2. Chapter 1
OVERVIEW
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
3. Chapter 1
KEY CONCEPTS
managerial economics economic profit
theory of the firm profit margin
expected value return on stockholders'
maximization equity
value of the firm frictional profit theory
present value monopoly profit theory
optimize innovation profit theory
satisfice compensatory profit theory
business profit
normal rate of return
4. 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.
5.
6. 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.
7.
8. 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.
9. Why Do Profits Vary
Among Firms?
Disequilibrium Profit Theories
Rapid growth in revenues.
Rapid decline in costs.
Compensatory Profit Theories
Better, faster, or cheaper than the
competition is profitable.
10. 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.
11.
12. 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.