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Managerial Economics

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Two questions: 1. How is the 'value of the firm' defined and measured? ... Global Business conditions. BOP and Exchange rate changes. 12. Terminology Issues ... – PowerPoint PPT presentation

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Title: Managerial Economics


1
Managerial Economics
  • Introduction
  • Managerial Economics
  • Describes the economic forces that shape the
    internal and external environments of a business
    firm.
  • Prescribes rules for managerial decision-making
    that furthers the objective of the firm.

2
A Decision-Making Model
Objectives
Define the problem
Alternative Solutions
Evaluation
Organizational and input constraints
Social constraints
Implement and monitor the decision
3
Objective of the Firm
  • Not market share
  • Not growth
  • Not revenue
  • Not empire building
  • Not name recognition
  • Not state-of-the-art technology

4
Whats the objective of the firm?
  • The objective of the firm is to maximize the
    value of the firm.
  • Value of the firm is the true measure of business
    success (of course, from a for-profit
    perspective.)
  • Two questions
  • 1. How is the value of the firm defined and
    measured?
  • 2. How do managers go about adding value to the
    firm?

5
Managerial Economics
  • Q1- Whats the value of the firm?
  • The present value of the firms future net
    earnings.
  • ?1 ?2 ?n
  • V -------- -------- . . .
    --------
  • (1r)1 (1r)2
    (1r)n
  • ?t
  • ? ------- , t 1, 2, ... ,
    N
  • (1r)t

6
Managerial Economics
  • Q2 - How should a manager go about adding
    value?
  • A good map or a travel guide to the curious
    land of the Econ should help.

7
Managerial Economics
  • A Useful Map
  • Profit Total Rev - Total Cost
  • ? P . Qd - AC . Qs

8
Theories of Profits
  • (Why are profits necessary?)
  • Risk-Bearing Theory of Profit - Profits (normal
    profits) are necessary to compensate for the risk
    that entrepreneurs take with their capital and
    efforts
  • Dynamic Equilibrium (Frictional) Theory -
    Profits, especially extraordinary profits, are
    the result of our economic systems inability to
    adjust instantaneously to unanticipated changes
    in market conditions.

9
Theories of Profits
  • Monopoly Theory - Profits are the result of some
    firms ability to dominate the market
  • Innovation Theory - Extraordinary profits are the
    rewards for successful innovations
  • Managerial Efficiency Theory - Extraordinary
    profits can result from exceptionally managerial
    skills of well-managed firms.

10
Managerial Actions
  • Controllable factors (internal environment)
  • Productions
  • Technology
  • Marketing Mix
  • Employment Policies
  • Investment Strategies
  • Capital structure

11
Managerial Actions
  • Non-Controllable factors(external environment)
  • Level of Economic activities
  • Economic Regulations
  • Unions
  • Global Business conditions
  • BOP and Exchange rate changes

12
Terminology Issues
  • The Marginality analysis
  • Economic Profits
  • Accounting Profits
  • Cash flows

13
The Principle of Marginality

1,000
MC
MB
Hospital Days
1
2
3
4
14
The Principle of Opportunity Cost
  • Costs are opportunities sacrificed. To be
    precise, the opportunity cost of a choice or
    decision is measured by the highest valued
    alternative that will be given up.
  • Cost is not always the monetary expense
  • Cost is often implicit rather than explicit

15
Significance of the Opportunity Cost Concept
  • Accounting profits Net revenue Accounting
    costs (dollar costs of goods and services)
  • Reported on the firms income statement
  • Economic profits Net revenue Opportunities
    Costs
  • Economic profits and opportunity costs are
    critical to decision making

16
More examples of useful concepts
  • The principal-agent or the agency problems
  • Moral hazard

17
Whats Managerial Economics?
  • Managerial economics is not a separate management
    discipline
  • Rather, it is a logical and useful tool for
    framing and solving management problems.

18
Outline for this Course
Microeconomics Way of Thinking
Sellers, Production, Costs
Consumers, Value and Demand
Markets and Pricing
19
What will we learn?
  • useful economic principles for sound economic
    decision-making in a management context.
  • the basics of the demand side of the market and
    which factors influence the buyers behavior.
  • the fundamentals of the markets supply side
    -laws of production and how these laws impact a
    firms costs.
  • how firms costs and buyers demand
    together determine the firms price
    and net profit.
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