Chapter 1: The Nature and Scope of Managerial Economics

Managerial Economics Defined The application of economic theory and

the tools of decision science to examine how an organization can achieve its aims or objectives most efficiently. applications of economic theory quantitative methods statistical methods computational methods

Economic Theory Microeconomics

Study of the economic behavior of individual decision-making units.

Relevance to Managerial Economics. Macroeconomics

Study of the total or aggregate level of output, income, employment, consumption, investment, and prices for the economy viewed as a whole.

Decision Sciences Mathematical Economics

Expresses and analyzes economic models using the tools of mathematics.

Econometrics Employs statistical methods to estimate

and test economic models using empirical data.

Economic Methodology Economic Models

Abstract from details Focus on most important determinants of

economic behavior – cause and effect Evaluating Economic Models

A model is accepted if it predicts accurately and if the predictions follow logically from the assumptions.

The Theory of the Firm Combines and organizes resources for

the purpose of producing goods and/or services for sale.

Internalizes transactions, reducing transactions costs.

Economic theory assumes that the primary goal of managers is to maximize the value of the firm.

Value of the FirmThe present value of all expected future profits

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Alternative Theories Sales maximization

Adequate rate of profit Management utility maximization

Principle-agent problem Satisficing behavior

Definitions of Profit Business or Accounting Profit: Total

revenue minus the explicit or accounting costs of production.

Economic Profit: Total revenue minus the explicit and implicit costs of production.

Opportunity Cost: Implicit value of a resource in its best alternative use.

Theories of Profit Risk-Bearing Theories of Profit Frictional Theory of Profit Monopoly Theory of Profit Innovation Theory of Profit Managerial Efficiency Theory of Profit

Social Function of Profit Profit is a signal that guides the

allocation of society’s resources. High profits in an industry are a signal

that buyers want more of what the industry produces.

Low (or negative) profits in an industry are a signal that buyers want less of what the industry produces.

Business Ethics Identifies types of behavior that

businesses and their employees should not engage in.

Source of guidance that goes beyond enforceable laws.

The Changing Environment of Managerial Economics Globalization of Economic Activity

Goods and Services Capital Technology Skilled Labor

Technological Change Telecommunications Advances The Internet and the World Wide Web