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The Fundamentals of Managerial Economics: Mcgraw-Hill/Irwin
The Fundamentals of Managerial Economics: Mcgraw-Hill/Irwin
The Fundamentals of
Managerial Economics
McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Overview
Chapter One
• Introduction
– The manager
– Economics
– Managerial economics defined
• Economics of Effective Management
– Identifying goals and constraints
– Recognize the nature and importance of profits
– Understand incentives
– Understand markets
– Recognize the time value of money
– Use marginal analysis
• Learning managerial economics
1-2
Chapter Overview
Introduction
• Chapter 1 focuses on defining managerial
economics, and illustrating how it is a valuable
tool for analyzing many business situations.
• This chapter provides an overview of managerial
economics.
– How do accounting profits and economic profits differ?
• Why is the difference important?
– How do managers account for time gaps between
costs and revenues?
– What guiding principle can managers use to maximize
profits?
1-3
Introduction
The Manager
• A person who directs resources to achieve a
stated goal.
– Directs the efforts of others.
– Purchases inputs used in the production of the
firm’s output.
– Directs the product price or quality decisions.
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Introduction
Economics
• The science of making decisions in the
presence of scarce resources.
– Resources are anything used to produce a good or
service, or achieve a goal.
– Decisions are important because scarcity implies
trade-offs.
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Introduction
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Economics of Effective Management
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Economics of Effective Management
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Economics of Effective Management
Power of Power of
Input Suppliers Buyers
·Supplier Concentration ·Buyer Concentration
·Price/Productivity of Level, Growth, ·Price/Value of Substitute
Alternative Inputs
Products or Services
·Relationship-Specific and Sustainability ·Relationship-Specific
Investments of Industry Profits Investments
·Supplier Switching Costs
·Customer Switching Costs
·Government Restraints
·Government Restraints
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Economics of Effective Management
Understand Incentives
• Changes in profits provide an incentive to how
resource holders use their resources.
• Within a firm, incentives impact how
resources are used and how hard workers
work.
– One role of a manager is to construct incentives to
induce maximal effort from employees.
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Economics of Effective Management
Understand Markets
• Two sides to every market transaction:
– Buyer.
– Seller.
• Bargaining position of consumers and
producers is limited by three rivalries in
economic transactions:
– Consumer-producer rivalry.
– Consumer-consumer rivalry.
– Producer-producer rivalry.
• Government and the market.
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Economics of Effective Management
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Economics of Effective Management
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Economics of Effective Management
or,
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Economics of Effective Management
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Economics of Effective Management
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Economics of Effective Management
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Economics of Effective Management
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Economics of Effective Management
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Economics of Effective Management
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Economics of Effective Management
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Economics of Effective Management
Marginal Analysis
• Given
a control variable, , of a managerial
objective, denote the
– total benefit as .
– total cost as .
• Manager’s objective is to maximize net
benefits:
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Economics of Effective Management
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Economics of Effective Management
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Economics of Effective Management
Marginal Principle II
• Marginal principle (calculus alternative)
– Slope of a continuous function is the derivative
/marginal value of that function:
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Economics of Effective Management
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Economics of Effective Management
𝐶
(𝑄)
=
pe
Slo
𝐵
(𝑄)
Maximum net
benefits
=
lope
S
0 Quantity
(Control Variable)
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Economics of Effective Management
Maximum
net benefits
Slope =
0 Quantity
𝑁
( 𝑄 )=𝐵 ( 𝑄 ) −𝐶 ( 𝑄 ) =0 (Control Variable)
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Economics of Effective Management
Maximum net
benefits 𝑀𝐶
(𝑄 )
0 Quantity
𝑀𝑁𝐵
(𝑄) 𝑀𝐵
(𝑄) (Control Variable)
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Economics of Effective Management
Incremental Decisions
• Incremental revenues
– The additional revenues that stem from a yes-or-
no decision.
• Incremental costs
– The additional costs that stem from a yes-or-no
decision.
• “Thumbs up” decision
–.
• “Thumbs down” decision
–.
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Learning Managerial Economics
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Conclusion
Conclusion
• Make sure you include all costs and benefits
when making decisions (opportunity costs).
• When decisions span time, make sure you are
comparing apples to apples (present value
analysis).
• Optimal economic decisions are made at the
margin (marginal analysis).
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