Chapter 1 The Nature and Scope of Managerial Economics Managerial Economics in a Global Economy, 5th Edition by Dominick Salvatore Chapter 1 The Nature and Scope of Managerial Economics PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 1

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. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2

Managerial Decision Problems Economic theory Microeconomics Macroeconomics Decision Sciences Mathematical Economics Econometrics MANAGERIAL ECONOMICS Application of economic theory and decision science tools to solve managerial decision problems OPTIMAL SOLUTIONS TO MANAGERIAL DECISION PROBLEMS PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3

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. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 4

The present value of all expected future profits Value of the Firm The present value of all expected future profits PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 5

Alternative Theories Sales maximization Adequate rate of profit Management utility maximization Principle-agent problem Satisficing behavior PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6

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. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 7

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 PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 8

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. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 9

Business Ethics Identifies types of behavior that businesses and their employees should not engage in. Source of guidance that goes beyond enforceable laws. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 10

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 PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 11