1. MANAGERIAL ECONOMICS 11th EditionBy
Mark Hirschey

2. Nature and Scope of Managerial Economics
Chapter 1

3. Chapter 1 OVERVIEW How Is Managerial Economics Useful?
Theory of the Firm
Profit Measurement
Why Do Profits Vary among Firms?
Role of Business in Society
Structure of this Text

4. Chapter 1 KEY CONCEPTS managerial economics theory of the firm
expected value maximization
value of the firm
present value
optimize
satisfice
business profit
normal rate of return
economic profit
profit margin
return on stockholders' equity
frictional profit theory
monopoly profit theory
innovation profit theory
compensatory profit theory

5. How Is Managerial Economics Useful?
Evaluating Choice Alternatives
Identify ways to efficiently achieve goals.
Specify pricing and production strategies.
Provide production and marketing rules to help maximize net profits.
Making the Best Decision
Managerial economics can be used to efficiently meet management objectives.
Managerial economics can be used to understand logic of company, consumer, and government decisions.

7. Theory of the Firm Expected Value Maximization
Owner-managers maximize short-run profits.
Primary goal is long-term expected value maximization.
Constraints and the Theory of the Firm
Resource constraints.
Social constraints
Limitations of the Theory of the Firm
Alternative theory adds perspective.
Competition forces efficiency.
Hostile takeovers threaten inefficient managers.

9. Profit Measurement Business Versus Economic Profit
Business (accounting) profit reflects explicit costs and revenues.
Economic profit.
Profit above a risk-adjusted normal return.
Considers cash and noncash items.
Variability of Business Profits
Business profits vary widely.

10. Why Do Profits Vary Among Firms?
Disequilibrium Profit Theories
Rapid growth in revenues.
Rapid decline in costs.
Compensatory Profit Theories
Better, faster, or cheaper than the competition is profitable.

11. Role of Business in Society
Why Firms Exist
Business is useful in satisfying consumer wants.
Business contributes to social welfare
Social Responsibility of Business
Serve customers.
Provide employment opportunities.
Obey laws and regulations.

13. Structure of this Text Objectives
Understand usefulness of economics in describing managerial behavior.
Understand how economics can be used to improve managerial decisions.
Appreciate vital role of business in society.

14. MANAGERIAL ECONOMICS 11th EditionBy
Mark Hirschey

15. Demand and Supply
Chapter 3

16. Chapter 3 OVERVIEW Basis for Demand Market Demand Function
Demand Curve
Basis For Supply
Market Supply Function
Supply Curve
Market Equilibrium

17. Chapter 3 KEY CONCEPTS demand direct demand utility derived demand
demand function
demand curve
change in the quantity demanded
shift in demand
Supply
supply function
supply curve
change in the quantity supplied
shift in supply
equilibrium
market equilibrium price
surplus
shortage
comparative statics analysis

18. Basis for Demand Direct Demand Derived Demand
Demand is the quantity customers are willing to buy under current market conditions.
Direct demand is demand for consumption.
Derived Demand
Derived demand is input demand.
Firms demand inputs that can be profitably employed.

19. Market Demand Function
Determinants of Demand
Demand is determined by price, prices of other goods, income, and so on.
Industry Demand Versus Firm Demand
Industry demand is subject to general economic conditions.
Firm demand is determined by economic conditions and competition.

20. Demand Curve Demand Curve Determination
The price-quantity demanded relation.
All non-price variables are held constant.

22. Relation Between the Demand Curve and Demand Function
Move along demand curve when price changes.
Shift to another demand curve when non-price variables change.

24. Basis For Supply How Output Prices Affect Supply
Firms offer supply to make profits.
Higher prices boost the quantity supplied.
Lower prices cut the quantity supplied.
Other Factors That Influence Supply
Everything that affects marginal production costs affects supply.
If MC falls, supply rises.
If MC rises, supply falls.

25. Market Supply Function
Determinants of Supply
Supply is determined by price, prices of other goods, technology, and so on.
Industry Supply Versus Firm Supply
Firm supply is determined by economic conditions and competition.
Industry supply is the horizontal sum of firm supply.

26. Supply Curve Supply Curve Determination
The price-quantity supplied relation.
All non-price variables are held constant.

28. Relation Between Supply Curve and Supply Function
Move along supply curve when price changes.
Shift to another curve when non-price variables change.

30. Market Equilibrium Surplus and Shortage Surplus is excess supply.
Shortage is excess demand.

32. Comparative Statics: Changing Demand
Equilibrium changes with demand shifts.
Comparative Statics: Changing Supply
Equilibrium changes with supply shifts.
Comparative Statics: Changing Demand and Supply

34. MANAGERIAL ECONOMICS 11th EditionBy
Mark Hirschey

35. Consumer Demand
Chapter 4

36. Chapter 4 OVERVIEW Utility Theory Indifference Curves
Budget Constraints
Individual Demand
Demand Curves and Consumer Surplus
Consumer Choice
Optimal Consumption

37. Chapter 4 KEY CONCEPTS budget constraint income effect
utility
nonsatiation principle
indifference
ordinal utility
cardinal utility
utility function
utils
market baskets
marginal utility
law of diminishing marginal utility
indifference curves
substitutes
complements
perfect substitutes
perfect complements
budget constraint
income effect
substitution effect
price-consumption curve
income-consumption curve
Engle curve
normal goods
inferior goods
consumer surplus
two-part pricing
bundle pricing
optimal market basket
revealed preference
marginal rate of substitution
consumption path

38. Utility Theory Assumptions About Consumer Preferences
More is better.
Consumers can rank preferences.
Consumers ran-order desirability of products.
Utility Functions
Descriptive statement relates well-being and consumption.
Marginal Utility
Added benefit is focus of consumers.
Law of Diminishing Marginal Utility
Marginal utility eventually declines for everything.

40. Indifference Curves Basic Characteristics of Indifference Curves
Higher indifference curves are better.
Indifference curves do not intersect.
Indifference curves slope downward.
Indifference curves are concave to origin.
Perfect Substitutes and Perfect Complements
Perfect substitutes satisfy the same need.
Perfect complements are consumed together.

42. Budget Constraints Basic Characteristics of Budget Constraints
Shows affordable combinations of X and Y.
Slope of –PX/PY reflects relative prices.
Effects of Changing Income and Changing Prices
Budget increase causes parallel outward shift.
Budget decrease causes parallel inward shift.
Income and Substitution Effects
Income (substitution) effect is change in overall (relative) consumption.

44. Individual Demand Price-consumption Curve Income-consumption Curve
Shows how consumption is affected by price changes (movement along demand curve).
Income-consumption Curve
Shows how consumption is affected by income changes (shifts from one demand curve to another).
Engle Curves
Plot between income and quantity consumed.
Consumption of normal goods rises with income.
Consumption of inferior goods falls with income (rare).

47. Demand Curves and Consumer Surplus
Graphing the Demand Curve
Demand curves always slope downward.
Consumer Surplus
Value received above amount paid.
Consumer Surplus and Two-Part Pricing: An Illustration
Membership fees and user fees extract consumer surplus for the seller.
Consumer Surplus and Bundle Pricing
Bundle pricing extracts consumer surplus for sellers.

49. Consumer Choice Marginal Utility and Consumer Choice
Optimal consumption maximizes utility.
Optimal consumption reflects marginal utility (benefits) and marginal costs.
Revealed Preference
Documented desire.
Buyer decisions can be used to infer consumer preferences.

50. Optimal Consumption Marginal Rate of Substitution (MRS)
MRSXY = -MUX/MUY and equals indifference curve slope.
MRSXY shows tradeoff in the amount of X and Y consumed, holding utility constant.
MRSXY diminishes as amount of substitution of X for Y increases.
Utility Maximization
Optimality requires PX/PY = MUX/MUY.
Optimality requires MUX/PX = MUY/PY.

52. MANAGERIAL ECONOMICS 11th EditionBy
Mark Hirschey

53. Production Analysis and Compensation Policy
Chapter 8

54. Chapter 8 OVERVIEW Production Functions
Total, Marginal, and Average Product
Law of Diminishing Returns to a Factor
Input Combination Choice
Marginal Revenue Product and Optimal Employment
Optimal Combination of Multiple Inputs
Optimal Levels of Multiple Inputs
Returns to Scale
Production Function Estimation
Productivity Measurement

55. Chapter 8 KEY CONCEPTS ridge lines marginal revenue product
economic efficiency
net marginal revenue
isocost curve (or budget line)
constant returns to scale
expansion path
increasing returns to scale
decreasing returns to scale
output elasticity
power production function
productivity growth
labor productivity
multifactor productivity
production function
discrete production function
continuous production function
returns to scale
returns to a factor
total product
marginal product
average product
law of diminishing returns
isoquant
technical efficiency
input substitution
marginal rate of technical

56. Production Functions Properties of Production Functions
Production functions are determined by technology, equipment and input prices.
Discrete production functions are lumpy.
Continuous production functions employ inputs in small increments.

58. Returns to Scale and Returns to a Factor
Returns to scale measure output effect of increasing all inputs.
Returns to a factor measure output effect of increasing one input.

59. Total, Marginal, and Average Product
Total Product
Total product is total output.

61. Marginal Product Average product
Marginal product is the change in output caused by increasing input use.
If MPX=∂Q/∂X> 0, total product is rising.
If MPX=∂Q/∂X< 0, total product is falling (rare).
Average product
APX=Q/X.

63. Law of Diminishing Returns to a Factor
Diminishing Returns to a Factor Concept
MPX tends to diminish as X use grows.
If MPX grew with use of X, there would be no limit to input usage.
MPX< 0 implies irrational input use (rare).
Illustration of Diminishing Returns to a Factor

66. Input Combination Choice
Production Isoquants
Technical efficiency is least-cost production.
Input Factor Substitution
Isoquant shape shows input substitutability.
C-shaped isoquants are common and imply imperfect substitutability.

68. Marginal Rate of Technical Substitution
MRTSXY=-MPX/MPY
Rational Limits of Input Substitution
MPX<0 or MPY<0 are never observed.

70. Marginal Revenue Product and Optimal Employment
MRPL is the revenue gain after all variable costs except labor costs.
MRPL= MPL x MRQ = ∂TR/∂L.
Optimal Level of a Single Input
Set MRPL=PL to get optimal employment.
Illustration of Optimal Employment

71. Optimal Combination of Multiple Inputs
Budget Lines
Least-cost production occurs when MPX/PX = MPY/PY and PX/PY = MPX/MPY
Expansion Path
Shows efficient input combinations as output grows.
Illustration of Optimal Input Proportions
Input proportions are optimal when no additional output could be produce for the same cost.
Optimal input proportions is a necessary but not sufficient condition for profit maximization.

73. Optimal Levels of Multiple Inputs
Optimal Employment and Profit Maximization
Profits are maximized when MRPX = PX for all inputs.
Profit maximization requires optimal input proportions plus an optimal level of output.
Illustration of Optimal Levels of Multiple Inputs

74. Returns to Scale Returns to Scale Estimation
Evaluating Returns to Scale
Returns to scale show the output effect of increasing all inputs.
Output Elasticity and Returns to Scale
Output elasticity is εQ = ∂Q/Q ÷ ∂Xi/Xi where Xi is all inputs (labor, capital, etc.)
εQ > 1 implies increasing returns.
εQ = 1 implies constant returns.
εQ < 1 implies decreasing returns.
Returns to Scale Estimation

76. Production Function Estimation
Cubic Production Functions
Display variable returns to scale.
First increasing, then decreasing returns are common.
Power Production Functions
Allow marginal productivity of each input to vary with employment of all inputs.

77. Productivity Measurement
How Is Productivity Measured?
Productivity measurement is the responsibility of the Bureau of Labor Statistics (since 1800s).
Productivity growth is the rate of change in output per unit of input.
Labor productivity is the change in output per worker hour.
Uses and Limitations of Productivity Data
Quality changes make productivity measurement difficult.

79. MANAGERIAL ECONOMICS 11th EditionBy
Mark Hirschey

80. Cost Analysis and Estimation
Chapter 9

81. Chapter 9 OVERVIEW What Makes Cost Analysis Difficult Opportunity Cost
Incremental and Sunk Costs in Decision Analysis
Short-run and Long-run Costs
Short-run Cost Curves
Long-run Cost Curves
Minimum Efficient Scale
Firm Size and Plant Size
Learning Curves
Economies of Scope
Cost-volume-profit Analysis

82. Chapter 9 KEY CONCEPTS historical cost current cost replacement cost
opportunity cost
explicit cost
implicit cost
incremental cost
profit contribution
sunk cost
cost function
short-run cost functions
long-run cost functions
short run
long run
planning curves
operating curves fixed cost
variable cost
short-run cost curve
long-run cost curve
economies of scale
cost elasticity
capacity
minimum efficient scale
multiplant economies of scale
multiplant diseconomies of scale
learning curve
economies of scope
cost-volume-profit analysis
breakeven quantity

83. What Makes Cost Analysis Difficult?
Link Between Accounting and Economic Valuations
Accounting and economic costs often differ.
Historical Versus Current Costs
Historical cost is the actual cash outlay.
Current cost is the present cost of previously acquired items.
Replacement Cost
Cost of replacing productive capacity using current technology.

84. Opportunity Cost Opportunity Cost Concept Explicit and Implicit Costs
Opportunity cost is foregone value.
Reflects second-best use.
Explicit and Implicit Costs
Explicit costs are cash expenses.
Implicit costs are noncash expenses.

85. Incremental and Sunk Costs in Decision Analysis
Incremental Cost
Incremental cost is the change in cost tied to a managerial decision.
Incremental cost can involve multiple units of output.
Marginal cost involves a single unit of output.
Sunk Cost
Irreversible expenses incurred previously.
Sunk costs are irrelevant to present decisions.

86. Short-run and Long-run Costs
How Is the Operating Period Defined?
At least one input is fixed in the short run.
All inputs are variable in the long run.
Fixed and Variable Costs
Fixed cost is a short-run concept.
All costs are variable in the long run.

87. Short-run Cost Curves Short-run Cost Categories
Total Cost = Fixed Cost + Variable Cost
For averages, ATC = AFC + AVC
Marginal Cost, MC = ∂TC/∂Q
Short-run Cost Relations
Short-run cost curves show minimum cost in a given production environment.

90. Long-run Cost Curves Economies of Scale
Long-run cost curves show minimum cost in an ideal environment.

93. Cost Elasticity and Economies of Scale
Cost elasticity is εC = ∂C/C ÷ ∂Q/Q.
εC < 1 means falling AC, increasing returns.
εC = 1 means constant AC constant returns.
εC > 1 means rising AC, decreasing returns.

94. Long-run Average Costs

95. Minimum Efficient Scale
Competitive Implications of Minimum Efficient Scale
MES is the minimum point on the LRAC curve.
Competition is most vigorous when:
MES is small in absolute terms.
MES is a small share of industry output.
Disadvantage to less than MES scale is modest.

96. Transportation Costs and MES
Terminal, line-haul and inventory costs can be important.
High transport costs reduce MES impact.

98. Firm Size and Plant Size
Multi-plant Economies and Diseconomies of Scale
Multi-plant economies are cost advantages from operating several plants.
Multi-plant diseconomies are cost disadvantages from operating several plants.

100. Economics of Multi-plant Operation: an Example
Plant Size and Flexibility

102. Learning Curves Learning Curve Concept Learning Curve Example
Learning causes an inward shift in the LRAC curve.
Learning curve advantages are often mistaken for economies of scale effects.
Learning Curve Example
Strategic Implications of the Learning Curve Concept
When learning results in 20% to 30% cost savings, it becomes a key part of competitive strategy.

104. Economies of Scope Economies of Scope Concept
Scope economies are cost advantages that stem from producing multiple outputs.
Big scope economies explain the popularity of multi-product firms.
Without scope economies, firms specialize.
Exploiting Scope Economies
Scope economics often shape competitive strategy for new products.

105. Cost-volume-profit Analysis
Cost-volume-profit Charts
Cost-volume-profit analysis shows effects of varying scale.
Breakeven analysis shows zero profit points of cost coverage.

107. Degree of Operating Leverage
DOL=Q(P-AVC)/[Q(P-AVC)-TFC]
DOL is the elasticity of profit with respect to output.

111. MANAGERIAL ECONOMICS 11th EditionBy
Mark Hirschey

112. Competitive Markets
Chapter 10

113. Chapter 10 OVERVIEW Competitive Environment
Factors That Shape the Competitive Environment
Competitive Market Characteristics
Profit Maximization in Competitive Markets
Marginal Cost and Firm Supply
Competitive Market Supply Curve
Competitive Market Equilibrium

114. Chapter 10 KEY CONCEPTS normal profit economic profit market structure
economic losses
marginal analysis
competitive firm short-run supply curve
competitive firm long-run supply curve.
market structure
market
potential entrant
product differentiation
competitive markets
barrier to entry
barrier to mobility
barrier to exit perfect competition
price takers

115. Competitive Environment
What is Market Structure?
Market structure is the competitive environment.
Number of buyers and sellers.
Potential entrants.
Barriers to entry and exit, etc.
Vital Role of Potential Entrants
Competition comes from actual and potential competitors.
Potential entrants often affect price/output decisions.

116. Factors that Shape the Competitive Environment
Product Differentiation
R&D, innovation, and advertising are important in many markets.
Production Methods
Economies of scale can preclude small-firm size.
Entry and Exit Conditions
Barriers to entry and exit can shelter incumbents from potential entrants.
Buyer Power
Powerful buyers can limit seller power.

117. Competitive Market Characteristics
Basic Features
Many buyers and sellers.
Product homogeneity.
Free entry and exit.
Perfect information.
Examples of Competitive Markets
Agricultural commodities.
Prominent markets for intermediate goods and services.
Unskilled labor market.

118. Profit Maximization in Competitive Markets
Profit Maximization Imperative
Normal profit is return necessary to attract and maintain capital investment.
Efficient firms can earn normal profit.
Inefficient firms suffer losses.
Role of Marginal Analysis
Set Mπ = MR – MC = 0 to maximize profits.
MR=MC when profits are maximized.

121. Marginal Cost and Firm Supply
Short-run Firm Supply
Competitive market price (P) is shown as a horizontal line because P=MR.
Firm’s marginal-cost curve shows the amount of output the firm would be willing to supply at any market price.
Marginal cost curve is the short-run supply curve so long as P > AVC .

123. Long-run Firm Supply
Marginal cost curve is the long-run supply curve so long as P > ATC.
In long run, firm must cover all necessary costs of production and earn a normal profit.

125. Competitive Market Supply Curve
Market Supply With a Fixed Number of Competitors
Supply is the sum of competitor output.
Market Supply With Entry and Exit
Entry results in more firms, increased output, a rightward shift in the supply curve, and drives down prices and profits.
Exit reduces the number of firms, decreases the quantity of output, shifts the supply curve leftward, and allows prices and profits to rise for remaining competitors.

128. Competitive Market Equilibrium
Balance of Supply and Demand
Equilibrium is a balance of supply and demand.
Normal Profit Equilibrium
With a horizontal market demand curve, MR=P.
P=MR=MC=ATC.
There are no economic profits.
All firms earn a normal rate of return.