1. MANAGERIAL ECONOMICS

2. Assessment Assessment Item Value Due Date Individual Assignment 25%
May 16th
Group Work
May 6th
Examination
50%
May 24th

3. Questions before class
Should you sell the product at a price which is lower than the average total cost of the goods? Why?
Why publishers sell international version textbook at low price?
Is it a good idea for a monopoly supplier to sell more goods than what they do now?
If you are a manager, how can you know production quantities?

4. Nature and Scope of Managerial Economics
Chapter 1

5. What is managerial economics?
Managerial economics applies economics tools and techniques to business and administrative decision making.

6. Why a grocery retailer may offer consumers milk at an extremely low markup over cost, say 1% to 2%, and offer nonprescription drugs at markups as high as 40% over cost?

7. Theory of the Firm
Firms are useful device for producing and distributing goods and services.
The firm is thought to have profit maximization as its primary goal.
maximize short-run profit.
Today, the emphasis on profit has been broadened to encompass uncertainty and the time value of money

8. Value of the Firm
= Present Value of Expected Future Profits

9. Constrained Optimization
To make decisions that maximize value, managers must consider how external constraints affect their ability to achieve organization objectives.
Limited availability of essential inputs
Limitations on investment funds
Constrained by Contractual requirements
Quality requirements
Legal restrictions

10. Limitations of the Theory of the Firm
Optimize or satisfice?
Value maximization
Size or growth maximization
Managers’ personal utility or welfare maximization

11. Profit Measurement Business (accounting) profit Economic profit.
Reflects explicit costs and revenues.
Be measured in profit margin
(profit/sales revenue).
Economic profit.
Profit above a risk-adjusted normal return.
Considers cash and noncash items.
Be assessed in terms of ROE (return on stockholders’ equity)
(net income/book value of the firm)

12. Economists versus Accountants
How an Economist
How an Accountant
Views a Firm
Views a Firm
Revenue
Economic
profit
Accounting
profit
Revenue
Implicit
costs
Total
opportunity
costs
Explicit
costs
Explicit
costs

13. Business profits vary widely.
Average annual ROE in U.S. is 10%.
(Normal rate of return on capital is the minimum return necessary to attract and retain investment.)
Variation in ROE
differential risk premiums
Overstate if accounting error or bias causes investments with long-term benefits to be omitted.

14. Why Do Profits Vary Among Firms?
Disequilibrium Profit Theories
Frictional profit theory
Abnormal profits result from unanticipated changes in demand and cost conditions
Monopoly profit theory
Some firms earn above-normal profits because of monopoly position.
(economies of scale, high capital requirements, patents, import protection)
Compensatory Profit Theories
Above-normal rates of return reward firms for extraordinary success in meeting customer need, maintaining efficient operations, and so forth.

15. Role of Economic Profits
Economic profits play an important role in a market-based economy.
Provide a signal for expansion and contraction.
Important reward for innovation and efficiency.

16. Structure of this Text Objectives
Learn usefulness of economics in describing managerial behavior.
Appreciate how economics can be used to improve managerial decisions.
Understand vital role of business in society.