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AFIK . ALEX . AZRA

The Fundamentalsof

Managerial Economics

Managerial Economics

The ManagerA person who direct the resources to achieved a stated goal

Economics The science of making decisions in the presence of scarce resources

Managerial EconomicsThe study of how to direct scarce resources in the way that most directly achieves a managerial goal.

The Economics Of Effective Management

Identify Goals and Costraints Recognize the nature and Importance Of

Profits Understand Incentives Understand markets Recognize the time value of money Use Marginal Analysis

Identify Goals and Constraint

The first step in making a decisions is determine the goal, because achieving different goals entails making different

decisions.

Recognize the Nature and Importance of Profits

Economic vs Accounting Profits Accounting profits : Total amount of money taken in from

sales (total revenue, or prices times quantity sold) minus the dollar cost of producing of goods and services. Reported on the firm’s income statement.

Economic Profits : The difference between the total revenue and the total opportunity cost of producing goods or services.

Opportunity Cost

Account Cost The explicit cost of the resources needed to produce

goods or services Reported on the firm’s income statement

Opportunity Cost Opportunity cost is the cost incurred as a result of

choosing a best chance of a few alternatives available.

Explicit and Implicit Cost

Explicit Cost The costs that are incurred in order to obtain input

needed in the production process.e.g : Material costs, wages, salaries, interest, rent, etc.

Implicit Cost The price of each input which is owned by the

company and used in the productione.g : Factory, machinery and equipment that have opportunity costs.

Incentives

Based on realist view, human is selfish. Everyone who came to you is greedy. Person: Something that motivates an

individu to perform an actionFirm: A bonus that can affect workers

performance or a trigger to induce maximal effort of worker

Markets

A result of crossing interest between buyers and sellers or producers and consumers. There are 3 ways of rivalry in a market:Consumer-Producer RivalryConsumer-Consumer RivalryProducer-Producer Rivalry

Time Value of Money

“Time is money” -Benjamin Franklin-

A money is worth more (or less) the sooner its received or paid due to it ability to earn an interest.

Aplication: To evaluate business decisions where at least some of the cash

flows for future To project future money amounts, such as cash flows, incomes,

and prices

Time Value of Money

Money concept based on time: Present Value

The number of $ you should spent presently in order to payback number of $ in the future

Future Value – Interest lost Future Value

The number of $ you will have to pay back in the future as a result of given number of $ presently

Present Value + Interest earned

Time Value of Money

Net Present Value (NPV) A concept used for measure the worth of any business plan or an

invesment If the result number is more than zero, it gives a profit to the

firm If the result number is less than zero, it gives a deficit to the firm

Using Marginal Analysis

Marginal analysis Managerial decisions involve comparing the marginal benefits of

a decisions with the managerial costs.

Marginal benefit The change in total benefits arising from a change in the

managerial control variable Q.

Marginal costs The change in total costs arising from a change in the

managerial control variable Q.

Determining the optimal level of a control variable

Net benefit marginal maximaze at marginal benefits equal marginal costs (MB=MC)

Why was Kristofer employment terminated?

Kristofer didn’t have a good basic at managerial: He didn’t think about the constraints. Too much focused on profit or ambitious. Can’t apply the formula of NPV very well

It will make Norwegian Cruises lose over $1 million

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