Scribd
Upload
40 views

Chapter 1

Uploaded by

Tabassum Akhtar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
40 views

Chapter 1

Uploaded by

Tabassum Akhtar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 18

Managerial Economics Thomas

Managerial Economics
ninth edition Maurice

Chapter 1
Managers, Profits, and Markets

McGraw-Hill/Irwin
Managerial Economics, 9e Copyright © 2008 by the McGraw-Hill Companies, Inc. All rights reserved.
Managerial Economics

Managerial Economics
& Theory
• Managerial economics applies
microeconomic theory to business
problems
• How to use economic analysis to
make decisions to achieve firm’s
goal of profit maximization
• Microeconomics
• Study of behavior of individual
economic agents

1-2
Managerial Economics

Economic Cost of Resources


• Opportunity cost of using any resource is:
• What firm owners must give up to use the resource
• Market-supplied resources
• Owned by others & hired, rented, or leased
• Owner-supplied resources
• Owned & used by the firm

1-3
Managerial Economics

Total Economic Cost


• Total Economic Cost
• Sum of opportunity costs of both market-supplied resources & owner-supplied
resources
• Explicit Costs
• Monetary payments to owners of market-supplied resources
• Implicit Costs
• Nonmonetary opportunity costs of using owner-supplied resources

1-4
Managerial Economics

Types of Implicit Costs


• Opportunity cost of cash provided by owners
• Equity capital
• Opportunity cost of using land or capital owned by the firm
• Opportunity cost of owner’s time spent managing or working for the firm

1-5
Managerial Economics

Economic Profit versus Accounting Profit


•Economic profit= Total revenue – Total economic cost
= Total revenue – Explicit costs – Implicit costs

•Accounting profit = Total revenue – Explicit costs

• Accounting profit does not subtract implicit costs from total revenue
• Firm owners must cover all costs of all resources used by the firm
• Objective is to maximize economic profit

1-6
Managerial Economics

Maximizing the
Value of a Firm
• Value of a firm
• Price for which it can be sold
• Equal to net present value of
expected future profit
• Risk premium
• Accounts for risk of not knowing
future profits
• The larger the risk, the higher
the risk premium, & the lower
the firm’s value

1-7
Managerial Economics
• Maximize firm’s value by maximizing profit in each time period
• Cost & revenue conditions must be independent across time periods
Maximizing the
Value of a Firm • Value of a firm = ?

1 2 T T
t
+ + ... + =
(1 + r ) (1 + r ) 2
(1 + r ) T
t =1 (1 + r ) t

1-8
Managerial Economics

Separation of Ownership & Control


• Principal-agent problem
• Conflict that arises when goals of management (agent) do not match goals of owner
(principal)
• Moral Hazard
• When either party to an agreement has incentive not to abide by all its provisions &
one party cannot cost effectively monitor the agreement

1-9
Managerial Economics

Corporate Control Mechanisms


• Require managers to hold stipulated amount of firm’s equity
• Increase percentage of outsiders serving on board of directors
• Finance corporate investments with debt instead of equity

1-10
Managerial Economics

Price-Takers vs. Price-Setters


• Price-taking firm
• Cannot set price of its product
• Price is determined strictly by market forces of demand & supply
• Price-setting firm
• Can set price of its product
• Has a degree of market power, which is ability to raise price without losing all sales

1-11
Managerial Economics

What is a Market?
• A market is any arrangement through which buyers & sellers exchange goods & services
• Markets reduce transaction costs
• Costs of making a transaction other than the price of the good or service

1-12
Managerial Economics

Market Structures
• Market characteristics that determine the economic environment in which a firm
operates
• Number & size of firms in market
• Degree of product differentiation
• Likelihood of new firms entering market

1-13
Managerial Economics

Perfect Competition
• Large number of relatively small firms
• Undifferentiated product
• No barriers to entry

1-14
Managerial Economics

Monopoly
• Single firm
• Produces product with no close
substitutes
• Protected by a barrier to entry

1-15
Managerial Economics

Monopolistic Competition

• Large number of relatively small firms


• Differentiated products
• No barriers to entry

1-16
Managerial Economics

Oligopoly
• Few firms produce all or most of market output
• Profits are interdependent
• Actions by any one firm will affect sales & profits of the other firms

1-17
Managerial Economics

Globalization of Markets
• Economic integration of markets located in nations around the world
• Provides opportunity to sell more goods & services to foreign buyers
• Presents threat of increased competition from foreign producers

1-18

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy