1. ECONOMICS What is it and why should we study it?

2. Managerial economics and microeconomic analysis Response to macroeconomic events and macroeconomic analysis Models and simplification of reality

3. Some basic definitions Opportunity Cost (explicit and implicit costs) Economic profits vs accounting profits Market Equilibrium Market structure Total, average, and marginal

4. What is the value of a business? Discounted stream of expected future profits VF =    i) +    i) 2 + …. +  n  i) n Example: (assume that the discount rate is 5%) yearProfits 200210,000,000 200310,000,000 200412,000,000 VF = 10 mill/1.05 + 10mill/1.1025+ + 12mill/1.157625 = =28.96 mill

5. Changes in the value of the firm Anything that changes future profits Anything that changes the discount rate Price to earning ratio as a measure of the market’s expectation of future earnings Maximization of the value of the firm requires profit maximization in each Period

6. Do managers care about profit maximization? Principle-agent problem: conflicting interests of shareholders and managers. Possible solutions include: payment in company’s shares borrowing instead of diluting shareholders’ equity possibility of a takeover Some other problems that can arise include: moral hazard asymmetric information and self-selection