Robert J. Graham

Markets rely on participants engaging in mutually beneficial exchange. If participants are free to choose, they trade only if they perceive a personal gain. Thus, the consumer buys the goods and services that give them the most satisfaction relative to the price they pay, while businesses sell the goods and services that generate the most or maximum profit.

Supply describes the economic relationship between the good’s price and how much businesses are willing to provide. Supply is a schedule that shows the relationship between the good’s price and quantity supplied, holding everything else constant. Holding everything else constant seems a little ambitious, even for economists, but there is a reason for that qualification.

The cross-price elasticity of demand measures the responsiveness of a good’s demand to changes in the price of a second good. In managerial economics, this relationship is crucial because the amount of your good customers purchase is influenced by the prices rival firms charge for similar goods. Also, the price you charge for one good — hamburgers, for example — influences the amount you sell of a second good, french fries.

The diffusion of new technology introduces a crucial time element into managerial decision-making. You may be interested in how an innovation is going to affect your firm’s production costs over time. Or you may be interested in determining how diffusion occurs within your firm’s industry. Learning curve and diffusion models examine the relationship between time and technological change and provide you perspective on how technological change evolves.

There are articles that say a dollar today is worth only 25 cents. The idea of the time value of money sounds somewhat absurd, and it is. But it’s really important to recognize what happens to money over time. A dollar today is worth — surprise — a dollar. However, a dollar today doesn’t buy as much stuff as a dollar did 30 years ago because of inflation.

Oligopolies commonly compete by trying to steal market share from one another. Thus, rather than compete by lowering price — the kinked demand curve indicates that this tactic doesn’t work because everyone lowers price — firms often compete on the other factor that directly affects profit — the quantity of the good they sell.

An important piece of managerial economics, technological change alters the firm’s production function by either changing the relationship between inputs and output or introducing a new product and therefore a new production function. An improvement in technology enables your firm to produce a given quantity of output with fewer inputs shifting the production isoquant inward.

Economic markets tend toward equilibrium, the price and quantity that correspond to the point where supply and demand intersect. But equilibrium itself can change. Because equilibrium corresponds to the point where the demand and supply curves intersect, anything that shifts the demand or supply curves establishes a new equilibrium.

Mastering managerial economics involves calculating values, with the ultimate goal of determining how to maximize profit. The usefulness of the price elasticity of demand depends upon calculating a specific value that measures how responsive quantity demanded is to a price change. Price elasticity of demand formula The formula used to calculate the price elasticity of demand is:The symbol η represents the price elasticity of demand.