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# Learning Objectives - Understand the scope of managerial economics as applied constrained optimization - Analyze demand and supply forces to determine market equilibrium - Calculate and interpret price elasticity of demand - Basic algebra (solving linear equations) - Familiarity with graphs and slopes ## 1. What i...
Learning Objectives
- Understand the scope of managerial economics as applied constrained optimization
- Analyze demand and supply forces to determine market equilibrium
- Calculate and interpret price elasticity of demand
- Basic algebra (solving linear equations)
- Familiarity with graphs and slopes
1. What is Managerial Economics?
Intuition: Every business faces constraints - limited budgets, production capacities, time. Managerial Economics provides a systematic framework for making optimal decisions under these constraints.
Formal Definition: Managerial Economics applies microeconomic theory to managerial decision-making. It is fundamentally an applied course in constrained optimization.
The core problem:
Key Actors:
- Buyer: Purchases only when BV >= Price
- Seller: Sells only when Price >= MC
- Result: BV >= Price >= MC creates Total Surplus = BV - MC Total Surplus divides into:
- Consumer Surplus = BV - Price
- Producer Surplus = Price - MC
2. Demand, Supply & Market Equilibrium
Law of Demand: As price increases, quantity demanded decreases (ceteris paribus).
Law of Supply: As price increases, quantity supplied increases.
Market Equilibrium: Qd = Qs. Solves for P* and Q*.
Worked Example: Qd = 100 - 2P, Qs = 3P - 20 100 - 2P = 3P - 20 -> 120 = 5P -> P* = 24 Q* = 100 - 2(24) = 52
3. Elasticity
Price Elasticity of Demand:
|E_d| > 1: Elastic (luxuries, many substitutes) - lower price to raise revenue |E_d| < 1: Inelastic (necessities, few substitutes) - raise price to raise revenue
Worked Example - Revenue Impact: Theater charges 10.80: quantity rises 15% to 575. New revenue = 6,210 > $6,000 (original). Revenue increases.
| Concept | Formula | Notes |
|---|---|---|
| Price Elasticity | E_d = (dQ/dP)(P/Q) | Usually negative |
| Revenue Maximization | MR = 0 | Elastic region |
| Market Equilibrium | Qd = Qs | Solves for P*, Q* |
| Consumer Surplus | CS = 0.5(P_max - P*)Q* | Triangle area |
- Shift vs. movement: Price change = movement along curve; non-price factors = shift
- Elasticity sign: Compare absolute values for magnitude
- Unit confusion: Elasticity is unit-free
Q1: Demand Q=200-4P, Supply Q=6P-40. Find equilibrium.200-4P=6P-40 -> 240=10P -> P*=24, Q*=104 Q2: If E_d=-0.8 and price +10%, what happens?%ΔQ = -0.8 x 10% = -8%. Inelastic, so revenue increases. Q3: Product has close substitutes. Elastic or inelastic?Elastic. Consumers can switch easily. Q4: Demand P=50-2Q, market price=30. Find CS.At P=30: Q=10. CS = 0.5 x (50-30) x 10 = 100.
- Next: Week 2 - Consumer Behavior
- Related: BSMS3034 Corporate Finance Join Discord NextConsumer Behavior & Utility