01 Intro to Managerial Economics

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Module 1

Introduction to

Managerial Economics


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INTRODUCTION

How does managerial economics differfrom regular economics?

There is no difference in the theory;standard economic theory provides thebasis for managerial economics.

The difference is in the way theeconomictheory is applied.


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What is managerial economics?

Managerial economics is the use ofeconomic analysis to make business decisions

involving the best use (allocation) of anorganizations scarce resources

Managerial economics is (mostly) appliedmicroeconomics (normative microeconomics)


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Managerial economics deals with

How decisions should be made bymanagers to achieve the firms goals -

in particular, how to maximize profit.

(Also government agencies and

nonprofit institutions benefit fromknowledge of economics, i.e. efficientrecourse allocation is important forthem too...)


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Relationship between ManagerialEconomics and Related Disciplines

ManagementDecision Problems

Economic ConceptsManagerialEconomics

Optimal Solutions to Managerial

Decision Problems

ManagementDecision Problems

ManagerialEconomics

Optimal Solutions to Managerial

Decision Problems

Decision Sciences


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Managerial Economics Use of Economic Concepts and Decision

Science Methodology to Solve Managerial

Decision Problems


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Circular Flow of Economic

Activity Individuals and firms are fundamental

participants in a market economy

They interact in two arenas Product market Factor market

Prices and profits serve as signals for

regulating flow of money and resourcesthrough factor market and flows of moneyand goods through product market


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Firm

An entity/organization which organizesfactors of production to produce goods and

services that will meet the demands ofindividual consumers and other firms

Types

Sole proprietorship

Partnerships

Corporations


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Firm: Rationale for

existence Firms exist as organizations because

the total cost of producing any rate of

output is lower than if the firm did notexist

Reasons

Transaction costs (external transactionsversus internal operations)

Government intervention


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THE GOALS OF A FIRM

Economic Goals:

Maximizing or Satisficing

1. Profit2. Market share

3. Revenue growth

4. Return on investment

5. Technology

6. Customer satisfaction

7. Shareholder value


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THE GOALS OF A FIRM continued

Non-economic Objectives:

1. A good place for our employees to work

2. Provide good products/services to our

customers

3. Act as a good citizen in our society


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Optimal Decision:

Given the goal(s) that the firm ispursuing, the optimal decision in

managerial economics is one thatbrings the firm closest to this goal.


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Roles of Managers:

Making decisions and processinginformation are the two primary tasks

of managers.Examples:

Whether or not to close down a branch ofthe firm?

Whether or not a store or restaurant shouldstay open more hours a day?

How a hospital can treat more patientswithout a decrease in patient care?


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Roles of Managers continued

How a government agency can bereorganized to be more efficient?

Whether to install an in-housecomputer rather than pay for outsidecomputing services?


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All these, as well as many othermanagerial decisions require the use of

basic economics.

Economic theory helps decision makersto know what information is necessary inorder to make the decision and how toprocess and use that information.


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Questions that managers must answer:

Should our firm be in this business?

If so, what price and output levels achieve

our goals?How can we maintain a competitive

advantage over our competitors? Cost-leader?

Product Differentiation?

Outsourcing, alliances, mergers, acquisitions?

International Dimensions?


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Questions that managers must answer:

What are the economic conditions in aparticular market?

Market Structure? Supply and Demand Conditions?

Technology?

Government Regulations?

International Dimensions? Future Conditions?

Macroeconomic Factors?


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Profit measurement

Profit = revenue - cost

Accounting profit = Revenue Explicit costs

Economic profit = Revenue (Explicit cost+ Implicit costs)

Implicit costs are costs associated with foregoneopportunities (opportunity cost of resources in

particular use) Opportunity cost is the value foregone (possible in next

best use)


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Profit maximization

Profit in current period

Profit over longer period

Present value analysis


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Expression of Economic

Relationship Economic relationship can be

expressed in following three ways:

Table

Equation

Graph

01 Intro to Managerial Economics

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