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Class notes Management Accounting (CA5102) Managerial Economics & Business Strategy, ISBN: 9780077802615
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Class notes about introduction of managerial economics with description. Microeconomics.
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Module 1: Fundamentals Managerial Economicstheir own by producing goods
The Six Basic Principles of Effective Management and services that can satisfy the
1. Identify goals and constraints market= resources are most
2. Recognize the nature and importance of profits highly valued by society
Main responsibility of market is
3. Understand incentives
4. Understand markets to produce an affordable to
5. Recognize the time value of money consumers based on their
6. Use marginal analysis capacity to pay or purchasing
power
Smith mentioned that be
1. Identify goals and constraints
pursuing itself interest the goal
- The first step in making sound decisions
of maximizing interest a firm
varies on the underlying goals of the
ultimately meets the needs of
manager
society
- Achieving different goals entails making
- This induces new firm to enter the
different decision
markets in which economic profits are
- Different units within a firm may be
available. As more firms enter the
given different goals
industry, the market price falls, and
For example:
economic profits declines
Marketing department- uses their resources
to maximize sales or market share
Finance department- might focus on The nature and importance of profits in a
earning growth or risk reduction strategies free market economy
Accounting profits- total amount of money
They only have one main goal: maximize the
sale & profits and minimize loses taken in from sales (total revenue) minus
- However, constraints make it difficult the amount of cost of producing goods or
for managers to achieve such goals as services
maximizing goals as maximizing profits Formula:
or increasing market share AP= TR- Explicit Costs
- These constraints include: available
Economic profits- the difference between
technology, availability of capital, labor
and the price inputs used in production total revenue and opportunity cost
Opportunity cost- the explicit cost of a
resource plus the implicit cost of
2. An effective manager must recognize the
giving up its best alternative
nature and importance of profits Explicit costs- wages, rent, and
- Profits are a signal to resource holders cost of materials
where resources are most highly valued Implicit- costs- forgone salary or
by society forgone rent
- Smith mentioned that by pursuing its Formula:
self- interest the goal of maximizing EP= TR- Opportunity costs
profits, a firm ultimately meets the
needs of society
Government should not Sample Problem:
intervene with the private 1. Suppose John’s Tailoring Shop uses, his own
activities of man to principle of resources, land, capital, his own time in the
self-individual interest production of goods. Total Revenue from
sales Php100,000, cost of production
Php50,000.
Meaning government should
work on their own and Entrepreneur's own forgone salary
businesses should also work on Php40,000, foregone interest on capital
Aris
, Php1,000 and foregone rent Php2,000. - Heightens competition and reduces the
Calculate his economic profit? margins of existing firms in a wide
variety of industry settings
EP = TR – Economic Costs (Explicit Costs + - A number of economic factors affect
Implicit Costs) EP = 100,000 – 50,000 + the ability of entrants to erode:
40,000 + 3,000 Entry cost- how much it cost to
Economic Profit = Php7,000 entry the industry or business
Sunk cost- cost that cannot be
2. John runs a small pottery firm. He hires one recovered
helper at Php10,000 per year, pays annual Economies of scale- usually
rent of P5,000 for his shop, and spends applied in factories, producing
Php20,000 per year on materials. in bulk or in large amounts=
cost of production declines=
He has been offered Php15,000 per year to therefore the cost of individual
work as a potter for a competitor. Total product declines
annual revenue from pottery sales is Reputation- manage your
Php70,000. Calculate his accounting profit image, act ethically, be legally
and economic profit. registered
Network effects- multiple
AP = 70,000 – 10,000+5,000+20,000 = networks/ suppliers/ customers
Php35,000 Switching cost- cost faced by
EP = 70,000 - 10,000+5,000+20,000+15,000 buyers/ firms when they change
= Php20,000 suppliers
Government restraints-
5 forces framework
- Pioneered by Michael Porter (an 2. Power of Input Suppliers
academician and management guru) - Industry profits tends to be lower when
explained that his framework can be suppliers have the power to negotiate
used to identify: favorable terms for their inputs
State of Competition and Profitability of an industry - Supplier power tends to be low when
inputs are relatively standardized and
relationship-specific investments are
minimal, inputs markets are not highly
concentrated or alternative inputs are
available with similar marginal
productivity
- Suppliers are the sources of resources
that are bases of the product or service
that is purchased (Kotler, 2001)
- For business on how to say ahead of
competition and avoid losses in a long 3. Power of Buyers
run - Industry profits tend to be lower when
- Used for understanding the customers or buyers have the power to
competitiveness of your business negotiate favorable terms for the
environment, and for identifying your products or services produced in the
strategy' potential profitability industry
Determines the competitive intensity and - If the buyer is price sensitive and well-
attractiveness of a market educated about the product, then buyer
power is high
1. Entry - Then if the customer purchases large
volumes of standardized products from
Aris
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