CHAPTER 1 : INTRODUCTION TO

MANAGERIAL ECONOMICS
• Definition of Managerial Economics
• Circular Flow of Economic Activity
• Nature of Firms
Definition of Firms
Why Firm Exist?
Goals of Firms
Other Economic Goals
Non-Economic Goals
Constraint Faced By Firm
What is Profit?
Functions of Profits
Calculation of Profit
CHAPTER 1 : INTRODUCTION TO
MANAGERIAL ECONOMICS
I. Definition of Managerial Economics
 It is an application of economic theory and the tools of analysis of decision science to
examine how a firm can achieve its aims or objectives most efficiently

Produce or buy?
Technique of Production
Problems faced by What to produce?
management Media or promotion

Economic Decision
Managerial sciences
Theory
Economics
Microeconomics Mathematical Economics
Macroeconomics Statistics

Optimal
solution
CHAPTER 1 : INTRODUCTION TO
MANAGERIAL ECONOMICS
II. Circular Flow of Economic Activity

Goods and services Goods and services

Product
market
Payment for Payment for
goods and services goods and services

Household Firms

Factor payment
income
Factor
market
Economic resources Land, labor, capital, entrepreneur
Outer loop – physical flows inner loop – money flows
CHAPTER 1 : INTRODUCTION TO
MANAGERIAL ECONOMICS
III. Nature of Firms

1. Definition of Firms
Organization that combines and organizes resources for the purpose of
producing goods and/or services for sale

2. Why Firm Exist?

Very costly for individual to enter into each step of production and
distribution process

3. Primary Goal of Firms

Maximizing wealth/value of the firm
(PV of the expected future profits of the firm)

4. Other Economic Goals

Maximizing sales
Maximizing market share
Produced technologically advanced product

5. Non-Economic Goals
Produce environmental friendly products
Provide a good place for employees
Provide good products and/or services to customer

CHAPTER 1 : INTRODUCTION TO
MANAGERIAL ECONOMICS
6. Constraint Faced By Firm
Financial
Moral
Technological
Environmental
Availability of resources
legal

7. What is Profit?
Reward for bearing risk
Reward due to monopoly status
Reward for innovation
Reward due to imperfect market mechanism

8. Functions of Profits
Signaling changes in the rate of production
Signaling for reallocation of resources due to changing in demand and taste

CHAPTER 1 : INTRODUCTION TO
MANAGERIAL ECONOMICS
9. Calculation of Profit
Profit = TR - TC
Accounting Profit = TR - Explicit Costs
Economic Profit = TR - Exp Costs - Imp Costs

Notes:

• EXPLICIT COSTS
The actual expenditures of the firm required to hire or
purchase inputs

• IMPLICIT COSTS
The value of the inputs owned and used by the firm

CHAPTER 1 : INTRODUCTION TO
MANAGERIAL ECONOMICS