details about managerial economic

1. MANAGERIAL ECONOMICS
12th Edition

2. Nature and Scope of
Managerial Economics
Chapter 1

3. Chapter 1
OVERVIEW
 How Is Managerial Economics Useful?
 Theory of the Firm
 Profit Measurement
 Why Do Profits Vary among Firms?
 Role of Business in Society
 Structure of this Text

4. Chapter 1
KEY CONCEPTS
 managerial economics
 theory of the firm
 expected value
maximization
 value of the firm
 present value
 optimize
 satisfice
 business profit
 normal rate of return
 economic profit
 profit margin
 return on stockholders'
equity
 frictional profit theory
 monopoly profit theory
 innovation profit theory
 compensatory profit
theory

5. How Is Managerial Economics
Useful?
 Evaluating Choice Alternatives
 Identify ways to efficiently achieve goals.
 Specify pricing and production strategies.
 Spell out production and marketing rules to maximize
profits.
 Making the Best Decision
 Managerial economics helps meet management
objectives efficiently.
 Managerial economics shows the logic of consumer,
and government decisions.

6. The Decision Process
The Decision Process
•Where does economics fit in?
•Establish Objectives… what is our goal?
•Define the Problem…Competition is fierce...
•Identify factors that affect the problem… Other firms appear to produce a
comparable product at lower costs…
•Specify Alternative Solutions… Should we expand our plant size or decrease
our plant size or improve our product techniques?
•Collect Data and Other Information… Do bigger firms dominate the industry?
or smaller firms? Have higher quality firms performed well?
•Evaluate and Screen Alternatives… Bigger firms are in better financing (need
clarity) shape. Smaller firms are being (need clarity) customers are buying
which ever costs the least.
•After further investigation of the best, cost less.
•Implement best alternatives and monitor results…

7. Theory of the Firm
 Expected Value Maximization
 Owner-managers maximize short-run profits.
 Primary goal is long-term expected value
maximization.
 Constraints and the Theory of the Firm
 Resource constraints.
 Social constraints.
 Limitations of the Theory of the Firm
 Alternative theory adds perspective.
 Competition forces efficiency.
 Hostile takeovers threaten inefficient managers.

8. Goal of the Firm
© 2009, 2006 South-Western, a
part of Cengage Learning
Theory of the Firm
Objective 1: Maximize stock prices. Maximize the present value (PV) of the
expected future profits – maximize PV over time…
Value of the Firm = present value of future profits. Expected profits are
discounted, which puts more weight on profits in the near term than the long
term. Any new information revealed about a company will immediately impact
their stock price. Positive reports increase the prospects of future expected
profit (stock prices rise), negative reports typically negatively impact the outlook
of future profits (stock prices fall).

9. Stock Prices, Profits, and Goals
i = interest rate = inflation rate + real rate of return
П = TR – TC

10. Other Goals of Firms
© 2009, 2006 South-Western, a
part of Cengage Learning
Alternative Objectives
Maximize Growth (Status) Revenue
Maximize Management Utility (Perks)
Friedman’s Quote regarding economics in the work place.
“Even though they don’t profess the laws of physics, pool players still use
them….”

11. How are profits measured?
Profits
TR- TC = profit
Business Perspective Profit =Total Revenue – Total Explicit Costs (Accounting)
Economics Perspective Profit = Total Revenue – Total Explicit (Accounting) and
Implicit Cost (Opportunity)
In equilibrium Economic profit = 0
When are economic profits ≠ to 0?
When are economic profits different from 0?
How do disequilibrium shocks affect markets?
market power – barriers?
innovation/productivity?
efficiency?
risk bearing?

12. Free Market Breakdowns
•Businesses compete for inputs and consumer’s dollars. But this breaks down
and there is a need for government intervention.
•natural monopolies
•cartels
•monopolies/unions
•externalities
•public goods, defense, bridges, schools
•circumstances where government influence is desired in microeconomics
•monopsonies (NCAA, Wal-Mart)

13. © 2009, 2006 South-Western, a
part of Cengage Learning
Profit Measurement
Business Versus Economic Profit
 Business (accounting) profit reflects
explicit costs and revenues.
 Economic profit.
• Profit above a risk-adjusted normal return.
• Considers cash and noncash items.
Variability of Business Profits
 Business profits vary widely.

15. What are sunk costs?

16. Assignment
© 2009, 2006 South-Western, a
part of Cengage Learning
Take a firm and characterize its industry,
pricing ability, competition, foreign and domestic.
Cigarettes, automotives, computers…
How can they compete better?
Remember the goal is to maximize the stock price.

17. © 2009, 2006 South-Western, a
part of Cengage Learning
Why Do Profits Vary
Among Firms?
Disequilibrium Profit Theories
 Unexpected revenue growth.
 Unexpected cost savings.
Compensatory Profit Theories
 Profits accrue to firms that are
better, faster, or cheaper than
the competition.

18. © 2009, 2006 South-Western, a
part of Cengage Learning
Role of Business in
Society
Why Firms Exist
 Businesses help satisfy consumer
wants.
 Businesses contributes to social welfare
Social Responsibility of Business
 Serve customers.
 Provide employment opportunities.
 Obey laws and regulations.

19. © 2009, 2006 South-Western, a
part of Cengage Learning

21. © 2009, 2006 South-Western, a
part of Cengage Learning
Structure of this Text
Objectives
 Learn usefulness of economics in
describing managerial behavior.
 Appreciate how economics can be used
to improve managerial decisions.
 Understand vital role of business in
society.