MANAGERIAL ECONOMICS BOOK PDF

• Risk-averse: prefers safer outcomes; may accept lower EMV for stability.
• Risk-neutral: chooses the alternative with highest EMV.
• Risk-seeking: prefers higher risk for higher possible gain.

Risk attitude affects the final decision even when EMV is known.

Degrees/types of price elasticity (based on |Ep|):

1. Perfectly inelastic (Ep=0): quantity does not change with price.
2. Relatively inelastic (Ep<1): small response to price changes.
3. Unitary elastic (Ep=1): %ΔQ = %ΔP.
4. Relatively elastic (Ep>1): quantity responds strongly.
5. Perfectly elastic (Ep=∞): very small price change leads to large demand change (theoretical).

These categories help in pricing decisions.

Perfect competition: many firms sell a homogeneous product, so each firm is a price taker.

Short-run price-output determination:

1. Market determines price P; for the firm, AR=MR=P (horizontal).
2. The firm chooses output where MR (=P) = MC (and MC is rising).
3. Profit/loss depends on comparison of P with AC at that output:
   • P > AC: supernormal profit
   • P = AC: normal profit
   • P < AC: loss
4. Shutdown condition (mention): if P < AVC, the firm shuts down in short run; if P ≥ AVC, it may operate even at loss because it covers variable cost.

Long-run equilibrium:

• Entry occurs if firms earn supernormal profits; supply increases and price falls.
• Exit occurs if firms incur losses; supply decreases and price rises.

Long-run equilibrium conditions:

• P = MR = MC and P = AC (only normal profit).
• Firms operate at minimum LAC (productive efficiency).

Thus, competitive forces ensure only normal profit in the long run.