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PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 1
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PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 2
 Managerial Economics
Defined
• The application of economic theory and
the tools of decision science to examine
how an organization can achieve its
aims or objectives most efficiently.
– applications of economic theory
– quantitative methods
– statistical methods
– computational methods
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 3
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 4
 Economic Theory
• Microeconomics
– Study of the economic behavior of individual
decision-making units.
– Relevance to Managerial Economics
• Macroeconomics
– Study of the total or aggregate level of
output, income, employment, consumption,
investment, and prices for the economy
viewed as a whole.
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 5
 Decision Sciences
• Mathematical Economics
– Expresses and analyzes economic models
using the tools of mathematics.
• Econometrics
– Employs statistical methods to estimate
and test economic models using empirical
data.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 6
 Economic Methodology
• Economic Models
– Abstract from details
– Focus on most important determinants of
economic behavior – cause and effect
• Evaluating Economic Models
– A model is accepted if it predicts accurately
and if the predictions follow logically from
the assumptions.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 7
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 8
 Theory of the Firm
• Combines and organizes resources for
the purpose of producing goods and/or
services for sale.
• Internalizes transactions, reducing
transactions costs.
• Economic theory assumes that the
primary goal of managers is to
maximize the value of the firm.
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 9
 Value of the Firm
The present value of all expected future profits

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 10
 Alternative Theories
• Sales maximization
– Adequate rate of profit
• Management utility maximization
– Principle-agent problem
• Satisficing behavior

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 11
 Definitions of Profit
• Business or Accounting Profit: Total
revenue minus the explicit or accounting
costs of production.
• Economic Profit: Total revenue minus
the explicit and implicit costs of
production.
• Opportunity Cost: Implicit value of a
resource in its best alternative use.
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 12
 Theories of Profit
• Risk-Bearing Theories of Profit
• Frictional Theory of Profit
• Monopoly Theory of Profit
• Innovation Theory of Profit
• Managerial Efficiency Theory of Profit

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 13
 Social Function of Profit
• Profit is a signal that guides the
allocation of society’s resources.
• High profits in an industry are a signal
that buyers want more of what the
industry produces.
• Low (or negative) profits in an industry
are a signal that buyers want less of
what the industry produces.
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 14
 Business Ethics
• Identifies types of behavior that
businesses and their employees should
not engage in.
• Source of guidance that goes beyond
enforceable laws.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 15
 The Changing Environment of
Managerial Economics
• Globalization of Economic Activity
– Goods and Services
– Capital
– Technology
– Skilled Labor
• Technological Change
– Telecommunications Advances
– The Internet and the World Wide Web
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 16
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 17
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 18
 Appendix to Chapter 1

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 19
 Law of Demand
• A decrease in the price of a good, all
other things held constant, will cause an
increase in the quantity demanded of
the good.
• An increase in the price of a good, all
other things held constant, will cause a
decrease in the quantity demanded of
the good.
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 20
 Change in Quantity
Demanded
Price
An increase in price
causes a decrease in
quantity demanded.
P1

P0

Quantity
Q1 Q0
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 21
 Change in Quantity
Demanded
Price
A decrease in price
causes an increase in
quantity demanded.

P0

P1

Quantity
Q0 Q1
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 22
 Changes in Demand
• Change in Buyers’ Tastes
• Change in Buyers’ Incomes
– Normal Goods
– Inferior Goods
• Change in the Number of Buyers
• Change in the Price of Related Goods
– Substitute Goods
– Complementary Goods
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 23
 Change in Demand
An increase in demand
Price
refers to a rightward shift
in the market demand
curve.

P0

Quantity
Q0 Q1
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 24
 Change in Demand
A decrease in demand
Price
refers to a leftward shift
in the market demand
curve.

P0

Quantity
Q1 Q0
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 25
 Law of Supply
• A decrease in the price of a good, all
other things held constant, will cause a
decrease in the quantity supplied of the
good.
• An increase in the price of a good, all
other things held constant, will cause an
increase in the quantity supplied of the
good.
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 26
 Change in Quantity Supplied
A decrease in price
Price causes a decrease in
quantity supplied.

P0

P1

Quantity
Q1 Q0
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 27
 Change in Quantity Supplied
An increase in price
Price causes an increase in
quantity supplied.

P1

P0

Quantity
Q0 Q1
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 28
 Changes in Supply

• Change in Production Technology

• Change in Input Prices
• Change in the Number of Sellers

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 29
 Change in Supply
An increase in supply
refers to a rightward shift
Price in the market supply curve.

P0

Quantity
Q0 Q1
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 30
 Change in Supply
A decrease in supply refers
to a leftward shift in the
Price market supply curve.

P0

Q1 Q0 Quantity

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 31
 Market Equilibrium
• Market equilibrium is determined at the
intersection of the market demand curve
and the market supply curve.
• The equilibrium price causes quantity
demanded to be equal to quantity
supplied.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 32
 Market Equilibrium
Price
D S

Quantity
Q
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 33
 Market Equilibrium
Price
D0 D1 S0
An increase in demand
will cause the market
P1
equilibrium price and
P0 quantity to increase.

Quantity
Q0 Q1
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 34
 Market Equilibrium
Price
D1 D0 S0
A decrease in demand
will cause the market
P0
equilibrium price and
P1 quantity to decrease.

Quantity
Q1 Q0
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 35
 Market Equilibrium
Price An increase
in supply
D0 S0 S1 will cause
the market
equilibrium
price to
P0 decrease and
P1 quantity to
increase.

Quantity
Q0 Q1
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 36
 Market Equilibrium
Price A decrease
in supply
D0 S1 S0 will cause
the market
equilibrium
price to
P1 increase and
P0 quantity to
decrease.

Quantity
Q1 Q0
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 37
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 38
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 39
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 40
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 41
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 42
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. Slide 43