Final Ecoomics Material
Final Ecoomics Material
Final Ecoomics Material
Managerial Economics
It is a special branch of economics bridging the gap between the economic theory and
managerial practice.
Scarcity (እጥረት)
Thus, the term scarcity reflects the imbalance between our wants and the means to satisfy those
wants. It is also important not to confuse with scarcity and shortage.
Choice
Due to the problem of scarcity, individuals, firms and government are forced to choose as to what
output to produce, in what quantity, and what output not to produce
Scarcity → limited resource → limited output → we might not satisfy all our
wants →choice involves costs → opportunity cost
An opportunity cost is the amount or value of the next best alternative that must be sacrificed (forgone) in
order to obtain one more unit of a product.
The theory has been debated and expanded to consider whether a company's goal is to
maximize profits in the short-term or long-term.
Different Economics
C. What is Profit?
Profit - is the surplus revenue after a firm has paid all its costs.
Michael Porter’s “Five Competitive Forces”:
Market entry conditions for new firms
Market rivalry amongst current firms
Market power of input suppliers
Types of Profits
1. Frictional profit theory - Abnormal profits observed following unanticipated changes in
demand or cost conditions
2. monopoly profit theory - Above-normal profits caused by barriers to entry that limit
competition
3. innovation profit theory - Above-normal profits that follow successful invention or
modernization
4. Compensatory profit theory - above-normal rates of return that reward firms for
extraordinary success in meeting customer needs, maintaining efficient operations
D. Profit Maximization
An assumption in classical economics is that firms seek to maximize profits.
Value Maximization - is a long- term objective that undertakes safe actions in order to
increase the market value of its common stock over time - more complete model of a firm
Types of Firms
Individual entrepreneurs
Private companies
Public limited companies
Co-operatives/social ventures
Government-owned companies
Chapter two
Demand and Supply
Demand Theory
Law of Demand
Demand curve is a graph of r/n ship b/n the quantity demand of the good
and its price citrus paribus
1. Price rationing
The process by which the market system allocates goods and services to consumers when
quantity demanded exceeds quantity supplied.
3. Price Ceiling- is legally imposed maximum price on the market. Transactions above this price is
prohibited
4. Price Floor- is legally imposed minimum price on the market. Transactions below this price is
prohibited
A product is considered to be elastic if the quantity demand of the product changes drastically
when its price increases or decreases.
Elasticity of Demand
1. Price elasticity of demand
Is the responsiveness of quantity demanded to a change in price.
When Price increases, the quantity demanded falls but we want to know how fast
quantity demanded will fall.
Ed > 1; demand is elastic. i.e. quantity demanded is more sensitive to price change
Ed < 1; demand is inelastic. i.e. quantity demanded is less sensitive to price change
Ed =1; unitary elastic; i.e. the proportionate change in both Q and P is the same
■ CEdab= %∆Qa
%∆Pb
Elasticity of supply (Es)
Price elasticity of supply is how responsive is supply to a change
in price
Es = %∆Q
%∆P
Example - If the price of banana rise from 2 birr/kg to 3 birr/kg the quantity
supplied rise from 20 kg to 25kg, then the price elasticity of supply would be: Es =
0.5
Demand Forecasting
– GDP
Chapter Three
Production Function and Economics of a firm
Production Function
■ In economics, a production function gives the technological relation
between
Q=f(X1, X2, ..., Xk); Q = Level of Output; X1, X2, ...,Xk= inputs used in
production
MP L PL
slope of isoquant =− = slope of isocost =−
MP K PK
MP L MP K
=
PL PK
Chapter four
Cost of production
The bases of firms decisions making
The bases of decision-making:
1. The market price of output
Marginal Cost
The MC curve is U-shaped. MC falls to begin with as output rises, because of increasing
returns, and then, after reaching outputQ1, it begins to rise because of diminishing returns
constant returns to scale An increase in a firm’s scale of production has no effect on costs per unit
produced.
decreasing returns to scale, or diseconomies of scale An increase in a firm’s scale of production leads to
higher costs per unit produced.
long-run average cost curve (LRAC) A graph that shows the different scales on which a firm can choose
to operate in the long run.