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Complete summary managerial economics
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1. Lecture 11.1. Part 1
How is a business plan structured?
Executive summary: explain why the business is going to be successful
Company description: describe the company’s business
Market analysis: describe what market the company is serving as well as the competitors
Service or product line: describe your product line, service line and the R&D plan
Marketing and sales: Describe the marketing strategy
Funding request and financial plan: Describe the funding you are trying to raise and the financial plan
Market demand
Quantity = f(yPrice + nIncome + xMarketing + …)
linear demand: Q = a – bP (a is the quantity when price is very small)
linear inverse demand: P = A – BQ (A is the maximum willingness to pay)
∆q
q ∆q p
Price elasticity of demand: ε = =
∆ p ∆ pq
p
o |ε| < 1: demand is inelastic => increasing price increases revenues
o |ε| > 1: demand is elastic => increasing price reduces revenues
∆ q1
q1 ∆ q 1 p2
Cross elasticity: ε 1,2= =
∆ p2 ∆ p2 q1
p2
o ε 1,2 > 0: substitute goods
o ε 1,2< 0: complement goods
Profit maximization
profit is the difference between revenues and costs: (q) = R(q) – C(q)
First order conditions for profit maximization: d/dq = 0
o => MR = MC
Perfect competition
firms and consumers are price-takers, a firm can sell as much as it likes at the ruling market price
1
, Therefore: marginal revenue equals price, and because MR = MC, price equals MC
Monopoly (market demand is firm demand, output decisions affect market clearing price)
Demand: P = A – BQ
Total revenue: TR = PQ = AQ – BQ2
DTR
Marginal revenue: MR = = A – 2BQ (same price intercept, twice the slope)
DQ
The monopolist maximizes profit by MR = MC: price is greater than MC: loss of efficiency & positive
economic profit
1.2.
1.2. Part 2
Total cost: C(Q)
Average cost: AC(Q) = C(Q)/Q
dC (Q)
Marginal cost: MC(Q) =
d (Q)
o if MC < AC then AC is falling
o if MC > AC then AC is rising
o MC = AC at the minimum of the AC curve
2
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