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MANAGERIALMANAGERIAL

ECONOMICS 11ECONOMICS 11thth EditionEdition

ByBy

Mark HirscheyMark Hirschey

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Nature and Scope ofNature and Scope of

Managerial EconomicsManagerial EconomicsChapter 1Chapter 1

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Chapter 1Chapter 1

OVERVIEWOVERVIEW 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

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Chapter 1Chapter 1

KEY 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 profittheory

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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, andgovernment decisions.

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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.

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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.

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Why Do Profits Vary

Among Firms?Disequilibrium Profit Theories

Rapid growth in revenues.

Rapid decline in costs.

Compensatory Profit Theories

Better, faster, or cheaper thanBetter, faster, or cheaper thanthe competition is profitable.the competition is profitable.

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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.

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Structure of this Text

ObjectivesUnderstand usefulness of

economics in describing managerialbehavior.Understand how economics can beused to improve managerial

decisions.Appreciate vital role of business insociety.