1. MANAGERIAL ECONOMICS

2. Nature and Scope of Managerial Economics 3. Chapter 1 OVERVIEW

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

4. Chapter 1 KEY 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

5. 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.

6. 7. 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.

8. 9. 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.

10. Why Do Profits Vary Among Firms?

Disequilibrium Profit Theories

• Rapid growth in revenues.

• Rapid decline in costs.

Compensatory Profit Theories

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

11. 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.

12. 13. Structure of this Text

Objectives

• Understand usefulness of economics in describing managerial behavior.

• Understand how economics can be used to improve managerial decisions.

• Appreciate vital role of business in society.