managerial economics
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Transcript of managerial economics
managerial economics
SUB-DISCIPLINES WITHIN ECONOMICS
Managerial economics • the application of economic theory and methods
to business decision-making
Relationship with economic theory1 theory of the firm2 theory of consumer behaviour (demand)3 production and cost theory (supply)4 price theory5 market structure and competition theory
Relationship with business functions
• 1 production and operations• 2 marketing• 3 finance and accounting• 4 human resources
Relationship with decision sciences* numerical and algebraic analysis* optimization* statistical estimation and forecasting* analysis of risk and uncertainty* discounting and time-value-of-money techniques
PROFIT
Business profit
• Residual of sales revenue minus the explicit accounting costs of doing business
Economic profit Business profit minus the implicit costs of capital
and any other owner-provided inputs
Variability of Business Profits
Profit margin• Accounting net income divided by sales
Return on stockholders’ equity (ROE)Accounting net income divided by the book value
of total assets minus total liabilities
WHY DO PROFITS VARY AMONG FIRMS?
Frictional profit theoryAbnormal profits observed following unanticipated changes in demand or cost conditions
Monopoly profit theoryAbove-normal profits caused by barriers to entry that limit competition
WHY DO PROFITS VARY AMONG FIRMS?
Compensatory profit theory
Above-normal rates of return that reward efficiency
Innovation profit theoryAbove-normal profits that follow successful invention or modernization