Books and Articles by 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.

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.

Business executives face an economic dilemma in determining price: Customers want low prices, and executives want high prices. Markets resolve this dilemma by reaching a compromise price.The compromise price is the one that makes quantity demanded equal to quantity supplied. At that price, every customer who is willing and able to buy the good can do so.

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 return. But some of the common pitfalls are an outcome of being too conservative in the approach to capital budgeting.

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 call price. Frequently, the option’s call price is its current price, although there is no single method for determining the call price.

Game theory can be applied to the science of managerial economics. For instance, how does a business person win the simultaneous-move, one-shot business game. In these games, players make decisions at the same time or, at the very least, they don’t know their rival’s decision prior to making their own. In addition, the game is played only once.

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 is the net present value technique. Variations of this technique include the profitability index and the internal rate of return.

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: where MRA is group A’s marginal revenue for the last unit it buys, MRB is group B’s marginal revenue for the last unit it buys, and MC is marginal cost for the last unit you produce.

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 — to finance the project. However, internal funds also cost you — even if you contribute those funds. The opportunity cost of funds you invest in the firm is the interest you could have earned if you had invested those funds elsewhere.