managerial economics defined the application of economic theory and the tools of decision science to...
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Managerial Economics Defined
• The application of economic theory and the tools of decision science to examine how an organization can achieve its aims or objectives most efficiently.
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Managerial Decision Problems
Economic theoryMicroeconomicsMacroeconomics
Decision SciencesMathematical Economics
Econometrics
MANAGERIAL ECONOMICSApplication of economic theory
and decision science tools to solvemanagerial decision problems
OPTIMAL SOLUTIONS TOMANAGERIAL DECISION PROBLEMS
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Theory of the Firm
• Combines and organizes resources for the purpose of producing goods and/or services for sale.
• Internalizes transactions, reducing transactions costs.
• Primary goal is to maximize the wealth or value of the firm.
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Value of the Firm
The present value of all expected future profits
1 21 2
1(1 ) (1 ) (1 ) (1 )
nn tn t
t
PVr r r r
1 1(1 ) (1 )
n nt t tt t
t t
TR TCValueof Firm
r r
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Alternative Theories
• Sales maximization– Adequate rate of profit
• Management utility maximization– Principle-agent problem
• Satisficing behavior
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Definitions of Profit
• Business Profit: Total revenue minus the explicit or accounting costs of production.
• Economic Profit: Total revenue minus the explicit and implicit costs of production.
• Opportunity Cost: Implicit value of a resource in its best alternative use.
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Theories of Profit
• Risk-Bearing Theories of Profit
• Frictional Theory of Profit
• Monopoly Theory of Profit
• Innovation Theory of Profit
• Managerial Efficiency Theory of Profit
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Function of Profit
• Profit is a signal that guides the allocation of society’s resources.
• High profits in an industry are a signal that buyers want more of what the industry produces.
• Low (or negative) profits in an industry are a signal that buyers want less of what the industry produces.
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Business Ethics
• Identifies types of behavior that businesses and their employees should not engage in.
• Source of guidance that goes beyond enforceable laws.
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The Changing Environment of Managerial Economics
• Globalization of Economic Activity– Goods and Services– Capital– Technology– Skilled Labor
• Technological Change– Telecommunications Advances– The Internet and the World Wide Web
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13
Calculus
• Review: Lecture notes on introductory calculus (Here is an interactive text to introductory calculus.doc)
• Lewis: Appendix to Chapter2