Nike Analysis
GYAAN KOSH TERM 1
Learning and Development Council, CAC
Managerial Economics
This document covers the basic concepts of Managerial Economics covered in Term 1. The document only summarizes the main concepts and is not intended to be an instructive material on the subject.
Gyaan Kosh Term 1
MGEC
Learning & Development Council, CAC
Opportunity cost: Taken into account for economic decisions. Opportunity Cost is the “next best” or “alternative” benefit from an investment Sunk costs: Never taken into account for economic decisions. Marginal Analysis: Used for profit maximization (deciding how much to produce) where TR and TC are functions of quantity. To maximize profits we take derivative=0
P r o f it M a x im iz a t io n G r a p h
For profit maximization, marginal revenue should be equal to marginal costs for EACH activity. If MR > MC – increase production If MR < MC – decrease production Demand Curve is the Marginal Benefit curve Consumer Surplus = Net benefit to customers = Willingness to pay – total paid. (Area under the demand curve above the price line) Demand and elasticity Demand shows quantity purchased as a function of price. Managers’ Knowledge of demand is critical because it helps in:
• Making production decisions • Defining market structure • Taking strategic and operational decisions
Gyaan Kosh Term 1
MGEC
Learning & Development Council, CAC
Price Elasticity of Demand is measure of responsiveness i.e. % Change in quantity demanded due to a 1% change in Price Demand is more elastic, • Greater the availability of other substitutes • Greater the time frame • Greater the good’s share of the budget • Lower the switching costs Income Elasticity of Demand
• Positive: Normal Good • Negative: Inferior Good
Cross Price Elasticity of Demand (change in demand of one good based on change in price of another)
• Positive: Substitutes • Negative: Complements
Monopoly pricing strategy If a uniform pricing is set for products
Learning and Development Council, CAC
Managerial Economics
This document covers the basic concepts of Managerial Economics covered in Term 1. The document only summarizes the main concepts and is not intended to be an instructive material on the subject.
Gyaan Kosh Term 1
MGEC
Learning & Development Council, CAC
Opportunity cost: Taken into account for economic decisions. Opportunity Cost is the “next best” or “alternative” benefit from an investment Sunk costs: Never taken into account for economic decisions. Marginal Analysis: Used for profit maximization (deciding how much to produce) where TR and TC are functions of quantity. To maximize profits we take derivative=0
P r o f it M a x im iz a t io n G r a p h
For profit maximization, marginal revenue should be equal to marginal costs for EACH activity. If MR > MC – increase production If MR < MC – decrease production Demand Curve is the Marginal Benefit curve Consumer Surplus = Net benefit to customers = Willingness to pay – total paid. (Area under the demand curve above the price line) Demand and elasticity Demand shows quantity purchased as a function of price. Managers’ Knowledge of demand is critical because it helps in:
• Making production decisions • Defining market structure • Taking strategic and operational decisions
Gyaan Kosh Term 1
MGEC
Learning & Development Council, CAC
Price Elasticity of Demand is measure of responsiveness i.e. % Change in quantity demanded due to a 1% change in Price Demand is more elastic, • Greater the availability of other substitutes • Greater the time frame • Greater the good’s share of the budget • Lower the switching costs Income Elasticity of Demand
• Positive: Normal Good • Negative: Inferior Good
Cross Price Elasticity of Demand (change in demand of one good based on change in price of another)
• Positive: Substitutes • Negative: Complements
Monopoly pricing strategy If a uniform pricing is set for products