Managerial Economics Problem-Solving in a Digital World

This topic examines the various concepts related to the costs of a firm, and in particular relationships between costs and output, and why these relationships are important for managerial decision making. The starting point is a discussion of the types of cost that are relevant, and irrelevant, for decision making. Distinctions are drawn between explicit and implicit costs, historical and current costs, sunk and incremental costs, and private and social costs. Cost relationships with output, and various types of unit cost, are explained, and the reasons for these relationships based on production theory. Distinctions between short-run cost relationships and long-run cost relationships are explained, and factors that can cause costs to change, aided by graphical presentation. Economies and diseconomies of scale, and returns to scale, are explained in cost terms, along with economies of scope. Cost-volume-profit (CVP) analysis is discussed, and its implications for managerial decision making. There is an extensive problem-solving section with many different types of example. More complex CVP problems are presented in case studies, for example battery charging for electric vehicles.