Economics & Finance

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How to Determine the Ideal Price with Price Elasticity of Demand

The theory of price elasticity is one of the major tenets of managerial economics. That theory maintains that long-term success and profitability depend upon ideal pricing, or producing a good to the point [more…]

How to Use Cost-Plus Pricing in Managerial Economics

Cost-plus pricing means that you determine price by starting with the good’s cost and then adding a fixed percentage or amount to that cost. One of the primary reasons cost-plus pricing is so popular is [more…]

How to Use Breakeven Analysis in Managerial Economics

A firm using breakeven analysis determines the smallest output level that leads to zero economic profit. Recall that zero economic profit doesn’t mean that the firm’s owners receive nothing — it means [more…]

How to Increase Profit through Price Discrimination in Managerial Economics

Price discrimination refers to a business situation where the same good is sold to different groups of consumers for different prices. For example, the couple sitting next to you at the movie paid a lower [more…]

How to Use Coupons for Price Discrimination in Managerial Economics

Coupons are a very effective way to price discriminate. Customers who are very responsive to price changes — that is, customers with a very elastic demand — are likely to take time to find coupons that [more…]

How to Use Pure Bundling to Increase Profits

Pure bundling is a business strategy in managerial economics that exists when consumers can only purchase the goods together. It isn’t possible to purchase the goods separately. [more…]

How to Use Mixed Bundling to Increase Profits

A strategy observed by managerial economists that increases profits for business is mixed bundling. Mixed bundling allows customers to purchase the goods either together as a bundle or separately. One [more…]

Managerial Economics: How to Price against Your Rivals

Managerial economics studies the ways in which firms can set ideal pricing to maximize profit. In a very real sense, businesses are always at war fighting battles with one another. Businesses compete for [more…]

Managerial Economics: How to Determine the Biggest Guaranteed Win

With the maxi-min criterion, your managerial economics decision is based upon the minimum or worst payoff associated with each action. For each action, you note the minimum payoff. [more…]

Managerial Economics: Measuring Regret with the Mini-Max Regret Criterion

The mini-max regret criterion in managerial economics bases business decisions on the maximum regret associated with each action. Regret measures the difference between each action’s payoff for a given [more…]

How to Determine Average Costs in Managerial Economics

As a manager you frequently want to know the cost per unit associated with producing a good, because you can use this information to establish your product’s price and determine your profit per unit. If [more…]

How to Analyze Risk Preferences in Managerial Economics

According to managerial economics, individuals have different risk preferences that they take into consideration when deciding whether to purchase a product. Different risk preferences result from differences [more…]

Managerial Economics: Auctions Can Maximize Profits

Managerial economic study seeks to define the ways in which a business can price products in order to maximize profit. As it turns out, an auction can provide the perfect market for profit maximization [more…]

How to Determine Cost of Capital of Internal Funds

The cost of capital of using internal funds is not as straightforward as it would be when borrowing money. Internal funds represent using equity — either the firm’s or the firm’s owner’s financial resources [more…]

How to Determine Cost of Capital of External Funds

The cost of using external funds, or the cost of debt capital, is the interest rate you must pay lenders. However, because interest expenses are tax deductible, the after-tax cost of debt, [more…]

Common Pitfalls in Capital Budgeting

There a several common mistakes made as businesses decide how to invest and budget their capital. Most business managers think that by avoiding risky investments and retaining capital they can maximize [more…]

How to Evaluate Business Investment Proposals

After determining cash flows and the cost of capital, managers can begin to evaluate various capital investment alternatives. The most commonly employed technique for evaluating investment alternatives [more…]

How Profit Sharing Can Improve a Business Manager's Performance

Managers increase effort if they have an incentive to do so. One method absentee owners use to increase effort is profit sharing. Profit sharing indicates that managers receive some share or percent of [more…]

How to Improve a Business Manager’s Performance with Stock Options

Business owners can include stock options as a method to increase managerial effort. A stock option provides its holder a future opportunity to buy the company’s stock at a predetermined price — the [more…]

How to Deal with Adverse Selection in Managerial Economics

Adverse selection arises in a business situation when an individual has hidden characteristics before a business transaction takes place. With hidden characteristics, one party knows things about himself [more…]

Basics of Externalities in Managerial Economics

In managerial economics, externalities refer to beneficial or harmful effects realized by individuals or third parties who aren’t directly involved in the market exchange. Thus, an externality is a cost [more…]

Basics of Second-Degree Price Discrimination for Managerial Economics

Charging different prices for different ranges or blocks of output from your company results in second-degree price discrimination or declining block pricing. [more…]

Basics of Third-Degree Price Discrimination for Managerial Economics

Your business is practicing third-degree price discrimination when you partition the market into two or more different groups of consumers based upon different price elasticities of demand. The differences [more…]

How to Determine Third-Degree Price Discrimination in Managerial Economics

In order to determine the profit-maximizing price and quantity for each group of customers by using third-degree price discrimination, you must satisfy the following condition: [more…]

Basics of First-Degree Price Discrimination in Managerial Economics

First-degree price discrimination, sometimes referred to as perfect price discrimination, exists when a firm charges customers a different price for each unit of the good sold — everyone pays a different [more…]

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