Chapter 1 Profits Managers And Markets 1 
CHAPTER 1
The Fundamentals of
Managerial Economics
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter One
Chapter Overview
• 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
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. 1-3
Introduction
Managerial Economics Defined
• The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal.
– Should a firm purchase components – like disk drives and chips – from other manufacturers or produce them within the firm?
– Should the firm specialize in making one type of computer or produce several different types?
– How many computers should the firm produce, and at what price should you sell them?
1-4
The economic principle for managers
• What is termed the economics of a business is to determine the key factors that affect the ability of a firm to earn an acceptable rate of return on its owners. • The most important of these factors are competition, technology and customers.
• A manager is essentially a person who is responsible for the allocation of a firms' scarce resources.
5
The Concept of Opportunity Cost
• Decisions are always among alternatives and decision alternative always have costs and benefits.
• Opportunity cost of using any resource is
– What we must forego when we make that choice
– Accurate and complete concept of cost
– Used when making or analyzing decisions
– Everything you actually sacrifice in making the choice
– The methods of measuring
The Fundamentals of
Managerial Economics
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter One
Chapter Overview
• 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
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. 1-3
Introduction
Managerial Economics Defined
• The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal.
– Should a firm purchase components – like disk drives and chips – from other manufacturers or produce them within the firm?
– Should the firm specialize in making one type of computer or produce several different types?
– How many computers should the firm produce, and at what price should you sell them?
1-4
The economic principle for managers
• What is termed the economics of a business is to determine the key factors that affect the ability of a firm to earn an acceptable rate of return on its owners. • The most important of these factors are competition, technology and customers.
• A manager is essentially a person who is responsible for the allocation of a firms' scarce resources.
5
The Concept of Opportunity Cost
• Decisions are always among alternatives and decision alternative always have costs and benefits.
• Opportunity cost of using any resource is
– What we must forego when we make that choice
– Accurate and complete concept of cost
– Used when making or analyzing decisions
– Everything you actually sacrifice in making the choice
– The methods of measuring