MANAGERIAL MANAGERIAL ECONOMICSECONOMICS

Nature and Scope Nature and Scope of Managerial of Managerial

EconomicsEconomics

OVERVIEWOVERVIEW

How Is Managerial Economics Useful?

Theory of the Firm Profit Measurement Why Do Profits Vary among

Firms? Role of Business in Society Structure of this Text

KEY CONCEPTSKEY 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

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.

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

Limitations of the Theory of the Firm Alternative theory adds

perspective. Competition forces efficiency. Hostile takeovers threaten

inefficient managers.

Profit Measurement

Business Versus Economic Profit Business (accounting) profit

reflects explicit costs and revenues.

Economic profit. Profit above a risk-adjusted

normal return. Considers cash and noncash

items. Variability of Business

Profits Business profits vary widely.

Why Do Profits Vary Among

Firms? Disequilibrium Profit

TheoriesRapid growth in revenues.

Rapid decline in costs. Compensatory Profit

TheoriesBetter, faster, or Better, faster, or cheaper than the cheaper than the competition is competition is profitable.profitable.

Role of Business in Society

Why Firms Exist Business is useful in

satisfying consumer wants. Business contributes to

social welfare Social Responsibility of

Business Serve customers. Provide employment

opportunities. Obey laws and

regulations.

Structure of this Text

ObjectivesUnderstand usefulness of economics in describing managerial behavior.

Understand how economics can be used to improve managerial decisions.

Appreciate vital role of business in society.