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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
Chapter 1Chapter 1KEY CONCEPTSKEY CONCEPTS
Managerial economics theory of the firm expected value maximization value of the firm present value Optimize business profit normal rate of return
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.