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Chapter 1
The Nature and Scopeof Managerial Economics
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The application of economic theory and the tools of decision science to examine how an organization can achieve its aims or objectives most efficiently.
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Managerial Decision Problems
Economic theoryMicroeconomicsMacroeconomics
Decision SciencesMathematical Economics
Econometrics
MANAGERIAL ECONOMICSApplication of economic theory
and decision science tools to solvemanagerial decision problems
OPTIMAL SOLUTIONS TOMANAGERIAL DECISION PROBLEMS
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Combines and organizes resources for the purpose of producing goods and/or services for sale.
Internalizes transactions, reducing transactions costs.
Primary goal is to maximize the wealth or value of the firm.
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The present value of all expected future profits
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Sales maximizationAdequate rate of profit
Management utility maximizationPrinciple-agent problem
Satisficing behavior
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Business 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.
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Risk-Bearing Theories of Profit Frictional Theory of Profit Monopoly Theory of Profit Innovation Theory of Profit Managerial Efficiency Theory of Profit
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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.
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Identifies types of behavior that businesses and their employees should not engage in.
Source of guidance that goes beyond enforceable laws.
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Globalization of Economic ActivityGoods and ServicesCapitalTechnologySkilled Labor
Technological ChangeTelecommunications AdvancesThe Internet and the World Wide Web
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