Title: Managerial Economics
1Managerial 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.
2A Decision-Making Model
Objectives
Define the problem
Alternative Solutions
Evaluation
Organizational and input constraints
Social constraints
Implement and monitor the decision
3Objective of the Firm
- Not market share
- Not growth
- Not revenue
- Not empire building
- Not name recognition
- Not state-of-the-art technology
4Whats 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?
5Managerial 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
6Managerial 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.
7Managerial Economics
- A Useful Map
- Profit Total Rev - Total Cost
- ? P . Qd - AC . Qs
8Theories 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.
9Theories 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.
10Managerial Actions
- Controllable factors (internal environment)
- Productions
- Technology
- Marketing Mix
- Employment Policies
- Investment Strategies
- Capital structure
11Managerial Actions
- Non-Controllable factors(external environment)
- Level of Economic activities
- Economic Regulations
- Unions
- Global Business conditions
- BOP and Exchange rate changes
12Terminology Issues
- The Marginality analysis
- Economic Profits
- Accounting Profits
- Cash flows
13The Principle of Marginality
1,000
MC
MB
Hospital Days
1
2
3
4
14The 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
15Significance 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
16More examples of useful concepts
- The principal-agent or the agency problems
- Moral hazard
17Whats Managerial Economics?
- Managerial economics is not a separate management
discipline - Rather, it is a logical and useful tool for
framing and solving management problems. -
-
18Outline for this Course
Microeconomics Way of Thinking
Sellers, Production, Costs
Consumers, Value and Demand
Markets and Pricing
19What 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.