Nature and Scope of

Managerial Economics

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

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

How Is Managerial Economics Useful?

Evaluating Choice Alternatives
Identify ways to efficiently achieve goals.
Specify pricing and production strategies.
Provide production and marketing rules to help
maximize net profits.

Making the Best Decision

Managerial economics can be used to efficiently
meet management objectives.
Managerial economics can be used to understand
logic of company, consumer, and government
decisions.

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.

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.

Why Do Profits Vary Among

Firms?
Disequilibrium Profit Theories
Rapid growth in revenues.
Rapid decline in costs.

Compensatory Profit Theories

Better, faster, or cheaper than the
competition is profitable.

Role of Business in Society

Why Firms Exist
Business is useful in satisfying consumer
wants.
Business contributes to social welfare

Social Responsibility of Business

Serve customers.
Provide employment opportunities.
Obey laws and regulations.

Structure of this Text

Objectives
Understand usefulness of economics in
describing managerial behavior.
Understand how economics can be
used to improve managerial decisions.
Appreciate vital role of business in
society.