agec 317 chapter 1 introduction to managerial economics 2011 (1)
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AGEC 317 Chapter 1 Introduction to Managerial Economics 2011 (1)TRANSCRIPT
Nature and Scope of Managerial Economics (Chapter 1 Hirschey)
INTRODUCTION
Definition of Managerial Economics
• Application of economic tools and techniques to business and administrative decision-making; another term for the title of this course, namely economic analysis for agribusiness and management.
• Helps decision-makers recognize how economic forces affect organizations and describes the economic consequences of managerial behavior. How? By linking economic concepts and quantitative methods to develop tools for managerial decision-making.
• Simply put, managerial economics uses economic concepts and quantitative methods to solve managerial problems.
• We place emphasis on the practical application of economic analysis to managerial decision problems; the primary virtue of managerial economics lies in its usefulness.
NATURE AND SCOPE OF MANAGERIAL ECONOMICS
Economic concepts:
influence which products to produce, which costs to consider, and the prices to charge;
necessitates the collection, organization, and analysis of information.
Emphasis is placed on microeconomic topics, although macroeconomic relations have implications for managerial decision-making as well.
ECONOMIC CONCEPTS
1) Optimization techniques (calculus-based and
linear programming)
2) Statistical relations
3) Demand analysis and estimation (through regression)
4) Forces of demand and supply
5) Forecasting of firm activities (sales, production, demand, prices)
6) Risk analysis
Economic decision-making requires the following:
Firms are useful for producing and distributing
goods and services
Motivation for firms:
profit maximization or expected value maximization; free enterprise depends upon profits and the profit motive
Expected value of maximization:
optimization of profits in light of uncertainty and time value of money.
FIRMS
VALUE OF THE FIRM
n
tttt
i
TCTR
1 )1( firm of Value
+
…
Suppose that Chevron Corporation makes
projections of profits (expected profits) over the next five years:
2011 = $18,690 million
2012 = $15,560 million
2013 = $14,935 million
2014 = $20,125 million
2015 = $24,585 million
EXAMPLE: VALUE OF THE FIRM
Let the discount rate be equal to three percent.
Calculate the value of Chevron Corporation today.
Value of the firm ( in millions)
=
Value of the firm discounted back to the present
= $_____________ million
EXAMPLE, CONT.
85,653
Expected value maximization relates to the
various functional departments of the firm; also illustrates the value of forecasting
TR: marketing department, primary responsibility for promotion and sales
TC: production department, primary responsibility for costs
i: finance department, primary responsibility for the acquisition of capital and hence the discount factor i.
EXPECTED VALUE MAXIMIZATION
The determination of TR and TC is a non-trivial
and often complex task.
Suppose that a firm produces only one product.
TRt = PtQt-1 requires the notion of a demand function
TCt = fixed costst + variable costst
Variable costs are a function of Q TCt = f(Qt)
Even more complex situation if a firm produces more than one product.
TOTAL REVENUE AND TOTAL COSTS
Skilled labor
Raw materials
Energy
Specialized machinery
Warehouse space
Amount of investment funds available for a particular project or activity
Legal /contractual restrictions
Consequently, optimization techniques with constraints are important in decision-making
Linear programming
Calculus-based optimization
FIRM FACES CONSTRAINTS
Business Profit:
= TR – TC
the residual of sales revenue minus the explicit costs of doing business.
Economic Profit:
= business profit minus the implicit costs of capital and any other owner-provided inputs
reflects the opportunity cost for the effort of the owner-entrepreneur.
PROFIT MEASUREMENT
Opportunity Costs:
Owner-provided inputs are a notable part of business profits, especially among small businesses.
Profit Margin:
= business profit (net income)/sales,
Expressed as a percent
PROFIT MEASUREMENT
In 2007, the sales revenue of the American
Express Company was $27,136 million. The Business profit or net income for this firm was $3,729 million. What was the profit margin for the American Express Company?
Profit Margin =
EXAMPLE: PROFIT MARGIN
b
Return on Equity(ROE)
business profit (net income)/equity
Expressed as a percent
Equity
total assets – total liabilities = net worth=equity
EQUITY
In 2007, the net income for Microsoft
Corporation was $11,909 million. The equity (or net worth) of this firm was $36,708 million. What is the ROE for Microsoft Corporation?
ROE =
EXAMPLE: ROE