notes for undergraduates

1. Lecturer : Ssali Ally

2. Course Name : MANAGERIAL ECONOMICS I
Course Code : 1106
Level of Course : 1 Semester 1

3. The course assumes previous
knowledge of economics. It aims
to provide an overview of the
main principles, theories and
techniques of economics and
their relevance to the
management of enterprises in
market economies.

4. The subject includes a review of the
fundamentals of business economics:
(i) how markets work in all economic
systems,
(ii) the role of governments in regulating
and managing the economy,
(iii)the economics of
government/business/consumer relations,
(iv) the economics of firms and industries,
enterprise economics and
(v) economic techniques to assist
management decision making, including the
basics of cost-benefit analysis.

5. 1. To explain economic tools and techniques
2. To discuss the sustainable competitive advantage of firms
3. To calculate optimal price of a product based on relevant
cost, demand, and competitive factors.
4. To explain least-cost production techniques based on
available technological options and factor prices.
5. To explain the economic profit generated by a given
investment project or business enterprise.
6. To discuss opportunity costs and the investment decision.
7. To compute various elasticities of demand (with respect to
own price, cross price, income, and advertising) for a given
product based on the demand function.
8. To explain the market structures, the degree of strategic and
price competition, barriers toentry, economies of scale, and
value creation

6. The course builds on
knowledge learned at lower
levels and shows how what
was learned at those levels
can be applied and used in
any form of business
enterprise.

7. 1. To equip learners with new concepts of
financial accounting
2. To show learners how to prepare accounts
and financial statements of companies
3. To direct learners to the preparation of
cash flow statements, branch accounts,
business purchase and interpretation of
financial statements
4. To enhance the learners’ ability to apply
the knowledge gained to organisations with
peculiar nature and in some accounting
situations they find

8. After successfully completing the course unit, students should be able
to:
1. Apply economic tools and techniques for the analysis of business
decisions
2. Analyze the sustainable competitive advantage of firms
3. Recommend strategies to business enterprises to achieve environmental
and social corporate responsibility.
4. Calculate optimal price of a product based on relevant cost, demand,
and competitive factors.
5. Identify least-cost production techniques based on available
technological options and factor prices.
6. Measure the economic profit generated by a given investment project
or business enterprise.
7. Recognize opportunity costs and know how they should enter into an
investment decision.
8. Compute various elasticities of demand (with respect to own price,
cross price, income, and advertising) for a given product based on the
demand function.
9. Analyze industries in terms of market structures, the degree of strategic
and price competition, barriers to entry, economies of scale, and value
creation

9.  While students may have preferred individual learning
strategies, it is important to note that most learning
will be achieved outside of class time. Lectures can
only provide a structure to assist your study. An "ideal"
strategy (on which the provision of the course
materials is based) might include:
 Reading of the relevant chapter(s) of the text and any
readings before the lecture. This will give you a
general idea of the topic area.
 Attendance at lectures. Here the context of the topic
in the course and the important elements of the topic
are identified. The relevance of the topic should be
explained.
 Attempting the review questions given at the lectures,
and checking the answers. Preparing notes for the
class discussion of the Submission Questions.
 Presenting (if allocated), or contributing to the class
discussion of the Submission Questions.

10. 1. Introduction: Basic concepts in Economics
(8 hours)
 Definition of economics
 Methodology, Models and Assumptions
 Fundamental Questions in Economics
 (The economic problem):Scarcity, Choice and
Opportunity Cost
 Production Possibility Curve (PPC)
 Shifts in the PPC
 Relationship between Production Possibility
Curve, Choice and Opportunity Cost
 Slope and Shape of a Production Possibility
Frontier and their implications

11. 2. Economic systems and solutions
to the fundamental economic
questions (4 hours)
The Traditional Economic System
The Command or Centrally Planned
Economy
Pure Capitalism
Mixed Economy

12. 3. Market Analysis (10 hours)
 The Demand Function
 A Demand curve
 Change in Quantity Demanded Vs Change in
demand
 The Market Demand Curve
 The Supply Curve
 Change in Quantity Supplied and Change in supply
 The Market Supply Curve
 Market Equilibrium
 Consumer's Surplus
 Producer's Surplus
 Price Ceiling Vs Price floor

13. 4. Elasticity (8 hours)
 Elasticity of Demand
 Price Elasticity of Demand
 Point elasticity and Arc Elasticity
 Arc elasticity
 Factors that Affect the Coefficient of Price
Elasticity of Demand
 Cross Elasticity
 Income Elasticity of Demand
 Factors that affect the Coefficient of
Income Elasticity of Demand
 Applications of Price Elasticity of Demand

14. 5. Production theory (8 hours)
Basic Concepts in Production
Theory
The Production Function
Average Product (AP)
Marginal Product (MP)
Relationship between a Production
Function, Marginal Product and
Average Product curves
(DRS)

15. 6. Theory of costs (6 hours)
Types of Costs
Variation of Costs in the Short
run
Relationship between the Short
run Cost Curves
Economies and Diseconomies of
Scale

16. 7. Market structures (6 hours)
Perfect competition
Monopoly
Oligopoly
Monopolistic competition
8. Consumer theory (2 hours)
Cardinal utility approach
Marginal utility approach
(indifference curve theory)

17. 8. Came Theory and Pricing Strategies
(8 hours)
Simultaneous Move, One Shot Games
Basic Pricing Strategies
Strategies that Yield Even Greater
Profits
Pricing Strategies for Special Cost and
Demand Structures
Pricing Strategies in Markets with
Intense Price Competition

18. Lectures
Class discussions and
presentations

19. Take-home assignment 10%
Two Class Tests 30%
Lecture room presentation10%
Final Examination 50%

20.  Baumol, W. J. and Blinder, A. S. (1991) Economics Principles and Policy.
San Diego: Harcourt Brace Jovanovich.
 Begg, D., Fisher, S. and Dornbusch, R. (1991) Economics. London: MeGraw
Hill.
 Craven, J. (1990) Introduction to Economics: An integrated approach to
Principles. Cambridge: Blackwell.
 Dwivedi, D. N. (2004) Managerial economics. 6h edition. Vikas publishing
house LTD
 Salvatore, D. (2004) Managerial Economics in a global economy. United
Kingdom: Thomson/South western.
 Truett, L. J. and Truet, D. M. (1987) Microeconomics Times. Mirrou /
Mosby College Publishing St. Louis
 Bibliography
 Additional readings will be provided during the semester. The following
books are recommended as supplementary readings for this course:
 Baumol, W. J., Blinder, A. S., Gunther, A.W. and Hicks, J. R. L. (1992)
Economics: Principles and Policy, Australian Edition, Harcourt Brace
Jovanovich,.
 Colander, D. C. (2004) Economics 5th Edition. London: McGraw Hill Irwin.

21. Managerial economics focuses on the
following themes:
1. Identifying problems and
opportunities
2. Analyzing alternatives from which
choices can be made
3. Making choices that are best from
the stand point of the firm or
organization

22. 1. The role of managers is to make
decisions
2. Decisions are always made among
alternatives
3. Decision alternatives always have costs
and benefits
4. The anticipated objective of
management is to increase the firm’s
value
5. The firm’s value is measured by the
expected profits
6. The firm’s sales revenue depends on the
demand for its product

23. 7. The firm must minimize cost for each
level of output
8. The firm must develop a strategy
consistent with its market
9. The firm’s growth depends on rational
investment decisions
10. Successful firms deal rationally and
ethically with laws and regulations

24. Definition of Economics:
According to Robbins:
"Economics is the science which
studies human behavior as a
relationship between ends and
scarce means which have
alternative uses"

25. Economics is the study of
scarcity and its implications for
the use of resources, production
of goods and services, growth of
production and welfare over
time, and a great variety of
other complex issues of vital
concern to society.

26. Economic methodology is the study
of methods, especially the scientific
method, in relation to economics,
including principles underlying
economic reasoning.
In contemporary English,
'methodology' may reference
theoretical or systematic aspects of
a method (or several methods).

27. A model is a description of the
relationship between two or more
variables. Economic models begin with
simplifying assumptions and then
deduce the implications ...
An economic model is a theoretical
construct representing economic
processes by a set of variables and a
set of logical and/or quantitative
relationships ...

28. An economic model is a theoretical construct
representing economic processes by a set
of variables and a set of logical and/or
quantitative relationships between them. The
economic model is a simplified,
often mathematical, framework designed to
illustrate complex processes

29. Some of the properties are already well
accepted among economists;
(1) parsimony,
(2) tractability,
(3) conceptual insightfulness, and
(4) generalizability.
The other properties -- falsifiability,
empirical consistency, and predictive
precision – are not universally accepted.

30. 1. Cobb–Douglas model of production
2. Solow–Swan model of economic growth
3. Lucas islands model of money supply
4. Heckscher–Ohlin model of international trade
5. Black–Scholes model of option pricing
6. AD–AS model a macroeconomic model of
aggregate demand– and supply
7. IS–LM model the relationship between interest
rates and assets markets
8. Ramsey–Cass–Koopmans model of economic
growth
9. Gordon–Loeb model for cyber security
investment

31. According to economists, there are
five basic assumptions that we make
regarding
economics:
(1) Scarcity.
(2) Trade-offs.
(3) Self-interest.
(4) Cost and benefits.
(5) Models and graphs

32. Scarcity or paucity refers to limitation.
Raw materials, components, goods, and
other supplies are limited. However, we
exist in an environment with unlimited
human wants.
This is one of economics’ fundamental
problems, i.e., having limitless human
wants in a market where resources that
are not limitless.

33. If our wants are limitless but scarcity exists, we
cannot satisfy all our wants. Therefore, we must
make choices. When we chose one thing, we are
subsequently trading it for something else.
In other words, every choice has a cost, i.e., a
trade-off. When we chose something, we also
wonder what we will have to give up. We call
this determining what the opportunity cost is .
In other words, first, we ask ourselves: “If I
choose this, what will I have to give up?”
Then, we can determine whether we are better
off with our choice.

34. Our goal is to make a choice
that maximizes our
satisfaction. In other words,
we all act in our own self-
interest.

35. We all make decisions by comparing the
cost and benefits of things. Whenever we
make a choice, we compare the choice’s
marginal costs against its marginal
benefits.
In other words, we perform a cost-benefit
analysis or benefit-cost analysis. This
analysis is a type of economic analysis.

36. Economists explain real-
life situations through
simplified graphs and
models. They also use
them to analyze real-life
situations.

37. The economic questions influence resource allocation.
These include;
1.When to produce? That is, the period or season of
production, whether to produce now or in future.
2.Where to produce from? That is, the location of the
business, whether to produce near the source of the
raw materials or near the market
3.How to produce? That is, the method or technique of
production, whether to use capital intensive
technology or labour intensive technology.
4.For whom to produce? That is, the nature of
consumers who are to consume the products.
5.What to produce? That is, the nature of the
commodity to be produced. Whether capital or
consumer goods, for export or for domestic
consumption etc

38. These are basic issues dealt with and
faced by individuals, group of
individuals and communities
concerning resource allocation and
they include;
Scarcity,
Choice; and
Opportunity cost

39. Is the limit in supply of resources
relative to the unlimited need for
them. It is also the limitedness in
supply of something in relation to
the demand for it.
In economics, resources are highly
limited and are unevenly distributed
between individuals and nations in
relation to human wants that have
to be satisfied.

40. Human wants are desires that have to
be satisfied to make life worthwhile.
They include non-material wants and
material wants.
Material wants are tangible e.g.
shelter, food and clothing
Non-material wants are intangible
e.g. health services, prestige
education, self esteem,
entertainment etc.

41. Human wants come as a result of social
environment in which people live and they
have the following features:
 They are unlimited
 They are competitive in order to satisfy one
another
 They are complementary. In order to yield
maximum satisfaction, some wants have not
to be sacrificed with others. E.g. when you
have food, you must have water.

42. Human wants are dynamic. They are
ever changing from one period to
another
They are recurring i.e. they must be
satisfied ever so often because
scarcity, choice has to be made by
individuals

43. In the selection of certain variables or
alternatives out of many or the making of
a decision. It involves the selection of
desires or wants to be satisfied in a given
period of time according to priority.
In making choice, one usually has a scale of
preference which is the list of needs
which have to be satisfied according to
the most pressing on top and the least
pressing at the bottom.

44. Man is rational and usually choose widely. The
problem of choice usually guides decision making
of individuals and business firms in relation to
the basic economic questions which are;
1. What to produce and consume and in what
quantity
2. For whom to produce (Rich or Poor)
3. How to produce (Technique of production)
4. Where to produce from (Location of
enterprise)
5. When to produce (timing of output/production)
*Making choice usually involves the element of
opportunity cost

45. Refers to alternative foregone when a
choice is made. It is the second best
alternative that has to be foregone when
choice is made.
The three fundamental economic problems
are usually interrelated in such a way that
because resources are scarce economic
units must make choice and in the process
of making choice, some alternatives are
foregone, hence opportunity cost.

46. 1. Used by consumers in making decisions
because the consumers usually consume
goods that are lowly priced in relation to
those which are highly priced in order to
maximize their satisfaction.
2. Used by producers in making production
decisions like what to produce, how to
produce it and usually producers decide to
produce commodities whose opportunity
cost is the lowest in order to maximize the
profits

47. 3. It is used as a basis for planning by
government especially in the resource
allocation
4. It is applied in pricing factors of production
in such a way that those factors where the
opportunity cost is high more attention is
given.
5. It is used to determine gains from
international trade. A country usually gains
where it specializes in producing
commodities where it incurs the least
opportunity cost compared to other countries

48. 6. It is used by producers in deciding on what
techniques of production to use and this
usually depends on the factors availability
and the opportunity cost
7.Workers use the concept of opportunity cost
in making a decision on whether they should
work or enjoy leisure
8. The concept is used in pricing goods and
services in a way that a commodity which
has high opportunity cost of production has
higher market price compared to one with
low opportunity cost

49. 1. It is subjective and not standard. No
standard value of opportunity cost can be
applied to specific choices and the level of
opportunity cost varies from on person to
another.
2. It cannot be applied where the factor of
production is specific and have no
alternative uses and in such cases the
opportunity cost is zero.
3. It cannot work where the factors of
production are immobile and cannot move
to alternative uses and locations

50. 4. Opportunity cost may not be measurable in
certain cases where the alternative foregone
cannot be ascertained. This is because
opportunity cost has no absolute values.
5. It is based on the assumption of rational
consumers and producers but in real life
there are some irrationals consumers and
producers.
6. A market imperfection where there is no
perfect knowledge makes it hard to know the
opportunity cost in making decisions

51. 7. Opportunity cost works under conditions
of full employment but it is an ideal
situation which can’t be attained in any
economy.
Qn. Discuss the relationship between
scarcity, choice and opportunity cost

52. What is a production possibility curve?
This is one that shows all
possible combinations of two
commodities that can be
maximumly produced when all
resources are fully and
efficiently employed.

53. The production possibilities curve
(PPC) is a graph that shows all of the
different combinations of two
products that can be produced given
current resources and technology.
Sometimes called the production
possibilities frontier (PPF), the PPC
illustrates scarcity and tradeoffs

54. 1. The resources are given and remain
constant.
2. The technology used in the
production process remains constant.
3. The resources and technology are
fully and efficiently utilized.
4. The technique of production remains
constant.
5. Only two goods are produced in
different proportions in the economy
6. The time period is short

55.  The slope of the PPF indicates the
opportunity cost of producing one good
versus the other good, and the opportunity
cost can be compared to the opportunity
costs of another producer to determine
comparative advantage.
 Opportunity cost can be illustrated by using
production possibility frontiers (PPFs) which
provide a simple, yet powerful tool to
illustrate the effects of making an economic
choice. A PPF shows all the possible
combinations of two goods, or two options
available at one point in time

56. Scarcity implies that a production
possibilities curve is downward
sloping; the law of increasing
opportunity cost implies that it will
be bowed out, or concave, in shape.
Slope of PPC indicates the amount of
Good-Y that needs to be sacrificed for
producing every additional unit of
Good-X. It is expressed as 'Change in
Y/Change in X. '

57. An illustration of the production
possibility frontier/Transformation
curve/opportunity cost curve
 Assuming the country can use its resources
on the production of two commodities x
and y and the country’s resources are
limited and therefore are restricted to the
production of a given amount of
commodity x and commodity y. In this
case the transformation curve will be
illustrated as below

58. ABCD = best combination (maximum efficiency)
E = attainable but low efficiency
F = unattainable
0
X 0
Y0
A
D
E
C
B
F
Commodity Y
Commodity X
Commodity X

60. PPC is concave-shaped because
more and more units of one
commodity are sacrificed to gain an
additional unit of another
commodity. However, if there is
unemployment or inefficiency in
resource utilisation, then we can
produce at any point inside the PPC.

62. PPC or PPF is a downward sloping
curve because of the increasing
marginal opportunity cost which
means that in order to increase the
production of one good a certain
amount of another good has to be
sacrificed. A PPC is downward
sloping curve that is concave to the
origin.

63.  The properties of the PPC include
its shape, slope, and position. Shape: The
PPC has a bowed-out shape, which reflects
the law of increasing opportunity cost. This
means that as more of one good is
produced, the opportunity cost of
producing that good increases.
 Other characteristics include; Scarcity,
opportunity cost, efficiency, and
inefficiency may all be shown and
illustrated using the production possibility
curve. The market or economy can be
shown more accurately using this curve.

64. PPC is production possibility
curve which graphically implies
the fuller and efficient use of
resources in an economy. IC is
the indifference curve which
graphically represents the set of
two commodities which provides
a consumer with same level of
satisfaction.

65. From the Production Possibility Schedule, come
up with a PPC

66. possibilities Quantity of
X
Quantity of
Y
P 0 250
B 100 230
C 150 200
D 200 150
P1 250 0

68. Assuming the country can use its resources
on the production of two commodities x and
y and the country’s resources are limited and
therefore are restricted to the production of
a given amount of commodity x and
commodity y. In this case the transformation
curve will be illustrated as below

69. 0
X 0
Y0
A
D
E
C
B
F
Commodity Y
Commodity X
Commodity X
ABCD = best combination (maximum efficiency)
E = attainable but low efficiency
F = unattainable

70.  From the diagram above, if all resources are devoted to
the production of commodity X, the economy can
produce the maximum of 0X0. Alternatively, if all the
resources are devoted to the production of commodity
Y, the economy can produce the maximum of 0Y0.
 However, it is possible for the economy to produce the
combination of X and Y and still maximally utilise the
resources.
 The combination of X and Y will depend on the needs of
the producer. E.g. the country can produce more units
of commodity X and fewer units of commodity Y or
more units of commodity Y and fewer of commodity X.
 When one unit of commodity Y is gained, then one unit
of commodity X is lost.
 All points along the PPF curve e.g. ABCD are obtainable
and indicate full employment/utilization of resources.
 All points inside the PPF e.g. point E indicate under
utilization of resources and thus inefficiency. The points
outside the PPF e.g. F are not obtainable because they
are beyond available resources.

71. Scarcity
Resources are scarce, because the country cannot produce
beyond her PPF using fixed resources. Scarcity is illustrated
by the PPF where production cannot exceed the resource
boundary.
Choice
The producer/ economy can choose the different
combinations of X and Y depending on the needs
of people.
Opportunity cost
This is illustrated by the movement along the PPF.
E.g. to gain one unit of commodity Y, you
produce one unit less of commodity X.

72. Community X X0
0 Y1 Y2 Y0 Commodity Y
X2
X1
X1 – X2 = Opportunity Cost
Y1 – Y2 = Choice

73. Efficiency in production
 In the graph above, points B and C for instance,
show efficient utilisation of the available
resources. Points inside the curve e.g. point E
shows that some resources are not yet utilised
(under employment) and hence inefficiency.
 Points outside the curve e.g. point f are not
attainable using the available resources.
Economic growth
 This is the persistent/ sustained increase in the
country’s volume of goods and services produced
in a given period of time. This is illustrated by
the shift of the PPF outside, i.e. to the right

74. COMMODITY X
0
COMMODITY Y
Y0
Y1 Y2
X0
X1
X2
In Ward Shift
Out Ward Shift

75. In the above illustration the outward
shift of the transformation curve is
shown by the shift of the PPF curve
from XoYo to X2 Y2, and the inward
shift of the transformation curve is
indicated by the shift of the PPF
curve to the left i.e. from XoYo to
X1Y1.

76. 1. change in the size of the labour force
2. Change in the efficiency and skills of
labour
3. Change in natural resource base
4. Change in the state of technology
5. Change in the level of capital inflow and
capital outflow
6. Change in the levels of entrepreneurial
skills.

77. 1. Increase in the size of labour force
2. Improvement in the skills of labour/
improvement in the level of efficiency
labour
3. Discovery of new natural resources to be
used in the production
4. Improvement in technology/ methods of
production
5. Increase in rate of capital inflow/ capital
brought into the country from abroad
6. Improvement in entrepreneurial skills

78. 1. Decrease in the size of the labour force
2. Decline in the level of labour skills/Decline
in the level of efficiency of labour
3. Depletion/exhaustion of natural resource
4. Decline in the state of
technology/Technology becoming obsolete
5. Decrease/Decline in the level of capital
inflow or increased level of capital outflow.
6. Decline in the level of entrepreneurial
skills/ability

79.  Used to explain the concept of scarcity and
choice.
 Used to show to the efficient utilisation of
resources in an economy.
 Used to show the rate of economic growth in
an economy i.e. when there is an outward
shift of the transformation curve.
 Used to show the marginal rate of
substitution of commodities or the marginal
rate of transformation of commodities