1. Fundamentals of Managerial Economics
G511 – Managerial Economics
Kyle Anderson
November 30, 2018

2. What are the goals of firms?
Kyle Anderson
November 30, 2018

3. Economic profits
Let’s say I purchase a golf course for $1 million, cash. The golf course earns $30,000 per year. I can sell my golf course for $1 million and invest it at 4% or I can lease the land to a developer and get $50,000 per year. What are my economic profits?
Kyle Anderson
November 30, 2018

4. Economic Profits Accounting profits are revenues minus expenses.
Analysis of economic profits include opportunity costs (implicit costs from using those resources).
Opportunity costs are in the form of:
Capital
Labor
Time
Role of profits in capitalist markets
Kyle Anderson
November 30, 2018

5. Time value of money
Money is more valuable today than it is in the future.
Opportunity cost of money
Kyle Anderson
November 30, 2018

6. Present value of an indefinite asset
Perpetuity
Value of a firm
where π is firm profits.
Kyle Anderson
November 30, 2018

7. Management goals
Maximize profits – maximizing the present value of current and future profits is equivalent to maximizing the value of the firm.
Put another way, the market capitalization of a firm (share value x number of shares outstanding) is equal (according to economic theory) to the present value of current and future profits.
Kyle Anderson
November 30, 2018

8. Example
JPMorgan Chase is thinking about acquiring a local bank. The local bank is currently earning profits of $500,000 per year and the profit growth rate is 4%. The interest rate is 10%. Using its managerial expertise, Chase can increase the growth rate to 6%. What is the value of the local bank?
PV=500*(1+.04)/( )=8,666
PV=500*(1+.06)/( )=13,250
Kyle Anderson
November 30, 2018

9. Incremental Analysis - Liquor laws in Indiana
A group known as Hoosiers for Beverage Choices is trying to change the law that prohibits the sales of alcohol on Sundays in Indiana.
Some retailers oppose this effort even though they would probably make positive profits on Sundays. Why would some oppose it?
Kyle Anderson
November 30, 2018

10. Incremental Analysis
Decisions need to be evaluated based on the incremental change in revenues, costs, and profits.
Even though the average revenues on liquor sales on a Sunday may exceed the average costs, many retailers would prefer not to be open.
Kyle Anderson
November 30, 2018

11. Marginal Analysis Optimal economic decisions are made on the margins.
Marginal benefit – the change in benefits due to a change in an underlying variable.
Example – if I hire 1 more mechanic, how much will my revenues increase?
Law of diminishing returns – the marginal benefit of adding one more unit of input tends to decline as the quantity of inputs increases
Kyle Anderson
November 30, 2018

12. Marginal Analysis
If the marginal benefits exceed the marginal costs, then the manager should continue.
Profit maximization occurs where marginal revenues equal marginal cost.
Kyle Anderson
November 30, 2018

13. G511 – Managerial Economics
Demand and Supply
G511 – Managerial Economics
Kyle Anderson
November 30, 2018

14. Price Gouging laws
Florida Statute states that during a state of emergency, it is unlawful to sell, lease, offer to sell, or offer for lease essential commodities, dwelling units, or self-storage facilities for an amount that grossly exceeds the average price for that commodity during the 30 days before the declaration of the state of emergency, unless the seller can justifying the price by showing increases in its prices or market trends. Examples of necessary commodities are food, ice, gas, and lumber. What is the likely impact of such a law?
Kyle J. Anderson
November 30, 2018

15. Sales Tax
Sales tax is a percentage tax that consumers pay to retailers and then retailers submit to the State. So who actually pays the sales tax? If the sales tax were eliminated, does the benefit go to the consumer, businesses, or both? Would eliminating the national sales tax on gasoline help consumers?
Kyle J. Anderson
November 30, 2018

16. Demand The relationship between price and quantity.
“Quantities of a good or service that people are ready to buy at various prices.”
Law of Demand: There is an inverse relationship between price and quantity demanded.
Kyle J. Anderson
November 30, 2018

17. Determinants of Demand
Income
Normal goods
Inferior goods
Price of related goods
Substitutes
Complements
Population/demographics
Advertising
Tastes and preferences
Consumer expectations
Time – Long run vs. short run
Kyle J. Anderson
November 30, 2018

18. The Demand Curve
Price
Quantity
Kyle J. Anderson
November 30, 2018

19. The Demand Curve Price Quantity Q = 3000 – 10P 300 P = 300 – 1/10Q
What if price drops?
150
100 D
1500
2000
3000
Kyle J. Anderson
November 30, 2018

20. Shift in the Demand Curve
Price
Quantity
Q1 = 3000 – 10P
350
Q2= P
300
150 D2 D1
3000
1500
2000
3500
Kyle J. Anderson
November 30, 2018

21. Consumer Surplus Price
Quantity
The value consumers get in excess of what they have to pay for a good.
Calculate:
½ b x h
300
150
½ * 150 *1500
=112,500 D
1500
Kyle J. Anderson
November 30, 2018

22. The Supply Curve
The amount of a good that will be supplied at a given price level.
Input prices
Technology
Government regulation
Number of firms
Substitutes in production
Taxes
Producer expectations
Time - Long run vs. short run
Kyle J. Anderson
November 30, 2018

23. Supply Price Quantity Q = 10P – 1000 S Producer Surplus PS= ½ *50*500
150
PS= ½ *50*500
= 12,500
100
500
November 30, 2018
Kyle J. Anderson

24. Equilibrium Qs = 10P – 1000 Price Qd = 3000 – 10P Qd=Qs S
Quantity
Qd = 3000 – 10P
300
Qd=Qs S
10P-1000= P
20P=4000
P=200
Q=1000
200
100 D
3000
1000
Kyle J. Anderson
November 30, 2018

25. Per Unit Tax Qs = 10P – 1000 Qd = 3000 – 10P Price
Quantity
Tax = 20, Ps = 120+1/10Q
Old Price = 200
300
New Price = 210 St
Old Quantity = 1000 S
New Quantity =900
210
Tax = 20*900 = 18,000
200
CS old = 50,000
190
Deadweight loss
CS new = 40500
PS old = 50,000 D
PS new = 40,500
Benefit = 40,500+40,500+18,000=99,000
900
1000
Kyle J. Anderson
November 30, 2018

26. Per Unit Gasoline Tax St S Price Quantity D
Virtually no effect on the price of gasoline – but big impact on profits of producers. P*
Tax amount D
Kyle J. Anderson
November 30, 2018

27. Price Gouging S2 Price Quantity S D D2 Deadweight loss P –law P* Qs Qd
Shortage D D2 Qs Qd Q*
Kyle J. Anderson
November 30, 2018

28. Price floor Qs = 2P – 200 Price Qd = 1000 – 8P S D Quantity
Deadweight loss S
P-floor
Surplus D Qd Qs
Kyle J. Anderson
November 30, 2018

29. Supply and Demand Shifts
Price
Quantity S
Surplus P P* D* D Q* Q
Kyle J. Anderson
November 30, 2018

30. Supply and Demand Shifts
Price
Quantity S S* P P* D* D Q* Q
Kyle J. Anderson
November 30, 2018