Managerial Economics
KEY CONCEPTS
• managerial economics • theory of the firm • expected value maximization • value of the firm • present value • optimize • satisfice • business profit • normal rate of return • economic profit • profit margin • return on stockholders' equity • frictional profit theory • monopoly profit theory • innovation profit theory • compensatory profit theory
Managers, Profits, and Markets
Chapter 1
How Is Managerial Economics Useful?
• Evaluating Choice Alternatives
• Identify ways to efficiently achieve goals. • Specify pricing and production strategies. • Provide production and marketing rules to help maximize net profits.
• Making the Best Decision
• Managerial economics can be used to efficiently meet management objectives. • Managerial economics can be used to understand logic of company, consumer, and government decisions.
Managerial Economics & Theory
• Managerial economics applies microeconomic theory to business problems
• How to use economic analysis to make decisions to achieve firm’s goal of profit maximization
Theory of the Firm
• Expected Value Maximization
• Owner-managers maximize short-run profits. • Primary goal is long-term expected value maximization.
• Constraints and the Theory of the Firm
• Resource constraints. • Social constraints
• Microeconomics
• Study of behavior of individual economic agents
• Limitations of the Theory of the Firm
• Alternative theory adds perspective. • Competition forces efficiency. • Hostile takeovers threaten inefficient managers.
1
Profit Measurement
• Business Versus Economic Profit
§
Economic Cost of Resources
• Opportunity cost of using any resource is:
Business (accounting) profit reflects explicit costs and revenues. Economic profit.
– Profit above a risk -adjusted normal return. – Considers cash and noncash items.
• What firm owners must give up to use the resource • Owned by others & hired, rented, or leased • Owned & used by the firm
§
• managerial economics • theory of the firm • expected value maximization • value of the firm • present value • optimize • satisfice • business profit • normal rate of return • economic profit • profit margin • return on stockholders' equity • frictional profit theory • monopoly profit theory • innovation profit theory • compensatory profit theory
Managers, Profits, and Markets
Chapter 1
How Is Managerial Economics Useful?
• Evaluating Choice Alternatives
• Identify ways to efficiently achieve goals. • Specify pricing and production strategies. • Provide production and marketing rules to help maximize net profits.
• Making the Best Decision
• Managerial economics can be used to efficiently meet management objectives. • Managerial economics can be used to understand logic of company, consumer, and government decisions.
Managerial Economics & Theory
• Managerial economics applies microeconomic theory to business problems
• How to use economic analysis to make decisions to achieve firm’s goal of profit maximization
Theory of the Firm
• Expected Value Maximization
• Owner-managers maximize short-run profits. • Primary goal is long-term expected value maximization.
• Constraints and the Theory of the Firm
• Resource constraints. • Social constraints
• Microeconomics
• Study of behavior of individual economic agents
• Limitations of the Theory of the Firm
• Alternative theory adds perspective. • Competition forces efficiency. • Hostile takeovers threaten inefficient managers.
1
Profit Measurement
• Business Versus Economic Profit
§
Economic Cost of Resources
• Opportunity cost of using any resource is:
Business (accounting) profit reflects explicit costs and revenues. Economic profit.
– Profit above a risk -adjusted normal return. – Considers cash and noncash items.
• What firm owners must give up to use the resource • Owned by others & hired, rented, or leased • Owned & used by the firm
§