Title: Chapter One The Nature and Scope of Managerial Economics Chapter Outline
1Chapter OneThe Nature and Scope of Managerial
EconomicsChapter Outline
- The Managerial Decision-Making Process
- Theory of the Firm
- Profit
- Role of Business in Society
2The Managerial Decision-Making Process
- Managerial Economics applies economic theory
and methods to business and administrative
decision making. - Specifically managerial economics
- prescribes rules for improving managerial
decisions. - indicates how one can achieve organizational
objectives efficiently - allows one to recognize how economic forces
affect organizations - describes the economic consequences of managerial
behavior.
3Management Decision Problems
Decision Sciences Numerical Analysis Statistical
Estimation Forecasting Optimization
Economic Concepts Theory of the Consumer Theory
of the Firm Theory of Market Structure
Managerial Economics Use of economic concepts and
decision science methodology to solve managerial
decision problems
4Managerial Decision Problems
- Product Price and Output
- Make or Buy
- Production Technique
- Inventory Level
- Advertising Media and Intensity
- Labor Hiring and Training
- Investment and Financing
5Theory of the FirmOutline
- Defining Value
- Constraints and the Theory of the Firm
- Limitations of the Theory of the Firm
6Theory of the FirmDefinitions
- Theory of the Firm The basic model of the
business enterprise. - Primary Motive Profit Maximization
- Expected Value Maximization Optimization of
profits in light of uncertainty and the time
value of money - Value of the Firm The present value of the
firms expected net cash flows. - Present Value Worth in current dollars.
7Constraints and Limitations
- Firms face constraints imposed by technology,
resource scarcity, contractual obligations, and
government laws. - Hence the topic of constrained optimization.
- Do firms optimize or satisfice?
- Optimize seek the best solution
- Satisfice seek satisfactory rather than optimal
results
8ProfitsOutline
- Business vs. Economic Profit
- The Variability of Business Profit
- Frictional Theory of Economic Profits
- Monopoly Theory of Economic Profits
- Innovation Theory of Economic Profits
- Compensatory Theory of Economic Profits
- The Role of Profits in the Economy
9Business vs. Economic Profit
- Business Profit Residual of sales revenue minus
the explicit accounting cost of doing business. - Business Profit TR Explicit Cost
- Normal Rate or Return Minimum profit necessary
to attract and retain investment. - Economic Profit Business profit minus the
implicit costs of capital and any other
owner-provided inputs. - Economic Profit TR (Explicit Cost Implicit
Cost)
10Variability of Business Profits
- Profit Margin vs. ROE
- Profit Margin Net profit divided by sales.
- Return on Stockholders Equity (ROE) Accounting
net income divided by the book value of total
assets minus total liabilities - ROE Profit / Book Value
- In perfect competition, economic profit is zero.
In other words, the ROE would be equal across all
firms.
11Theories of Economic Profit
- Frictional Profit Theory Above-normal profits
observed following unanticipated changes in
demand and cost conditions. - Monopoly Profit Theory Above-normal profits
caused by barriers to entry that limit
competition. - Innovation Profit Theory Above-normal profits
that follow successful invention or
modernization. - Compensatory Profit Theory Above-normal rates
of return that reward efficiency.
12Role of Business in SocietyOutline
- The Market System Has Led to the Highest Standard
of Living the Human Race Has Ever Known!!! - Why Firms Exist
- The Role of Social Constraints
- The Social Responsibility of Business
13Why Firms Exist
- Firms exist by public consent to serve the needs
of society. - Competition between firms forces business to
provide the goods and services consumers demand
at the lowest possible cost.
14The Role of Social Constraints
- Barriers to Entry and other Limits on Competition
- Exploitation of Workers
- Negative Externalities