Welcome To

Economics 515The Price System and Resource Allocation

Instructor: Munir Mahmud

Office: LH 703

Phone: (714)278-5847

E-mail: mmahmud@fullerton.edu

Office Hours: Mon 5-7 p.m.& By Appointments

All of you should have a personal e-mail account and you are required to send me an e-mail from that account within the first week of classes.

The Subject Heading of the e-mail should be just “Econ 515”.

In the Message Area you should mention your “Name” and “Student I.D”

My e-mail address is mmahmud@fullerton.edu

Web Address:

http://calstate.fullerton.edu/munir/econ515.html

Managerial Economics:

Definition:

It is the application of the tools of economic theory and decision sciences to see how a firm or organization can achieve its aims and objectives most efficiently.

Management

Economic Theory Decision Sciences

Managerial Economics

Optimal Solutions

a. Microeconomicsb. Macroeconomics

a. Mathematical Economicsb. Econometrics

Q = f ( P, Y, Pc , Ps )

Q = + 1 P + 2 Y + 3 Pc + 4 Ps

Theory of the Firm

Firm:

It is an organization or entity that combines and organizes resources for the purpose of producing goods and services for sale.

Proprietorship Partnership Corporation

Objective of the Firm:

Profit Maximization

Value of the Firm:

It is the present value of a the firm’s expected future net cash flows

$100

Year OneYear Two$100

Interest Rate = 5 %

$100 today $105 in a year

So one dollar a year from now has a present value of

05.1

1

05.1

1

105

100

1 2 3 4

21 34

4

1

44

33

22

11

)1(

)1()1()1()1(

tt

t

i

iiiiPV

Project 1: $100, $20, $10

Project 2: $40, $50, $60

Discount rate = 2%

69.126

)02.1(

10

)02.1(

20

)02.1(

1003211

PV

81.143

)02.1(

60

)02.1(

50

)02.1(

403212

PV

Value of the Firm

n

tt

ttn

tt

t

i

TCTR

i 11 )1()1(

Distinction between Accounting & Economic Profit:

Total Profit = TR - TC

Accounting Profit = TR - Explicit Costs

Economic Profit = Accounting Profit - Implicit Costs

= TR - Explicit Costs - Implicit Costs