ECONOMICSECONOMICSFOR MANAGERSFOR MANAGERS

ByBy

Mark HirscheyMark Hirschey

IntroductionIntroduction

Chapter 1Chapter 1

Chapter 1Chapter 1OVERVIEWOVERVIEW

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 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

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