Economics for Managers
What the exam tests
Economics for Managers tests how incentives, markets, and policy affect pricing, output, and profitability. Expect supply and demand, elasticity, marginal analysis, opportunity cost, market structure, externalities, and macroeconomic indicators.
Core rules
- A demand shift changes the quantity demanded at every price; a movement along the curve is a response to price.
- Price elasticity of demand = percentage change in quantity / percentage change in price. Demand is elastic if the absolute value exceeds 1.
- If demand is inelastic, a price increase raises total revenue; if elastic, it lowers total revenue.
- Rational decisions compare marginal benefit with marginal cost, not average cost.
- Opportunity cost is the value of the next-best forgone option. Sunk costs are irrelevant.
Worked example
A 10% price increase reduces quantity demanded by 5%. Elasticity = -5% / 10% = -0.5, so demand is inelastic in this range. Revenue changes by roughly (1.10)(0.95) - 1 = 4.5%. The price gain outweighs the volume loss, so total revenue rises. A manager should still check capacity, competitor response, and long-run elasticity before raising price again.
Traps
Do not call a price change a demand shift. Do not ignore the sign convention for elasticity; compare absolute value. Do not use sunk costs in forward-looking decisions. Do not confuse nominal GDP growth with real growth when inflation is present.