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Learning Objectives

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Now · 1. What is Managerial Economics?

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:

\max_{x} f(x) \quad \text{s.t.} \quad g(x) \leq c

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 = \frac{\%\Delta Q_d}{\%\Delta P}

|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

12, 500 tickets/week, E_d = -1.5. If price drops 10% to

10.80: quantity rises 15% to 575. New revenue =

10.80 x 575 =

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