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The document discusses the principles of managerial economics, focusing on applying microeconomic theory to business decisions aimed at profit maximization. It covers concepts such as economic costs, the distinction between economic and accounting profit, and the importance of market structures. Additionally, it addresses the implications of globalization on market competition and firm value.

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2 views

Chapter_1

The document discusses the principles of managerial economics, focusing on applying microeconomic theory to business decisions aimed at profit maximization. It covers concepts such as economic costs, the distinction between economic and accounting profit, and the importance of market structures. Additionally, it addresses the implications of globalization on market competition and firm value.

Uploaded by

meghna
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 19

Managerial Economics Thomas

ninth edition Maurice

Chapter 1

Managers, Profits,
and Markets
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Managerial Economics,
Managerial Economics, Copyright © 2008 by the McGraw-Hill Companies, Inc. All
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
Economic Cost of Using
Resources (Figure 1.1)
E xplicit C o sts
of
M a rk e t-S u p p lie d R e s o u rc e s
T h e m o n e ta ry p a ym e n ts to
re so u rce o w n e rs

+
Im plic it C os ts
of
O w n e r-S u p p lie d R e s o u rc e s
T he retu rns fo rg o ne by n o t ta kin g
the o w n e rs’ re s ou rce s to m arke t

To tal Ec on om ic C os t
= T h e to ta l o p p o rtu n ity co s ts o f
b o th kin d s o f re s o u rce s

1-5
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

1-6
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
1-7
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 rise, the higher the
risk premium, & the lower the firm’s
value
1-8
Managerial Economics

Maximizing the Value of a Firm


• Maximize firm’s value by maximizing
profit in each time period
• Cost & revenue conditions must be
independent across time periods

• Value of a firm =
1 2 T T
t
 2
 ...  T
 t
(1  r ) (1  r ) (1  r ) t 1 (1  r )
1-9
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
1-10
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

1-11
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
1-12
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

1-13
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

1-14
Managerial Economics

Perfect Competition

• Large number of relatively small


firms
• Undifferentiated product
• No barriers to entry

1-15
Managerial Economics

Monopoly

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

1-16
Managerial Economics

Monopolistic Competition

• Large number of relatively small


firms
• Differentiated products
• No barriers to entry

1-17
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

1-18
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

1-19

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