Summary: Managerial Economics

Read the summary and the most important questions on Managerial economics

• 1 Foundations

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• What is market demand?

  Market demand of a good is the quantity that consumers purchase that good at various prices. Dependant on: price, income, preferences, substitutes, etc.
  
  Generally a simple linear line. 
  Q = a - bP 
  P = A - BQ

• What is the firms demand?

  How much one can sell given the price they ask. It depends on: competitors, their products, prices, marketing, etc.

• How can profit be maximised?

  By deriving the marginal revenue and marginal cost. Profit is at a max when these are equal
  
  pi(q) = R(q) - C(q)
  dp/dq = 0 --> dR(q)/dq - dC(q)/dq = 0
  Gives MR = MC

• What is perfect competition? And a monolopy?

  Firms and consumers are price-takers. A firm can sell as much as it likes at the ruling market price. The price equals marginal cost.
  
  Monolopy is the only firm in the market.  Derives maximum profit by equating the marginal revenue with the marginal cost.

• What is the neoclassical view of the firm?

  The firm transforms inputs into outputs with a goal of maximizing profits. 
  
  Can be richer:
  - what happens inside firms?
  - how are firms structured?
  - how are individuals organized/motivated?

• What are the cost relationships for a single-product firm?

  C(Q): total cost of producing output Q
  AC(Q): average cost = C(Q)/Q)
  Marginal cost: cost of one more unit, formally the derivative of the total cost.
  
  Sunk costs: incurred on entry independent of output, cannot be recovered on exit

• What is market structure? And what is a market?

  Number and size distributions of firms
  
  Presumably, define a market by closeness in substitutability of the commodities involved
  
  Demand substitutability: key concept is cross-price elasticity: if goods are significant substitutes then they belong to the same market
  
  Determinents are:
  - economies of scale and scope. 
  - presence of network externalities

• How can the government affect a market?

  By limiting entry
  Tax medallions
  Airline regulation
  
  - Through the patent system
  - Through antitrust decisions

• What are the measures of well-being?

  Consumer surplus: is the difference between the maximum amount a consumer is willing to pay and the amount actually paid
  Producer surplus: the difference between cost and producer receives for a unit
  
  Total surplus = consumer surplus + producer surplus.

• What is the deadweight loss of monopoly?

  The monopolist sets MR = MC to give different number of output and price than the perfect equilibrium. Total surplus reduces. The monopolist produces less surplus than the competitive industry. There are mutually beneficial trades that do not take place -> inefficiency. The monopolist basis its decisions purely on the surplus it gets, not on consumer surplus.