MANAGERIAL ECONOMICS

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.