To encourage saving and investment.
● To check sectoral imbalances so that regional disparities can be removed.
● To check extravagant and superfluous consumption.
● To reduce income and wealth inequalities.
● To raise the standard of living of the country as a whole and to uplift the poor section of
the community.

LESSON 6: TRADE POLICIES

Trade Policy
● The set of agreements, regulations, and practices by a government that affect trade with
foreign countries.
 ● Each nation determines its own standards for trading, including its tariffs, subsidies, and
regulations.
● Trade policies have a significant effect on the international economy and on financial
markets. They affect exchange rates, the availability of goods, and the prices that people
pay for them, among many other economic factors.

Why Nations Trade?

● The factors of production are not evenly distributed throughout the world. (Resource
Distribution)
● When one nation can produce a good at a lower cost than another. (Absolute
Advantage)
● The ability for a nation to produce at a lower opportunity cost. (Comparative Advantage)

How Trade Policy Works?

● Trade policy is established when a government sets standards and laws regarding
international trade.
● In some cases, a nation will pursue a more aggressive protectionist policy designed to
favor its domestic industries over international competitors.
Protectionism policies can include setting quotas on the number of important goods
allowed in a country, imposing tariffs on imported goods, and offering subsidies for
domestic producers. (Tariff - a tax imposed by one country on the goods and services
imported from another country to influence it, raise revenues, or protect competitive
advantages.)
● A nation may want to increase international investment and pursue a free trade policy
(“open trade policy”) that reduces the barriers to doing business.
● Many countries establish trade policies between two extremes, adjusting them as the
global economy and domestic political pressure change.

Benefits of Trade
● Trade expansion can provide a number of economic benefits for a nation. It can fuel
economic growth, improve the job market, lower the costs of goods sold, and raise living
standards. Trade expansion results in a wider variety of product options available for
consumers and businesses.
 ● Trade policies that reduce tariffs, quotas, and other barriers on imports generally lead to
lower prices and more options for consumers. However, manufacturers that sell goods to
domestic customers often prefer a more important restrictive policy.

Some of the Philippine Trade Agreements

● ASEAN Trade in Goods Agreement
● Philippines-Japan Economic Partnership Agreement
● Philippines-European Free Trade Association Free Trade Agreement
● Regional Comprehensive Economic Partnership
● Other Free Trade Agreements

Key Takeaways/Lesson Summary

● Trade policy is a government’s stance on international trade, or a combination of laws
and practices that affects imports and exports.
● Trade policies can include regulations, tariffs, and quotas.
● Some nations want to encourage more trade and pursue open trade policies with certain
other nations, while others want to restrict trade and set policies that protect local
industries from competition.
● Trade policies can have a number of benefits, including economic growth or lower costs
of goods.